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THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 2001-2


CONFLICTS IN CORPORATE AND TRANSACTIONAL MATTERS

TOPIC:            Conflicts of Interest; Waivers; Imputation of Conflicts

DIGEST:        A law firm may represent a client whose interests in a corporate transaction are adverse to those of a current client in a separate matter, and may represent multiple clients in a single matter, with disclosure and informed consent, so long as a disinterested lawyer would believe that the law firm can competently represent the interests of each.  Satisfaction of the "disinterested lawyer" test in this context will depend on an evaluation of the nature and circumstances of the simultaneous representations, including those enumerated below.

CODE:            DR 5-105; EC 5-1; EC 5-15; EC 5-16.

QUESTION:  Under what circumstances, if any, may a law firm in a corporate transaction represent a client adverse to a current client of the law firm in another matter, or represent multiple clients of the firm in a single transaction where those clients have differing interests?

OPINION:

There will be many situations in which a lawyer will be able to provide competent representation to multiple clients in a transactional setting, including in situations where the lawyer represents a client whose interests in a corporate transaction are adverse to those of another current client represented by the lawyer in a separate matter.  Indeed, where the lawyer represents one party in a negotiated transaction involving another client the lawyer represents in an unrelated matter, we think that ordinarily a "disinterested lawyer" could reasonably conclude that the lawyer can competently represent the interests of each client.  The same conclusion may also hold where the lawyer represents multiple clients with differing interests in the same transaction, depending on an analysis of a number of circumstances described below.  In these and similar situations, clients who are fully advised of the relevant circumstances and of the material and reasonably foreseeable ways that the conflict could adversely affect their interests have the right to waive the conflict in order to be represented by the lawyer of their choice, as set forth below.

DISCUSSION:

Much has been written on conflicts of interest arising from a lawyer's simultaneous representation of  two clients with adverse interests in litigation.  Less guidance exists, however, about the ethical issues involved in the simultaneous representation of multiple clients with differing interests in transactional matters.  Accordingly, the Committee has been asked to address the circumstances in which it is permissible for a lawyer to represent a client in a corporate transaction whose interests in the matter are adverse to a client that the lawyer or law firm represents in another matter, and the circumstances in which a law firm may represent multiple clients in a single transaction.  The Committee has concluded that there are a variety of circumstances in which client consent would permit a lawyer in a transactional matter to represent one client whose interests are adverse to those of another client in the same transaction or an unrelated matter.

While questions concerning the ability of a lawyer to represent one client in a corporate transaction adverse to another client may arise in a variety of contexts, we begin our conflicts analysis in the context of a lawyer who represents a client ("ABC Corp.") in several products liability lawsuits, who has been asked by another client to represent it as the lender in a loan proposed to be made to ABC Corp., which will be represented by another law firm in the loan transaction.  May the lawyer accept the representation of the lending client assuming that both clients consent? What limitations, if any, would apply to the simultaneous adverse representations?

Our analysis necessarily begins with Disciplinary Rule 5-105 of the New York Code of Professional Responsibility (the "Code"), which was amended effective June 30, 1999.  22 N.Y.C.R.R. §1200.24.[1]  Under this rule, a lawyer may not represent a client in a matter that is adverse to the interests of another client, even if the dual representations are wholly unrelated, unless the lawyer has the informed consent of both clients and "a disinterested lawyer would believe that the lawyer can competently represent the interest of each . . . ." DR 5-105(A) and (C); 22 N.Y.C.R.R. §1200.24.

DR 5-105(A) is designed to protect the duty of loyalty and the duty of confidentiality owed to every client. Wolfram, Modern Legal Ethics, §7.3.1 (West 1986).  The rule is triggered whenever a lawyer simultaneously represents two clients in matters involving "differing interests," regardless of the context in which those differing interests arise.  The Code defines "differing interests" broadly to include "every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse, or other interest."  Def. 1, 22 N.Y.C.R.R. §1200.1. 

