A lawyer represents a startup company and its two co-founders as an intermediary in negotiating initial investment terms with a venture capital firm. The co-founders have a close personal relationship and share a common vision for the company. However, during negotiations, the venture capital firm proposes a deal structure that grants one co-founder significantly more equity and control than the other, creating a substantial divergence of interests. What is the lawyer's most appropriate course of action?
- AContinue to represent both co-founders, attempting to persuade the less favored co-founder to accept the terms for the good of the company.
- BWithdraw from representing both co-founders and the company, advising them to seek separate counsel.
- CSuggest a revised deal structure that offers equal equity and control to both co-founders, without consulting the venture capital firm.
- DAdvise the co-founders to accept the deal, as it is the only one on the table and beneficial to the company overall.
Show answer & explanationAnswer & explanation
Correct answer: B. Withdraw from representing both co-founders and the company, advising them to seek separate counsel.
When a lawyer acts as an intermediary, common representation is permissible only if the lawyer reasonably believes that the matter can be resolved on terms compatible with the clients' best interests and that each client will be able to make informed decisions. A significant divergence of interests, such as one co-founder receiving substantially more equity and control, creates an unmanageable conflict that prevents the lawyer from continuing as an intermediary. The lawyer must withdraw from representing both parties and advise them to seek independent counsel.
Why the other options are wrong
- A. Attempting to persuade one client against their individual interest while representing both violates the duty of loyalty and impartiality as an intermediary.
- C. Suggesting a revised deal without client consultation and when a conflict already exists is inappropriate and does not resolve the underlying ethical issue of unmanageable conflict.
- D. Advising acceptance of a deal that disproportionately benefits one client over the other, whom the lawyer also represents, is a clear conflict of interest.
Intermediary: Unmanageable Conflict
If a lawyer acting as an intermediary discovers a significant divergence of interests among the co-represented clients that cannot be resolved amicably, the lawyer must withdraw from representation of all clients.
- Requires withdrawal from all clients.
- Clients must be advised to seek independent counsel.
- Occurs when common representation is no longer possible or ethical.
Memory trick: Conflicts Cause Complete Cessation of Common Counsel.