Formal Opinion 2000-3: Acceptance of securities in a client in exchange for legal services to be performed; business transactions with clients; conflicts of interest; charging or collection of an excessive fee
Formal Opinion 2000-3: Acceptance of securities in a client in exchange for legal services to be performed; business transactions with clients; conflicts of interest; charging or collection of an excessive fee
TOPIC: Acceptance of securities in a client in exchange for legal services to be performed; business transactions with clients; conflicts of interest; charging or collection of an excessive fee.
DIGEST: Attorney may, in certain circumstances, ethically accept securities in a client company in exchange for legal services to be performed; an attorney may have to meet the requirements of DR 5-104(A) if the client expects the lawyer to exercise independent professional judgment for the protection of the client; attorney should be mindful that, in some situations, there may be non-consentable conflicts of interest which preclude such an arrangement; in other situations, the attorney may be required to disclose potential conflicts of interest, advise client of right to seek independent counsel with respect to the fee arrangement and obtain written consent of client; attorney should evaluate, at the time the fee arrangement is agreed to, whether the acceptance of securities as compensation for legal services to be rendered would constitute an excessive fee.
CODE: DR 2-106; DR 5-101; DR 5-104; DR 5-105; EC 2-20; EC 2-24; EC 5-3; EC 5-15
May an attorney accept securities in a corporate client for legal services to be rendered, and, if so, what ethical concerns are presented by an agreement by an attorney to accept securities in a client company instead of a cash fee?
As high technology and internet companies have continued to spawn throughout the country from Silicon Valley, California to Silicon Alley, New York, the legal profession has been prompted to examine and adopt alternatives to the conventional hourly billing rate arrangement that has been traditionally applied to more mature companies. In response to the attitudes and concerns of the “”new age”” entrepreneurs who are often strapped for cash, normally risk-averse attorneys increasingly are accepting securities, including options or equity stakes, in startup companies, instead of their customary cash retainers and monthly payments for legal services.  These relatively new and novel, business-driven fee arrangements, which provide the attorney with an additional interest in the business success of the client, raise important questions of professional and ethical concern to attorneys in private practice and have generated a new arena for critical review and analysis.
Among the ethical issues raised by a lawyer’s acceptance of securities in a corporate client in exchange for legal services to be rendered are those relating to the reasonableness of the fee charged to the client, the potential conflicts of interest with the client and the effect on the attorney’s independence and judgment. Given the increasing frequency with which lawyers are accepting securities and the widespread interest by members of the Bar in the ethical propriety of these arrangements, we take this opportunity to examine and address the ethical issues raised by acceptance of securities in exchange for legal services to be rendered.
In Part A, we examine the application of ethics rules governing an attorney’s business transactions with a client to arrangements between a lawyer and a client for fees to be paid in securities of a client company. In Part B, we analyze potential conflicts of interest that may arise as a result of accepting securities in exchange for legal services to be rendered. In Part C, we address the issues to be considered in determining whether a payment in the form of securities in the client company is “”excessive.””
Before turning to these specific ethical concerns, for the sake of clarity, we state here our conclusion that there is no per se ethical prohibition on the acceptance of shares or other securities, including options, as compensation for legal services to be rendered. We hasten to add, however, our caution that such arrangements can present thorny ethical and other issues that must be resolved prior to entering into an arrangement in which a lawyer is to be compensated in client company securities.
A. Entering into a Business Transaction with a Client
As a threshold matter, whenever an attorney is considering accepting securities in a client company as a fee for services to be rendered, DR 5-104(A) may be implicated. This rule outlines the parameters under which it is ethically permissible for an attorney to enter into a business transaction with her client. DR 5-104 provides:
(A) A lawyer shall not enter into a business transaction with a client if they have differing interests therein and if the client expects the lawyer to exercise professional judgment therein for the protection of the client, unless: (1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client; (2) The lawyer advises the client to seek the advice of independent counsel in the transaction; and (3) The client consents in writing, after full disclosure, to the terms of the transaction and to the lawyer’s inherent conflict of interest in the transaction.
On its face, DR 5-104(A) requires a two part inquiry. First, the attorney must determine if the transaction is one in which the attorney and her client have differing interests and in which the client expects the lawyer to exercise professional judgment on the client’s behalf. If these questions are answered in the affirmative, then the attorney must demonstrate that the terms of the transaction are fair and reasonable to the client and have been transmitted to the client in clear written form, that the attorney has advised the client that the client may consult independent counsel and that the client has consented in writing after full disclosure.
