May 6, 2020

I was recently approached by a company that wanted to pay me with a share of profits from the sale of their goods. I have debated this potential fee structure many times in the past so I decided to do the research to figure out if a fee agreement like this was permitted.

This answer is a bit tricky. Yes, you can structure a fee agreement where an attorney is paid with shares of a company (and probably shares of profits), but as with everything in the law, the exact rules are complicated.

As an Illinois lawyer, I will only discuss the Rules of Professional Conduct from our Supreme Court. Two such rules are of utmost importance here: Rule 1.8 and Rule 5.4.

Professional Rules of Professional Conduct – Rule 1.8

Rule 1.8 deals specifically with what, if any, conflicts of interest exist in entering into a business transaction with a client. The Rule specifically states that “a lawyer shall not enter into a business transaction with a client” unless certain conditions are met. Those conditions are:

1. The terms are fair and reasonable to the client and are fully disclosed in writing;
2. The client is informed in writing that they may acquire independent counsel; and
3. The client gives informed consent to the transaction, including the attorney’s role in the transaction.

When we review the comments to the Rule, we see why this rule exists. The Court’s concern is that the attorney will have too much power in the relationship, which could lead to overreaching on the part of the lawyer. Further, the Court discusses how the risk to the client is great because the lawyer’s financial interest may differ from the interest of the client.

Therefore, the Court’s primary concern is that the client is fully informed about the fee agreement, the transaction, and the amount of fees ultimately being paid to the lawyer.

Rule 1.8 further states that “a lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation” except by contracting for reasonable contingent fees.

This brings up an interesting point: can a lawyer be paid a contingent fee for transactional work? That is essentially what is happening when a lawyer is paid with shares of the company. He or she is hoping that, through their efforts, the company will have value that can be obtained by selling the shares.

The Court is concerned that if the lawyer is paid on a contingent basis, the company won’t be able to fire the lawyer without a lot of headaches. If the company wants to enter into this kind of arrangement, the Court wants the company to be fully informed of the consequences.

That brings us to another point: the reasonableness of the fee. The Professional Rules state that fees must be reasonable, and the American Bar Association issued an opinion on the issue as well. The main worry is that shares of a company are difficult to value. This is especially true when a company is young, which is precisely when a fee agreement involving the transfer of shares would occur.

Let’s say that I do some legal work for a startup. The value of the legal work is around $20,000. I acquire some shares in the company, it’s not clear what the shares are worth. Six months later the company has exploded with growth and the shares are worth $200,000. Were my fees reasonable?

Well, it’s not clear. I had to wait six months to get paid, and I certainly contributed value to the company. The ABA also mentioned that the risk I took by doing the work for shares is a factor to be considered. The fee is probably reasonable.

However, the ABA mentioned that a better solution would be to agree on the value of the services now and then pay the attorney a number of shares of equivalent value when they are valuable.

This isn’t to say that there is a right way to do this or a wrong way. I’m merely pointing out that there is no clear answer about transactional work paid for with shares of a company.

Professional Rules of Professional Conduct – Rule 5.4

Rule 5.4 states that lawyers cannot share legal fees with nonlawyers, nor can they enter into a partnership with a nonlawyer if the partnership consists of the practice of law. Essentially, if a lawyer is a partner with a nonlawyer, they better not be practicing law.

Seems straightforward. I include it to point out that if a lawyer is being paid with shares of a company, they are becoming co-owners with people who may not be lawyers (in fact, they are almost certainly not, otherwise they wouldn’t need the lawyer). Therefore, the business they are working in should not conduct itself in any way that would appear to be practicing law.

But that wouldn’t happen, right? Don’t be so sure.

There are organizations where the practice of law could occur without intending to. For example, if I partner with a financial planner to offer financial advice to families, and as part of my role, I also give advice on estate planning. That could be considered the practice of law, and I may be in violation of Rule 5.4.