In the question posed, the clients have "differing interests" as well as interests in common.  To be sure, ABC Corp. wants to obtain the loan, and the lending client of the lawyer wants to make the loan,  but the interests of the borrower and the lender diverge with respect to a host of business and legal issues, including pricing, covenants, defaults, security, remedies, warranties and the like.  Whether the interests of the two clients are so sharply divergent that a "disinterested lawyer" would not conclude that the same lawyer or law firm "can competently represent the interest of each" client is a threshold question that must be addressed before client consent can be sought.  In this context, conflicts are imputed, so if any lawyer in a firm cannot take on the representation, then no lawyer can.  See DR 5-105(D).[2]

The Committee believes, and other ethics committees have also concluded, that there are many situations in transactional practice involving the simultaneous representation of clients with "differing interests" where the "disinterested lawyer" test of DR 5-105(C) may be satisfied.  In many transactional settings, for example, the parties' interests may be both "differing" within the meaning of the Code and overlapping in the sense that both share the goal of consummating the transaction.  The fact that the matter does not involve litigation or another adversary proceeding between the parties makes it less likely that the lawyer's judgment will be adversely affected.  See EC 5-15; N.Y. County 671 (1989) (other factors to be considered include:  (i) the extent and nature of the lawyer's relationship with each client; (ii) the importance of the matter to each client; (iii) the likelihood that the negotiations will be contentious; (iv) the likelihood that the matter will result in litigation).  In transactional matters, there will be many situations when a lawyer, with disclosure and consent, may represent one client in a transaction with another client.  In litigation, the burden of the lawyer to justify simultaneous adverse representation may be higher than in the corporate context.  See Cinema 5, Ltd. v. Cinerama, Inc., 28 F.2d 1384, 1386 (2d Cir. 1976).

There may also exist circumstances where a lawyer is asked to represent multiple clients with differing interests in the same matter, such as representing the borrower and lender simultaneously in a loan transaction.   If the subject matters of the two representations are wholly unrelated, a "disinterested lawyer" might, after weighing the relevant factors, believe that the lawyer or law firm can competently represent the interests of each client.  Where a lawyer undertakes multiple representations of clients with actual or potentially differing interests in the same matter, the possibility that a disinterested lawyer may not believe that a lawyer or law firm can provide competent representation of both sides is increased.

In litigation, the answer is clear-cut.  As Professor Simon states, "Obviously, a lawyer cannot represent both sides in the same litigation.  That is one of the few per se rules in the field of conflicts."  Simon's New York Code of Prof'l Resp. Ann., DR 5-105, at 337 (West 2000); accord Wolfram, § 3.7.2 ("Almost without exception, a lawyer may not represent adverse parties in the same litigation.").  In contrast, the application of DR 5-105 to the representation of multiple parties is more relaxed in a transactional context.  See EC 5-15 ("there are many instances in which a lawyer may properly serve multiple clients having potentially differing interests in matters not involving litigation"); Wolfram, § 7.3.4 ("Courts demonstrate a somewhat more benign attitude as the scene of a conflict of interest moves away from litigation and into contract and other private-ordering transactions.").

Today, many law firms serve clients who are requesting, indeed, insisting that they simultaneously represent two clients with differing interests in a single negotiated transaction.   It is understandable that clients who have developed a longstanding and close relationship with their lawyer or law firm may be far more willing to face other lawyers from that same firm  across the bargaining table in a negotiated deal than be forced to retain a different law firm to handle the deal.[3]  Indeed, if two clients who both regularly use the same law firm wish to utilize the firm in the same transaction but are precluded from doing so, it is likely to result in both clients being denied an extremely important right, which is to select counsel of choice.[4]  Although the likelihood of a non-consentable conflict arising in such circumstances is greater than where the clients' interests diverge in distinct matters, there is no per se ban on simultaneous representations of clients with antagonistic interests in a single matter.  In fact, ethics committees have recognized various circumstances in which such an arrangement is ethically permissible.  E.g., ABA Informal Op. 518 (1962) (concluding that attorney may ethically represent opposing parties in drafting a contract "with consent given by them after full disclosure"); N.Y. State 611 (1990) (concluding that lawyer may represent both seller and lender in real estate transaction in certain limited circumstances and where both parties provide fully informed consent); N.Y. State 162 (1970) (concluding that attorney may represent both buyer and seller in simple real estate transaction where all terms have been agreed to and no major points of negotiation remain); N.Y. County 615 (1973) (same).

We must give especially heavy weight to the fundamental right of clients to select counsel of their choice because the New York Court of Appeals has decisively established that the right of multiple parties to utilize a single lawyer in a transaction is virtually absolute, even in an area such as the representation of both spouses in the preparation of a separation agreement, which is fraught with potential adversity and is often extremely contentious where substantive terms need to be negotiated.  Levine v. Levine, 56 N.Y.2d 42 (1982) (Jasen, J.).  In Levine, one attorney who was related to the husband and had also represented the husband in connection with his business, represented both the husband and wife in the preparation of a separation agreement providing, among other things, for custody of the children and allocation of property.   The attorney, who had known both clients for several years, advised the wife that she was free to seek the advice of another attorney.  Although the basic terms had been agreed upon at the time of the lawyer's retention, further negotiations ensued before the final agreement was reached, and two amendments were thereafter executed.  In an action by the wife to rescind the separation agreement and amendments, the Court of Appeals rejected the wife's argument that "she was not represented by counsel of her own choosing", based on the lawyer's joint representation of the couple.   Judge Jasen stated:

[A]s long as the attorney fairly advises the parties of both the salient issues and the consequences of joint representation, and the separation agreement arrived at was fair, rescission will not be granted. . . . While the potential conflict of interests inherent in such joint representation suggests that the husband and wife should retain separate counsel, the parties have an absolute right to be represented by the same attorney provided "there has been full disclosure between the parties, not only of all relevant facts but also of their contextual significance, and there has been an absence of inequitable conduct or other infirmity which might vitiate the execution of the agreement".

Id.  at 48 (citations omitted; emphasis added).  The Court of Appeals reaffirmed this conclusion in Matter of Estate of Cassone, 63 N.Y.2d 756 (1984), in which it rejected a challenge to an arbitration clause based on the fact that the clause had been drafted by an attorney representing all parties to the contract.  Id. at 758.  Thus, in determining whether "a disinterested lawyer would believe that the lawyer can competently represent the interests" of two simultaneously represented clients with differing interests under DR 5–105(C), whether in the same or unrelated matters, we must be mindful of the overarching right of clients to be represented by their chosen counsel, even where they choose the same one.  Accordingly, we believe the following factors should be considered:

1.                  The nature of the conflict.  In a transaction where common interests predominate over issues in dispute, the possibility of an adverse effect on the exercise of the lawyer's independent professional judgment is significantly mitigated.  In the example of simultaneous representation of one client in litigated matters and the other in an unrelated loan  transaction, the interests of the two clients in closing the loan transaction appear to predominate over the areas of conflict, many of which raise business (as opposed to legal) issues.  Significantly, the law firm's representation of ABC Corp. in products liability litigation will not be affected in any way by the representation of the lender client in connection with the loan,  which does not provide the law firm any motive or incentive to be less zealous in its representation of ABC Corp.   Indeed, the law firm would have no reason to be less vigorous in its representation of ABC Corp. in the products liability litigation merely because it was representing a lender to ABC Corp. because the lender client would not benefit from any such diminished loyalty.  Finally, the dynamics of the lender/borrower relationship, at least at the early stages, are very different—indeed, some might say more aligned—than the contentious relationship that typically prevails between plaintiff and defendant.

Similarly, the context of the proposed representation of multiple clients in the same transaction may dictate the outcome of the disinterested lawyer test.  Where the interests of the parties are inherently antagonistic, such as the interests of the hostile bidder and the target in a corporate takeover, simultaneous representation generally will be ethically impermissible.  See Wolfram, § 7.3.4; Simon's New York Code of Prof'l Resp. Ann. DR 5-105, at 337 ("only rarely may a lawyer ethically represent both sides of the same transaction").  Situations in which a lawyer or members of a single law firm would be required to negotiate directly with herself or each other on behalf of multiple clients in a transaction also will rarely be consentable.

In other contexts, however, the conflict involved may be less direct and contentious and, therefore, more amenable to simultaneous representation with informed client consent.  We think it too simplistic merely to inquire whether a lawyer or law firm is on "both sides" of a transaction.  The more relevant inquiry is whether the nature of the concurrent roles that the lawyer is being asked to play precludes consent from being effective.  This distinction is illustrated by two corporate clients requesting a single law firm to represent both in the purchase and sale of a subsidiary.   If the dual representations require lawyers to directly negotiate the substantive business terms with each other, the direct adversity could preclude such concurrent representation-even with consent.  On the other hand, if the engagements were limited, at least on one side, so that head-to-head negotiations between lawyers in the same firm were eliminated, concurrent representation with consent would be allowable.   In this vein, where a single firm serves as mergers and acquisitions counsel to one corporation in a friendly merger and as antitrust counsel to the other merging corporation for purposes of securing regulatory approval, we do not think the nature of the conflict forecloses effective consent.  Under these circumstances, mergers and acquisitions counsel could represent its client without an adverse effect on its professional judgment because counsel’s primary interest is the consummation of the merger on the best terms available; antitrust counsel's primary work on behalf of the other client will be in furtherance of obtaining necessary regulatory approvals for the transaction to proceed, and not on improving the terms of the deal.  Because the antitrust lawyer's engagement would not be directly opposed to its own firm's efforts on behalf of the other party, informed consent could be effective.