In other jurisdictions, ethics committees considering arrangements in which an attorney accepts securities in a client instead of a cash fee consistently have concluded such transactions may withstand ethical scrutiny provided that the obligations to provide full disclosure, to advise the client of the client’s right to obtain independent counsel and to obtain written consent of the client are satisfied. See, e.g., Utah 98-13 (1998) (finding that Model Rule 1.8, which is analogous to DR 5-104, “”was intended to apply to any transaction with a client in which the lawyer acquires an ownership interest in the client””); Mississippi 230 (1995) (opining that “”the acceptance of stock in a corporation as a fee for incorporating the business does not create a conflict of interest per se”” but that “”the lawyer’s acquisition of stock in the client amounts to the entering into a business transaction with the client””); Pennsylvania 89-158 (1989) (opining that attorney may accept securities in client as payment for corporate work and that such a fee arrangement constitutes a business transaction with the client within the purview of Pennsylvania’s Rule 1.8). Accord Hazard & Hodes, The Law of Lawyering, 1.8:202, p. 263, “”Illustrative Case: Taking an Interest in a Client’s Business in Lieu of a Fee”” (finding that taking an interest in a client’s business instead of a cash fee implicates disclosure, consent and independent counsel requirements of ABA Model Rule 1.8(a)).
However, the text of N.Y. DR 5-104(A) differs from that of the rules under which these opinions were issued. Unlike these other rules, the New York rule interposes a threshold inquiry before requiring the lawyer to undertake the disclosure and other prescribed remedial measures. On its face, DR 5-104 applies only to business transactions where “”the client expects the lawyer to exercise professional judgment therein for the protection of the client,”” and absent a specific requirement imposed by disciplinary rule, requirements such as those imposed by DR 5-104(A) would not be mandated. See Beatie v. DeLong, 164 A.D.2d 104, 561 N.Y.S.2d 448, 451 (1st Dep’t 1990) (finding “”[no] authority to support defendant’s contention that attorney . . . was obliged to advise [client] of the desirability of obtaining independent legal advice”” before granting him an interest in the proceeds of the patent as payment for legal services to be rendered); see also N.Y. City 80-14.
Some commentators have concluded that DR 5-104(A)’s disclosure and consent requirements do not apply to fee arrangements entered into at the outset of the representation:
A prominent exception to DR 5-104(A) is that a fee agreement, at its inception, is not covered by the rule, even though a fee agreement is literally “”a business transaction with a client.”” If fee agreements were covered by the rule, then a lawyer would have to advise every client to obtain independent counsel before entering into a fee agreement. If the client retained independent counsel, that lawyer would also have to advise the client to obtain independent counsel before entering into a fee agreement – so on down the line. To avoid this absurd result, fee agreements are considered outside the scope of DR 5-104(A).
Simon’s Code of Prof’l Resp. Ann., DR 5-104(A), Commentary at 310 (West 2000). Professor Simon’s conclusion is consistent with a prior opinion of this Committee. See N.Y. City 88-7 (1988) (“”the mere establishment of a lawyer’s fee . . . is not normally regarded as a business transaction’ under DR 5-104(A)””) (citing Wolfram 8.11.3, at 481-82).
In Opinion 88-7, we concluded that an attorney’s acceptance of a mortgage interest in a client’s home to secure payment of a fee constituted a “”business transaction with a client”” within the meaning of DR 5-104(A). In reaching this conclusion, we stated:
A mortgage and related agreements may well contain highly technical language raising important legal obligations readily ascertained by the lawyer but imperceptible to the untrained eye. People whose situation requires the assistance of counsel may be particularly vulnerable.
In certain circumstances, these concerns may also apply to the fee arrangements considered here. Principals in startup companies typically entering into “”securities for fees”” arrangements may be legally unsophisticated and may be relying on the attorney with respect to the transaction.
In our opinion, the application of DR 5-104(A) can, and should, be resolved by the text of the rule, which extends its mandates to all those situations in which the client expects the lawyer to exercise independent judgment for the protection of the client. Consistent with Opinion 88-7, we conclude that DR5-104(A) does not exclude from its ambit fee agreements between lawyers and clients. To be sure, garden variety fee arrangements generally can be expected to fall outside the scope of DR 5-104(A) because the client will rarely be relying on the lawyer to provide “”independent advice”” in connection with such an arrangement. As a result, the endless chain of independent lawyers envisioned by Professor Simon will not occur. In any event, there is nothing in the text of DR 5-104(A) that automatically precludes its application to all fee arrangements.
This same textual analysis also leads the Committee to the ineluctable conclusion that New York’s DR 5-104(A) does not automatically impose any consent or disclosure requirements on all transactions in which an attorney accepts securities in a client company for legal services to be rendered, at least where such an agreement is reached at the outset of the representation. This is not to say that DR 5-104(A) will never apply to such a fee arrangement. Whether the rule applies in specific circumstances will necessarily turn on whether the lawyer is expected to provide independent advice in the specific transaction by which the securities for services exchange is made. If the lawyer is expected to play any role in advising the client, especially if a client lacks sophistication, the mandates of DR 5-104(A) must be followed. See N.Y. City 88-7. In performing this analysis, we note, however, that there is a crucial difference between bargaining with the client, a function that puts the lawyer squarely on the other side of the table, and providing advice to the client relating to a transaction, including a transaction involving fees, where the client expects to rely on the attorney’s judgment.
