Since the option of taking an equity investment in a client as a form of payment of fees came up in class today, I wanted to follow up with some information on this practice.
Here are a couple of interesting links. The first is a Wall Street Journal story from 2012, which notes that the practice has changed: in the “dot com” boom in the 1990s, firms like Wilson Sonsini would take stock instead of fees, but after experiencing some big losses when that tech bubble burst the firms, it seems, have switched to a practice of deferring or reducing fees (deferring fees would be more like a debt investment) coupled with taking the opportunity to invest (with the firm’s own cash) in the same manner as founders or venture capital investors. The second is a more technical article on some of the legal and regulatory considerations. Lawyers’ equity investments in clients raise a number of tax, securities, insurance and other issues. But taking on a bunch of complex issues and turning them into an opportunity is a favourite pastime of clever lawyers.
I’m not aware of any Canadian law firms that have done this, and – while obviously the specifics of tax, securities law and so on are different here – I don’t know whether there are any clear bars to doing this in Canada, for example under professional ethics rules. It might be an interesting question to look into.
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It turns out that my friend Salim Hirji knows the answer! Under BC’s Professional Conduct rules and pursuant to a change made in 2003, lawyers are permitted to take shares in their corporate clients under certain conditions. They must ensure that the financial interest does not affect their professional judgment. Unless the stock is purchased through a stock exchange – that is, if the lawyer is investing in a startup / privately held company – the client must be independently represented and must acknowledge in writing that the lawyer isn’t representing them in this transaction. Acquiring an interest in a client could also trigger an exclusion from professional liability insurance, so lawyers would have to be careful to avoid that. The approach is very similar to that of the ABA Committee on Ethics and Professional Responsibility in its Formal Opinion 00-418. Of course all other applicable laws, including securities regulations concerning private placements, would have to be complied with.