The Impact of a Multi-Tiered Business Structure

Let’s say I function as a co-counsel to Company A. Company A owns Company B, Company C, and Company D. Essentially, A is a shell company that holds intellectual property and whatnot. Can I be paid for my work with shares from Company B?

I think there is a serious conflict of interest here. My client is Company A, but I’m being paid by the success of Company B. This gives me a tremendous financial incentive to boost B over C, D, or even A. Classic conflict. I don’t think this system would be permitted by our ethical rules.

Conclusion

Can a lawyer work for shares of a company? Yes, but they better make sure everything is documented very clearly. The scope of the lawyer’s representation should be clear and the fee paid should be fully disclosed to all parties. Further, the fee agreement should include disclosures to the client covering their right to independent counsel.

There is a place for this kind of fee arrangement, especially when dealing with start-up companies, but everyone should proceed with caution.

May 4, 2020

A shot has been fired against Governor Pritzker’s Stay-at-Home Order. State Representative Darren Bailey filed a lawsuit against the governor, seeking a restraining order against the statewide order to stay home. This comes on the heels of protests in other parts of the country against governors’ powers.

I’m not going to wade into the debate as to whether we should stay home or reopen the economy (I do plan to write about what reopening might look like. Hint: not like it did before). However, I do want to discuss the governor’s powers and what possible limitations exist.

The Law

The statute that Pritzker’s orders are based on is 20 ILCS 3305/7, Emergency Powers of the Governor. This statute relates only to Illinois. I cannot vouch for any other state. The statute allows the governor to declare a state of emergency for 30 days. During those 30 days, the governor acquires a bunch of powers including suspension of state business, utilization of resources for emergency response, possession of private personal property, and the organization of evacuation.

The main item that people are focusing on is the 30-day limit. There is nothing in the statute that prevents the governor from issuing multiple states of emergency, nor is there any language expressly permitting it.

The Order

Governor Pritzker has issued multiple orders in relation to the COVID-19 pandemic. The most recent was issued on April 27 and extended the stay-at-home order until May 30.

The first disaster proclamation was issued on March 9. That was set to expire on April 7, but the governor extended it on April 1, lasting until April 30.

The current order requires the wearing of face masks in public. It also allows essential stores (of which there are many) to open but provide face masks to all employees, allow only 50% occupancy, and set up one-way aisles. Non-essential stores may offer curbside pick-up and drop off, and manufacturers may operate with face coverings and staggered shifts.

There are also requirements for staying at home, but with pretty liberal exceptions and little to no enforcement.

Essentially, this is the same order we lived with for April with some new exceptions that appear to be lifting some of the original restrictions. Though, in practice, it appears that day-to-day life will be roughly unchanged.

The Challenge

State Representative Darren Bailey of Xenia, Illinois attacked the stay-at-home order, claiming that the governor exceeded his authority.

Bailey said in a statement about the lawsuit, “Enough is enough! I filed this lawsuit on behalf of myself and my constituents who are ready to go back to work and resume a normal life.”

The local court agreed with Bailey and issued a temporary restraining order in his favor, but the court limited the restraining order to only Bailey. Everyone else is still subject to the order. Now other lawmakers are also filing suit.

This issue will most certainly head to the Illinois Supreme Court. I can find no case law that would provide any guidance as to what the Court can or will do. I do know that Pritzker has previously issued back-to-back declarations of emergency in 2019 for severe flooding that affected parts of the state. We are in our third month of this executive order. I don’t know if we have hit a “limit” of Pritzker’s power.

My Thoughts

The governor has a couple of things going for him. First, he has issued back-to-back orders previously so there is precedent for this kind of behavior. It doesn’t make it right, but the Court will certainly consider how other emergencies have been handled.

Second, these are unprecedented times. Just like how many laws and orders were allowed following 9-11, we are seeing unusual extensions of powers and laws. Again, that doesn’t make it right. And, in fact, some of the policies adopted after 9-11 were ultimately considered to be oversteps. It’s hard to imagine what the Court will do given the current never-before-seen pandemic.