Although DR 5-104(A) does not always apply, the Committee notes that the New York Court of Appeals has cautioned that transactions between attorneys and their clients are “”not advisable.”” Greene v. Greene, 56 N.Y.2d 86, 92, 436 N.E.2d 496, 499, 451 N.Y.S.2d 46 (1982); see also Mary C. Daly, “”The Perils in Business Transactions with Clients,”” The New York Professional Responsibility Report, at 2 (March 2000); Hazard & Hodes, The Law of Lawyering, 1.8:200 at 262 (“”there are no transactions that courts will scrutinize with more jealousy than dealings between an attorney and his clients””). Indeed, if the attorney-client relationship were to dissolve and litigation over the fee arrangement were to ensue, the terms of the agreement would be construed most favorably to the client. Schlanger v. Flaton, 218 A.D.2d 597, 631 N.Y.S.2d 293, 295 (2d Dep’t 1995). Absent the attorney’s ability to demonstrate “”that the client was fully aware of the consequences and that there was no exploitation of the client’s confidence in the attorney,”” the client may be able to rescind the agreement.Greene, 56 N.Y.2d at 92. If the attorney makes complete disclosure, obtains client consent and informs the client that the client should seek independent advice with respect to the fee arrangement, even where such measures are not required by DR 5-104, the lawyer may reduce the likelihood of such an adverse result. Thus, although it is not ethically mandated in all cases by DR 5-104(A), we believe that the more prudent course for an attorney exchanging legal services for securities in the client company would be to follow the disclosure and written consent requirements of the rule.
B. Conflicts of Interest
An attorney’s inquiry into her potential ethical obligations arising out of a transaction in which the attorney accepts securities for fees does not end with DR 5-104. Unique issues of potential conflicts of interest also may arise as a result of such arrangements.
At the outset of the representation, the acceptance of securities in a client corporation as part of the consideration for legal services to be rendered may implicate the standard of independent professional judgment that is embodied in DR 5-101(A):
A lawyer shall not accept or continue employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents to the representation after full disclosure of the implications of the lawyer’s interest.
Under this rule, if the lawyer accepts securities from a client in exchange for legal services to be rendered, as a threshold matter, she must determine whether this ownership interest in the client would, or reasonably may, affect the exercise of her independent professional judgment on behalf of the client. If the answer is affirmative, the lawyer must then determine whether a “”disinterested lawyer”” would believe that the effect on the lawyer’s exercise of professional judgment will be adversely affected because the lawyer stands to be paid in securities of her client. If the effect is determined to be adverse, then the conflict is non-consentable and the representation on those terms must be declined. On the other hand, if a reasonable determination is made that the effect on the representation would not be adverse, then the arrangement can proceed if the client consents to the representation after the implications of the lawyer’s interest are fully disclosed.
The New York State Bar Association’s Committee on Professional Ethics has observed that “”when there is no more than a fanciful, theoretical or de minimusrisk that the lawyer’s judgment will be affected adversely by a potentially relevant set of interests, DR 5-101(A) imposes no restriction. . . . At the other extreme, DR5-101(A) has long been understood to foreclose the lawyer from undertaking a representation, even with the client’s consent after full disclosure, if there is a reasonable probability (viewed objectively) that the lawyer’s interests will affect adversely the advice to be given or the services to be rendered to the client.”” N.Y. State 712 (1999) (citations omitted). See also NYSBA EC 5-2.
It is this Committee’s opinion that an arrangement by which a lawyer accepts securities in a client corporation as compensation for legal services to be rendered reasonably may affect the professional judgment of the lawyer on behalf of her client. By way of example, when a lawyer has agreed to accept securities in a client corporation as a fee for negotiating and documenting an equity investment, or for representing it in connection with an initial public offering, there is a riskthat the lawyer’s judgment will be skewed in favor of the transaction to such an extent that the lawyer may fail to exercise independent professional judgment. It is possible that the lawyer’s interest in the securities may create economic pressure to “”get the deal done,”” which pressure in turn may impact the lawyer’s independent judgment on disclosure issues. In this respect, the risk is not significantly different than that presented when the lawyer’s cash fee depends (in whole or in part) on a business transaction’s successfully closing. In both cases, the lawyer is “”invested”” in the transaction. The contingent fee arrangement has long been accepted as ethical if the fee is appropriate and reasonable and the client has been fully informed as to alternative billing arrangements. ABA 389 (1994). We see no ethical distinction between the transactional contingent fee and agreeing to take client securities instead of cash fees.