These illustrations are by no means a comprehensive catalogue of the various means available to ameliorate the direct adversity that might otherwise emanate from multiple representation in a single transaction.  Indeed, adverse clients desiring to utilize a single law firm on opposite sides of a transaction could each retain separate counsel to assure adequate representation by the lawyers from the law firm retained to represent each side.  In the Committee's view, this practice would sufficiently ameliorate the nature of the conflicts to allow consent to be adequate.  As EC 5-15 recognizes, "If the interests vary only slightly, it is generally likely that the lawyer will not be subject to an adverse influence and that the lawyer can retain his or her independent judgment on behalf of each client . . . ."  To be sure, whether the divergence in the positions of the two clients in the transaction is so severe as to render a conflict non-consentable must be evaluated on a case-by-case basis, with the ultimate resolution turning on the nature of the specific engagement undertaken and the other precautions the attorneys employ.

2.                  The likelihood that client confidences or secrets in one matter will be relevant to the other representation.  As noted, one function of the rule against simultaneous adverse representation is to protect the client's confidences and secrets.  To the extent that neither client's confidential information could be used to its disadvantage in the conflicting representation or to the advantage of the other client, this concern is not implicated.  It is true that the propriety of an adverse concurrent representation in litigated matters is measured not by the similarities in the two matters, but by the duty of loyalty that the attorney owes to each of the clients.  See Cinema 5, Ltd. v. Cinerama, Inc., 28 F.2d 1384, 1386 (2d Cir. 1976).  Nevertheless, the fact that the concurrent representation in a transactional matter of one client with interests adverse to another client in a different transactional matter does not give rise to the opportunity to compromise confidences or secrets of either client because of the dissimilarities of the two matters is relevant in evaluating the potential impact on the lawyer's professional judgment in this context.  In cases where a lawyer is asked to represent multiple clients in the same transaction, the confidences and secrets of those clients are clearly relevant.  Nonetheless, concurrent representation is permissible where appropriate measures may be taken to protect those confidences and both clients knowingly consent.[5]

3.                  The ability of the lawyer or law firm to ensure that confidential information of the clients will be preserved.  Assuming that confidential information of one client may be relevant to the adverse concurrent representation of the other, what safeguards can the lawyer or law firm offer to ensure the confidential treatment of all such information?  "Screening" has not yet attained general recognition in New York as a substitute for client consent or as a conflict avoidance mechanism, except to avoid firm-wide disqualification in the case of the former government lawyer, or in other limited circumstances.  See DR 9-101(B); Kassis v. Teacher's Insurance & Annuity Ass├ón, 93 N.Y.2d. 611 (1999); see also, Gillers, Barbara S., "`Kassis' Case and its Impact on the Legal Hiring Practices at New York Law Firms," New York Law Journal, September 21, 1999; but see Cummins v. Cummins, 264 A.D.2d 637 (1st Dep't 1999).  Nevertheless, screening and the establishment of other information control devices may be appropriately offered by the lawyer or demanded by the client as a condition of the client's consent.  The client may agree to information control mechanisms such as "firewalls," file segregation and separate legal teams to protect the confidentiality of its information.

There is no reasoned basis to believe that screening could not be effective in a situation where a firm simultaneously represents parties with differing interests in the same matter.  See Jonathan J. Lerner, "Eliminating the Gamesmanship," N.Y.L.J., Feb. 7, 1984 (quoting dissent by Judge Newman in Armstrong v. McAlpin, 625 F.2d 433, 453 (2d Cir. 1980) (en banc) (dissent), vacated on other grounds, 449 U.S. 1106 (1981) ("I do not see why a Chinese Wall should be thought more impervious to information that originated from a government investigation than to information learned from a client without adverse interests.").   In fact, the risk of misuse of client confidences and secrets can be reduced further depending on the nature of the dual representation.  By minimizing direct adversity of the dual roles played by counsel, the effectiveness of screening is likely to be enhanced.  For example, where the firm's mergers and acquisitions department represents one client and its antitrust or tax department the other client, "the likelihood of contact between a 'screened' attorney and one handling an adverse representation is normally reduced when the two groups operate in different departments within the firm."  "Conflicts of Interest in Private Practice," 94 Harvard L. Rev. 1284, 1367-68 (1981).

