After a number of years representing a business client, you have been asked to join the client as a full-time in-house counsel. You will soon be negotiating your salary, your bonus structure and other nonmonetary compensation, including stock or stock options. Going in, you need to keep in mind the Georgia Rules of Professional Conduct, which generally apply to in-house counsel in Georgia. There are three rules that may bear on your compensation package as in-house counsel.
Business Transaction With Client
Pursuant to Rule 1.8 (a), a lawyer should not enter into a business transaction with a client unless: (1) the transaction is fair and reasonable to the client and the terms are fully disclosed; (2) the client is advised about the desirability of seeking and given an opportunity to seek the advice of independent counsel; and (3) the client gives informed consent. All of this must be documented in writing.
If stock or stock options are part of the compensation package to in-house counsel, Rule 1.8 (a) may apply. See Ga. Formal Ethics Op. 05-2 (applying Rule 1.8(h)); Kaye v. Rosefielde, 432 N.J. Super. 421, 480, 75 A.3d 1168, 1204 (App. Div. 2013), rev’d on other grounds, 223 N.J. 218, 121 A.3d 862 (2015); but see Chism v. Tri-State Const., Inc., 374 P.3d 193 (Wash. App. 2016).
Whether Rule 1.8(a) applies depends on the underlying facts. Stock option compensation that is being offered as part of a larger, well-defined employee benefit plan is less likely to be treated as a business transaction under Rule 1.8(a) than if it is a unique offer being made solely to the in-house counsel. The more heavily negotiated by the lawyer and the less sophisticated the client, the more likely the Rule 1.8 (a) written disclosures and consent are necessary.
The role the attorney will play at the employer may also determine whether Rule 1.8 (a) applies. For example, if the lawyer is being hired solely in a business role, rather than in a legal capacity, then the employer is not a client and the rule would not apply.
When in doubt, the safest route would be to document the transaction as proscribed in Rule 1.8 (a) (i.e., obtain the client’s written informed consent after fully disclosing the transaction and advising the client to seek the advice of independent counsel in writing).
Reasonableness of Compensation
Rule 1.5 (a) prohibits lawyers from agreeing to, charging or collecting an unreasonable fee. Typically, this rule has been used to prohibit fees that are much higher than justified by the work performed by the lawyer.
Whether an in-house attorney’s “wages” fall within the definition of “fee” in Rule 1.5 (a) is debatable. Even assuming it does, the reasonableness of the wage component of an in-house lawyer’s compensation package would be fairly easy to discern. And, if the client-employer set the salary, then it would probably be deemed reasonable on its face.
A thornier issue is any nonmonetary compensation. Even if reasonable when given, should stock or stock options subsequently rise dramatically, one might argue that the total compensation received by the attorney is too high and unreasonable under Rule 1.5 (a). Another timely example might be the in-house lawyer given 1,000 bitcoin when they were worth $15 each. If she cashed out in December 2017, she would have pocketed around $20 million.
Conflict of Interest
Rule 1.7 generally prohibits a lawyer from representing a client if there is a significant risk that the lawyer’s own interests will materially and adversely affect the representation of the client. If a lawyer has a large stock or financial stake in a client, the lawyer’s own personal interests may diverge with the client’s best interest.
Imagine a scenario where a company must decide between two options that would affect its stock owners differently. The company is sitting on a large amount of cash. One option would be to declare a large dividend and pay the cash out to shareholders. Another option would be to use the money for long-term investments that may or may not pay off to the company and shareholders at some time in the future. If the in-house lawyer owns a large number of shares, his own needs or desires may improperly affect his advice to the company and might run afoul of Rule 1.7 (a). In such a situation, the best course would be for the in-house lawyer to have independent counsel advise the client.
Jonathan E. Hawkins is a partner in the Atlanta firm of Krevolin & Horst. He represents clients in numerous business sectors in high stakes, complex commercial litigation and serves as outside general, business and ethics counsel to lawyers and law firms.