Opinion No. 81-11
Summary: Purchase by a lawyer of warrants issued by his corporate client to pay the costs of a public offering as to which he was advising the client is not in itself a violation of the disciplinary rules.
Facts: A lawyer has sought our advice on the ethical propriety of purchasing warrants proposed to be issued by a closely-held corporate client under the following conditions. The corporation is considering going public. If it does so, it will fund the cost by issuing warrants for 1/6 the price at which the corporation's stock will be offered to the public. The lawyer will be performing a variety of tasks in connection with the offering, including preparing and filing of necessary registration statements and coordinating the process with all interested parties. The lawyer has asked us to assume that the proposed transactions will not violate any state or federal securities laws or regulations. We express no opinion on those questions of substantive law. The lawyer has also asked us to assume that his client has given his consent to his purchase of its warrants. We further assume that proper disclosure accompanied the consent. See DR 5-101(A) and 5-104(A).
Discussion: In Opinion No. 76-16 we stated that there was no ethical impropriety in a law firm's taking payment of a fee in the stock of its corporate client when the services performed involved formation of corporation, preparing documents in connection with marketing an invention, and giving general legal advice. We interpreted DR 5-103(A), which prohibits a lawyer from acquiring "a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client" as not applying to the kind of services rendered by that law firm. In so doing we distinguished ABA Opinion 279, which had advised that such an arrangement was improper when the services involved filing a competing or counter-application to the FCC in connection with transfer of an existing radio license. We distinguished that case as involving at least some of the elements of a "litigation" but expressed no opinion of its correctness where the subject material of the lawyer's representation involved "an application to an administrative agency, rather than enforcement of a more traditional type of cause of action being litigated between two adverse parties."
Whether the opportunity offered to the lawyer by the corporation in this inquiry to purchase the warrants for 1/6 of the price at which stock will be offered to the public is denominated a fee or not, it does appear that the lawyer is acquiring a "proprietary interest" and the only question is whether he is acquiring it in a "cause of action or subject matter of litigation." Since this inquiry does not involve the "traditional type of cause of action being litigated between two parties," it does require us to face the issue we left open in Opinion No. 76-16. While one might argue forcefully that the obligation of the SEC and state agencies to protect the public in connection with stock offerings puts it in a position vis a vis the potential issuer of securities rather similar to that of an adversary party in a more traditional adversary setting, we are not inclined to stretch the terms "litigation" and "cause of action" in DR 5-103(A) so far. That rule places the outright prohibition of acquisition of a proprietary interest by a lawyer within a narrow compass. The acquisition of corporate stock in clients, while a matter of discussion within the profession, is a well-known phenomenon, and if its prohibition in specific factual situations is desired, it should be done explicitly and not by an expansive reading of a seemingly limited rule.
Having so read DR 5-103(A), however, we do feel constrained to point out that purchase of the client's warrants may entail some difficulties for the lawyer. Problems may arise in connection with the public offering where personal ownership of the warrants might interfere with the lawyer's exercise of his independent professional judgment on behalf of his client. See DR 5-101(A) and DR 5-104(A). The consent that the lawyer has already received to purchase of the stock would not suffice as consent to continued representation, once actual conflicts between the lawyer's personal professional interests arise, and if such problems arise, the whole matter would have to be discussed anew with the client.
Permission to publish granted by the Board of Delegates, 1981. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.