4.                  The ability of the lawyer to explain, and the client's ability to understand, the reasonably foreseeable risks of the conflict.  DR 5-105(C) requires that a lawyer seeking to obtain consent make "full disclosure of the implications of the simultaneous representation and the advantages and risks involved."   In so doing, the lawyer should apprise the client whose consent is sought of the kinds of conflicts that the client would be consenting to waive and the effect of the consent.  There may be circumstances where a lawyer's duty of confidentiality to one client will prevent the lawyer from being able to explain fully to the other client the nature of the conflict and the material and reasonably foreseeable ways that the conflict could adversely affect the client's interests.

In this connection, the sophistication of the client is a factor that must be considered in determining the effectiveness of client consent to a transactional conflict.  See EC 5-16 ("the lawyer should explain fully to each client the implications of the common representation and otherwise provide to each client information reasonably sufficient, giving due regard to the sophistication of the client, to permit the client to appreciate the significance of the potential conflict . . . .").  A client represented by other counsel or in house counsel in connection with the waiver may more readily comprehend the possible effects on loyalty and confidentiality of the simultaneous adverse representation.  To be sure, sophisticated corporate and institutional clients can consent to conflicts which might be non-consentable in cases involving unsophisticated lay clients who are not represented by independent counsel in connection with the consent.  For example, in Allegaert v. Perot, 434 F. Supp. 790, 799 (S.D.N.Y.), aff'd, 565 F.2d 246 (2d Cir. 1977), the United States District Court for the Southern District of New York relied on the fact that an attorney's clients were sophisticated Wall Street brokerage firms in rejecting an allegation that the attorney's failure to notify these clients of the perils of simultaneous representation violated Canon 5.  In this same vein, the United States District Court for the District of Wisconsin found that the independent review and approval of a simultaneous representation by a commercial client's internal legal department effectively authorized the multiple representation.  Int'l Union, United Automobile, Aerospace & Agricultural Implement Workers v. Allis-Chalmers Corp., 447 F. Supp. 766, 771 (E.D. Wis. 1978).  In cases where a corporate client itself has an in-house legal department, it is difficult to see why such a client should not be allowed to consent to simultaneous representation by the same law firm of diverging interests in the same matter, especially where that client desires, or is demanding, that the firm do so.

5.                  The lawyer's relationship with the clients.  The "disinterested lawyer" test requires that the lawyer be able to represent both clients with equal and undiminished vigor.  If the lawyer's relationship with one client (as opposed to the other) is so disproportionate as to create a bias in favor of the more "important" client (because of the length and nature of the relationship, the amount of fees earned or other factors), a "disinterested lawyer" may consider this to be a factor in determining whether the lawyer will be able to represent each client with undivided loyalty.  See, Restatement Third, The Law Governing Lawyers, § 121 RN Comment c(iii) ("[r]elevant factors in determining whether there is potential for adverse effect include the duration and intimacy of the lawyer's relationship with the client or clients involved, the function being performed by the lawyer, the likelihood that actual conflict will arise and the likely prejudice to the client from the conflict if it does arise; [t]he question is often one of proximity and degree").  This subject is also one as to which disclosure may be required for consent to be informed.

Conclusion

In sum, a lawyer may represent one client in a transaction with a concurrent client in another matter, with disclosure and informed consent, so long as a "disinterested lawyer would believe that the lawyer can competently represent the interests of each."  A lawyer may also represent multiple parties in a single transaction where the interests of the represented clients are generally aligned or not directly adverse, with disclosure and informed consent, so long as the "disinterested lawyer" test is satisfied.  Satisfaction of the "disinterested lawyer" test in a non-litigation context will depend on an evaluation of the circumstances of the simultaneous representations, including those enumerated above.



[1]           DR 5-105 provides in relevant part:

A.        A lawyer shall decline proffered employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105 [22 N.Y.C.R.R. 1200.24] (C).
B.         A lawyer shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer's representation of another client, or if it would be likely to involve the lawyer in representing differing interests, except to the extent permitted under DR 5-105 [22 N.Y.C.R.R. 1200.24] (C).

[2]           DR 5-105(D) provides in relevant part:  "While lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under . . . DR 5-105(A) or (B) . . except as otherwise provided therein."

[3]            Depending on the size of the law firm involved, the client may never even have met, much less worked with, the lawyer who would be representing the other party to the transaction (who may not even be located in the same office as the lawyers with whom the client works).

[4]           In situations where the law firm cannot represent both clients, it is likely that neither client will be able to use its firm of choice because the other client is unlikely to consent to the exclusive use by the other party.

[5]           We hasten to add that clients are free to knowingly waive the attorney-client privilege if they do so on a fully-informed basis.  A fortiori, then, a client may consent to a conflict although it could compromise confidences.


Issued: April, 2001