Are lawyers obligated to speak out against doomed deals?

A news story last week in the London Daily Telegraph got me thinking about a lawyer’s responsibility – both legal and ethical – to pronounce on the viability of a deal that may seem doomed to fail.

The story cited a report by the Financial Services Authority, which seemed to suggest that advisers to the Royal Bank of Scotland (RBS) – including Linklaters, the fourth-largest firm in the world – must have known that RBS’s proposed merger with ABN Amro would end in tears (RBS was forced to accept a government bailout).

But even if Linklaters had felt the deal was a poor one, was it really the firm’s responsibility to speak up? Or more pointedly, to blow the whistle? RBS had hired Merrill Lynch and Deloitte to advise on financial and reporting matters. Could Linklaters really be held accountable for what, in hindsight, turned out to be a disastrous deal — both for shareholders and taxpayers.

I got on the phone with Lexpert ethics columnist and law school professor Paul Paton, who says he’s “not surprised that they’re trying to go after the lawyers.”

According to Paton, the same thing happened in 2002 with Enron. At the time, John Edwards – yes, he of ill repute – got up in front of the Senate and spoke to the need for higher standards in the legal profession. “He made this speech about how lawyers needed to remember that their client was not the CEO or the CFO, but the company and the company’s shareholders.”

When Enron’s lawyers, Vinson & Elkins, were questioned about what they should have known or should have said prior to that company’s demise, senior partners there responded by explaining that their job was to advise on let matters, not business matters.

That wasn’t good enough for legislators, who post-Enron instituted Sarbanes-Oxley and changes that, in the US at least, provided for a “crime-fraud exception” to confidentiality and up-the-ladder whistleblowing rules for lawyers.

Even today, Paton says that there is a real sense of caution around providing anything other than legal advice. He recalls a debate where one partner at a major Toronto firm was asked whether it was a firm’s duty to speak up where a deal seems unfeasible. “Our clients don’t want to hear that from us,” he said. “They’re paying us for legal advice, and so we’re not going to go outside the parameters of that legal advice”

Which is not to say that lawyers are restrained by the “parameters” of their professional expertise. Rules of professional conduct clearly state that lawyers may – not must, but may – refer to considerations other than legal ones, such as moral, economic, social and political considerations.

Sometimes that means having a frank discussion. “There are some firms that will sit down with a client and say, ‘We think your transaction has problems.”

But the general thinking is that (apart from some egregious examples) it’s simply not in the purview of legal counsel to warn off a prospective client. To suggest that a firm somehow should have known better, or that lawyers went through the motions of a doomed transaction in order to extract fees, strikes Paton as awfully convenient. “You would almost need to find that the lawyers had conspired with the clients to go ahead and run up the meter knowing that the transaction is not going to proceed.”

And that would be quite an accusation indeed.

David Dias

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