Disputes between business owners are not uncommon. Although many are resolved amicably, some escalate to a business divorce. In such a case, a lawyer is critical to helping a business owner navigate the legal issues involved. However, a business divorce can easily trigger legal conflicts of interest that could prevent a lawyer from representing a business owner in that dispute. Business owners should be aware of these potential conflicts and understand the importance of having separate legal counsel for each key constituent of the business.

This post provides an overview of common conflicts issues that can emerge during a business divorce. It also offers best practices for business owners to address these challenges so they can retain the lawyer of their choice.

The Rules and Relevance of Legal Conflicts of Interest in a Business Divorce

In a business divorce, it is not uncommon for a business owner to want to hire an attorney who has already represented the company or its owners. However, a lawyer owes ethical duties to each current and former client, and a legal conflict of interest can arise if that lawyer currently or previously represented the company or other owners who are involved in the dispute.

These potential conflicts are addressed in the California Rules of Professional Conduct, which are binding ethics rules for all lawyers practicing in this state. The Rules are intended to protect the integrity of the legal system, enhance the administration of justice, and promote confidence in the legal profession. Rules 1.7 and 1.9 in particular address some common legal conflicts of interest that can arise in a business divorce. 

Rule 1.7 prohibits a lawyer from representing a client who is adverse to another client, unless both clients consent. That rule also prohibits a lawyer from representing a client if there is a significant risk that the representation will be materially affected by the lawyer’s responsibilities to or relationships with other clients or persons, or by the lawyer’s own interests, unless the client consents.

Similarly, Rule 1.9 prohibits a lawyer from representing a client adverse to a former client in a substantially related matter, unless the former client consents.

Examples                                                    

No business owner wants to contemplate the various complexities of a business divorce, let alone the applicable legal ethics rules. But it is important to understand that, should you ever find yourself in a business divorce, legal conflicts of interest could prevent you from hiring the lawyer of your choice. The following examples illustrate some key conflicts that could emerge during this process: 

1. The lawyer represents the owners: A lawyer owes a duty of loyalty to each current client. If the lawyer you want to hire for a business divorce already represents some or all of the owners, that lawyer cannot represent you against those owners without their consent, which is extremely unlikely in litigation.
2. The lawyer represents the company: When a lawyer represents a company, his or her primary duty is to the company, not to the individual owners. If the lawyer you want to hire for a business divorce already represents the company, he or she cannot represent you against the company without its consent. This is true even if you were the person who hired that lawyer to represent the company in the first place.
3. The lawyer previously represented the company or its owners: For each former client, a lawyer has duties of confidentiality and to not be adverse to the former client in any matter related to the prior representation. If the lawyer you want to hire for a business divorce previously represented the company or the other owners, that lawyer probably cannot represent you against them without their consent. Again, such consent is extremely unlikely in litigation.
4. Withdrawal and referral: In some situations, an ethical conflict may not only prevent your preferred lawyer from representing you, it may also require that lawyer to withdraw from his or her current representation of the company or its owners. This would require the company and possibly the owners to obtain new counsel, which would cost both time and money. 

Best Practices for Business Owners

As a business owner who may be faced with a business divorce at some point, it is crucial to be proactive so you may engage the lawyer of your choice. The following best practices will help you to mitigate potential legal conflicts of interest and harm to the business:

1. Ask your current legal counsel about potential conflicts of interest. For example, discuss any concerns you have about sharing sensitive information with your lawyer, and his or her ability to represent you in a dispute, if he or she also represents the company or your co-owners.

1. Engage your own attorney if your interests appear to differ significantly from those of the company or your co-owners, particularly in situations involving personal assets, financial disagreements, or differing visions for the company's future.
2. Prioritize the best interests of the company when making decisions regarding the business divorce. Consider the long-term consequences of your choices and how they may impact the company's operations, reputation, and stakeholders.
3. Adhere to corporate governance principles to protect the integrity of the company during the dispute. This includes respecting the roles of the board of directors, management, and other stakeholders in making decisions and resolving conflicts.

Conclusion

Recognizing potential legal conflicts of interest is essential to ensuring you can hire the lawyer of your choice if a business divorce occurs. Business owners should proactively avoid such conflicts by seeking legal advice and maintaining open communication with their counsel. In so doing, business owners can successfully manage the challenges of a business dispute while preserving the long-term success and stability of their enterprise.