Working against the governor is that he is not the appropriate governing body for long-lasting decisions. The legislation is the proper governmental unit to make widespread decisions. The purpose of the emergency rules is to allow the governor to make decisions while the legislature starts planning for long-term handling of a problem. Arguably, this is an overstep from Pritzker. Why Representative Bailey is seeking help through the Court rather than his own legislative body, I don’t understand. Perhaps he doesn’t feel anything needs to be done in the face of over 2,000 deaths. I cannot say.

What Will a Reopening Look Like?

I plan to write on this in the future (stay tuned!) so I won’t go into a lot of details now, but suffice to say that our world will not go straight back to ‘normal’ once these restrictions are lifted. There is still a serious health emergency happening, and reopening the economy without restriction will not address the public’s very real fears.

I’m sure many businesses would love to reopen, but simply opening your doors will not guarantee a return of customers. How long will it be until people return to restaurants? Hotels? Movie theaters? I don’t think this issue is as binary as some would want you to believe. The economy will not likely be ‘on’ or ‘off’, rather I think we will see a gradual rebuilding in line with the reasonable fears of the public.

Apr 29, 2020

If you managed to get a Paycheck Protection Program loan under the CARES Act, you can and should be concerned about loan forgiveness. You may already know that the amount of forgiveness may be reduced if you reduce your workforce or your employees’ pay, but many people I’ve spoken to don’t know exactly how the forgiveness works.

How does the forgiveness work?

If you maintain your staff and their pay, your loan will be forgiven in full so long as the proceeds are used for payroll, rent, and utilities. However, if you lay off any of your employees or reduced their wages by more than 25%, your loan will not be forgiven 100%.

If you reduce your full-time staff, your forgiveness will be reduced to a fraction where the numerator is the number of full-time employees during the 8-week covered period and the denominator is the number of full-time employees between January 1, 2020, and February 29, 2020.

If you run a seasonal business, you can opt for the denominator to be equal to the number of employees you had between February 15, 2019, and June 20, 2019. Essentially you are matching your workforce from last year.

Let’s use an example. Let’s assume you had 10 full-time employees prior to February 29, 2020. You laid off five of them. Your forgiveness would be reduced to 5/10 or 50% (the numerator would be the number of employees during the covered period and the denominator would be the number of employees prior to the period). If you only kept two employees, your forgiveness would be reduced to 20%.

The forgiveness reduction is similar for a reduction in wages. Your forgiveness will be reduced by a percentage equal to the percentage below 25% you reduced wages. Therefore, if you cut wages by 50%, your forgiveness will be reduced by 25%.

Confused? The SBA will be issuing additional guidance. Nothing like accepting a loan without knowing exactly how the forgiveness will work, right?

What happens if you laid-off workers before accepting the loan?

If like many businesses, you laid off workers prior to receiving PPP funds, your loan can still be forgiven so long as you rehire your employees before June 30, 2020. Note, you do not need to hire the same employees. You just need to have the same number of full-time employees as before the covered period.

But that brings me to an interesting point. What happens if you can’t afford to rehire employees? The requirement to rehire does not consider whether your business will be open or earning money. The PPP funds will only cover you for 8 weeks, and realistically, they may not cover all of a business’s expenses. The PPP loan expects that your rent expense will be about 1/4 of your payroll, hence the 2.5 times your payroll expense. But that’s not true for many businesses. There are plenty of situations where companies may not receive enough money to pay their people and pay rent, meaning at the end of the 8-week period, they may have considerably less than when the period began. How, then, are they supposed to hire their employees back?

Similarly, how long do you have to hire those employees back for? Couldn’t an employer hire the full-time employees as of June 30, 2020, and then fire them a few days later? There is no word on whether this is allowed, but I have seen nothing that would prevent it. I’m sure that the SBA won’t want that to happen, but for businesses who aren’t even open yet, I’m not sure there are other solutions.