The Rules of Legal Ethics in Family Business
Because of the complex dynamics involved in family business ownership, attorneys who work with family businesses as their clients need to be attuned to the rules that govern attorney conduct in such matters. One reason why representing family businesses is such a delicate matter is because there are often multiple owners, certainly to a greater degree in the second or succeeding generations. And those assorted owners also have familial and emotional ties to one another.
When working with a family business, attorneys have certain duties to their clients. The following answers and questions about just a few of those duties as covered in the Texas Disciplinary Rules of Professional Conduct
Q: What responsibility does a family business attorney have in communicating with the client?
A: According to Rule 1.03, the attorney must keep the client reasonably informed of facts and promptly respond to client requests – all with the goal of helping the client make informed decisions.
Q: Is a family business attorney bound by attorney-client privilege?
A; Yes, like in all attorney-client relationships, the family business attorney is prohibited from disclosing the client’s confidential information, even if the attorney no longer represents that client. This includes privileged information protected under Rule 503 of the Texas Rules of Evidence and 501 of the Federal Rules of Evidence, and even unprivileged information shared with the attorney during representation.
Q: Are there any exceptions to attorney-client privilege?
Yes – for example, if the client gives informed consent, or if the attorney has a reasonable belief that he or she must disclose protected information in order to comply with the law or a court order, the attorney may break attorney-client privilege. The same applies to circumstances in which the attorney seeks to prevent a crime by or enforce a claim against the client, such as the collection of fees – and in the defense of a malpractice claim by the client.
Q: How should an attorney respond to a conflict of interest involving a family business?
A: Rule 1.06 specifies that attorneys should not represent conflicting interests, such as opposing parties in the same litigation, and in most cases when clients whose interests are in conflict with each other, or in situations that limit an attorney’s responsibilities to another client. However, many conflicts of interest are difficult to assess, especially in business and estate planning for family businesses.
Q: How can an attorney resolve a conflict of interest between two clients?
A: When an attorney believes that a conflict between multiple parties can be resolved satisfactorily without litigation, the attorney can act as an intermediary, as long as the matter can be handled impartially and without negatively affecting the attorney’s responsibilities to each client. As an intermediary, an attorney can represent multiple parties to promote the interests of each in an effort to resolve the conflict. In this instance, the attorney should disclose to each client that he or she is acting as an intermediary through common representation, informing them of the advantages and disadvantages of the mediation process, including its effect on client-attorney privilege. Clients should be able to make an informed decision regarding their participation in the mediation, with each giving written consent as well.
Q: When should an attorney not serve as an intermediary?
A: If there is a risk of substantial material prejudice to any of the clients involved in a proposed mediation, or if the attorney expects contentious negotiations through the process, an attorney should not act as an intermediary. If an attorney is in a firm that includes an attorney that is prohibited from acting as an intermediary, all attorneys of that firm are also disqualified. In addition, an attorney should discontinue serving as an intermediary in a matter if requested to do so by an involved client.
Q: Can an attorney represent a client in a claim against a former client?
A: Unless the former client consents, an attorney is prohibited from representing a client in litigation against a former client. Additionally, an attorney cannot represent a client in this way if doing so will violate attorney-client privilege or put into question the validity of the attorney’s previous work for the former client – or if the matter is the same or substantially related as was involved in the attorney’s work for the former client.
Q: When an attorney represents a family business as an organization, does he or she also represent the family business owners as individuals?
A: No, when an attorney is employed by a family business, he or she represents the entire entity, rather than its individual owners or family members and other involved parties. If a matter arises in an attorney’s representation of the organization that puts an individual owner at risk of an adverse outcome, the attorney is obligated to explain his or her role, advising the individual to seek independent counsel. The attorney should also explain that the matter discussed with the individual may not be privileged unless the information shared was provided while the attorney was acting within his or her “organizational capacity.”
Q: How do attorneys represent multiple parties in estate planning, probate and trust administration?
A: In these matters there are often conflicting interests and difficulties surrounding confidentiality, as an attorney represents more than one family member in estate planning. The attorney can approach the situation using joint representation, in which the parties and the attorney work together toward a common goal, sharing all information and communications among all parties. As an option, the attorney can represent each party separately, and in such circumstances may not disclose confidential information of one party to the other party – though this sometimes prohibits an attorney from using what he has learned from both parties to create the most effective plan. When each party seeks his or her own counsel independently, each attorney can more effectively work in the best interests of the client, but this option is more costly in terms of time, resources and attorney’s fees.
Q: What should an attorney include in an engagement letter when a family business seeks representation?
A: Because the representation of a family business and/or its owners can be especially complex, the attorney should structure the relationship by way of a formal engagement letter at the outset. The letter should specify who the client is exactly, the scope of the representation by the attorney, his or her fees and payment terms, and a summary of potential conflicts of interest in the representation. With the potential conflicts disclosed, the attorney can seek to inform the clients and obtain their consent for representation. Once retained by a family business, an attorney can go a step further and notify any individuals or entities that he or she does not represent that they should seek separate counsel as needed.
For complete details and for answers to more questions on how attorneys should work with family businesses, consult the complete text on the topic of professional conduct for attorneys in the state of Texas at the Texas Disciplinary Rules of Professional Conduct
Contributing Source: “Texas Disciplinary Rules of Professional Conduct,”texasbar.com; “Business Succession Planning – Second Generation” Chapter 32 by Scott Carter, 2009 State Bar of Texas 33rd Annual Advanced Estate Planning & Probate Course