Many people do not realize that an attorney would have a conflict of interest in representing all or even some of the owners of a company in drafting or reviewing the founding document(s) for a company. It is perfectly acceptable for one attorney to represent a company in later transactions, such as engaging or hiring independent contractors and employees or entering into a strategic partnership with another entity; in such cases, the attorney represents the interests of all the owners by representing the company as a whole. In the drafting of a company’s founding document(s), however, the owners, rather than the company itself, are the parties to those agreements and each of those parties has different interests.
Each Owner Should Have Separate Representation In Drafting or Reviewing Founding Documents
Founding documents, such as operating and shareholder agreements, bylaws and organizational minutes, address matters related to management and decision-making, such as what decisions are made at the board of director (corporation) or manager (LLC) level and what decisions are made at the ownership level. There are more obvious examples of interests diverging between owners in a decision-making context, such as when there are two owners, one with a significant majority interest and the other with a much smaller minority interest, say 75%/25%. In many cases the 25% owner does not have an expectation of being able to make decisions for company affairs, understanding their minority status. But there are larger decisions in which the minority owner might like to have a say, such as the sale, merger, or liquidation of the company or taking on a certain amount of debt.
Ensuring the founding document(s) take the minority owner’s interests into account will often require representation of the minority owner, as the majority owner is typically in charge of drafting the founding document(s) and is surely more interested in maximizing their majority control. This protection of minority owners is relevant not just to decision-making, but to all rules of the company, such as how and when owners may sell their interests in the company to third parties, how and when additional owners may be admitted to the company and how and when additional capital is to be contributed to the company.
During Formation, Each Individual Owner Has Distinct Interests From Other Owners
Even when all the owners seemingly have aligned interests, a conflict of interest still exists. Take, for example, a company with four owners, each with 25% ownership and equal voice in company management and affairs. It may seem that to represent one is to represent them all, but that is not the case. Each owner, at 25%, is still a minority owner on their own. And that is all that can be relied upon. If you arrange decision-making around majority vote, then one owner may be the one typically left out in the cold, perhaps the one who has the weakest personal or strategic bond with the other owners. So it would be in that owner’s best interests to make sure that their minority interest was protected in the founding documents. It is also important that all owners protect the minority interest in case they find themselves in that position later. Finally, tiebreaking mechanisms should be considered any time there are an even number of owners and majority vote is the determining factor in most of the company’s decision-making.
Given the above, it is important to remember that you don’t have the same interests as the other owners as you form the company, and therefore representation should be restricted to each individual owner, or at least each owner should understand the drafting attorney is not representing the interests of all owners even if their ownership is equal. Once the company has been formed and the founding document(s) drafted, however, decisions made by the company will be company decisions, and therefore one attorney may freely represent the company’s interests without conflict concerns.