Although such an arrangement may affect the lawyer’s independent professional judgment, it still can pass muster under the “”disinterested lawyer”” test of DR 5-101(A). DR 5-101(A) would preclude any arrangement if there exists a reasonable probability (viewed objectively) that the lawyer’s interests will affect adversely the advice to be given or the specific services to be rendered to the client. See N.Y. State 712 (1999). See also Utah 98-13 (1998) (if a lawyer agrees to accept stock in a client company in return for performing services for that company, a possible conflict does not preclude the representation; the critical questions are the likelihood that a conflict will arise and whether it will materially interfere with the lawyer’s professional judgment in considering alternatives or foreclosing courses of action). This Committee believes that, standing alone, acceptance by a lawyer of a “”stake in the action,”” is not sufficient to warrant the conclusion in every case that a lawyer’s exercise of professional judgment on behalf of his client will be adversely affected by accepting securities in her client’s company for legal services to be performed. See Mississippi 230 (1995) (there is no inherent conflict of interest in lawyer accepting stock for fees to incorporate a corporation and provide legal advice); Virginia 1593 (1994) (notper se improper for lawyer to be compensated in stock for his legal services).
The determination of whether a reasonable probability of such an adverse effect exists is factually driven and demands an analysis of the nature and relationship of the particular interest and the specific legal services to be rendered. Some salient factors to be considered may be the size of the investment in proportion to the holdings of other investors, the potential value of the investment in relation to the law firm’s earnings or assets, the possible impact on the lawyer of levels of risk involved, and whether the investment is active or passive. See Barrie, “”Investing in Your Client’s Business,”” Wash. State Bar News (Mar. 2000). The Committee can envision situations in which there exists a likelihood, when viewed objectively, that the lawyer’s interest in “”getting the deal done”” will adversely affect the lawyer’s independent professional judgment. The risk of such an adverse effect would be especially high, for example, in the case of a potentially very large fee paid in client securities which represents both a significant portion of the law firm’s revenues and a substantial stake in the client’s business. In these circumstances, it is conceivable that the desire to obtain such a fee might diminish the willingness of the attorney, albeit unconsciously, to advise the client company to disclose negative information or increase the lawyer’s willingness to issue a questionable legal opinion required to close the deal. In such situations, the conflict would be non-consentable and the fee arrangement ethically prohibited.
If, however, a determination is made under the “”disinterested lawyer”” test that the lawyer’s representation of the client will not be adversely affected by an agreement to accept client securities as payment for legal services to be rendered, DR 5-101(A) allows the representation, but only if full disclosure is made to the client and the client’s consent is obtained. Although not required under the Disciplinary Rule, the Committee recommends that the disclosure and consent be in writing for the same reasons we believe it is prudent under DR 5-104(A). SeeNYSBA EC 5-3.
Disclosure should include, among other things: (1) the risks inherent in representation by a lawyer with a financial, business, property, or personal interest in the company, including the possible effects upon the lawyer’s actions and recommendations to the client; (2) the possible conflicts that might arise between lawyer/shareholder and client or its management and the range of possible consequences stemming from them; and (3) any potential impact on the attorney/client privilege and confidentiality rules, particularly in communications between the client and the attorney in his role as investor rather than as counsel. See Barrie, “”Investing in Your Client’s Business,”” Wash. State Bar News (Mar. 2000).
C. Excessive Fees
A lawyer must also consider whether accepting securities in a client as payment for legal services to be rendered constitutes the charging or collection of an excessive fee in violation of DR 2-106.
An agreement to accept securities in satisfaction of legal fees is not prohibited by DR 2-106(A). However, DR 2-106(A) prohibits a lawyer from agreeing to charge an excessive fee for his or her legal services as well as collecting such a fee. An arrangement by which an attorney is to be paid wholly or partly in securities must satisfy this requirement.
DR 2-106(B) provides a test for determining whether a fee is “”excessive”” by asking whether it would be the “”definite and firm conviction”” of “”a lawyer of ordinary prudence”” that “”the fee is in excess of a reasonable fee.”” This test (eliminated from comparable Rule 1.5(a) of the ABA’s Model Rules of Professional Conduct) is intended to be an objective one. The rule also provides eight “”factors”” to assist in determining whether a legal fee is excessive. Those eight factors are:
(1)The time and labor required, the novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly. (2)The likelihood, if apparent, or made known to the client, that the acceptance of the particular employment will preclude other employment by the lawyer. (3)The fee customarily charged in the locality for similar legal services. (4)The amount involved and the results obtained. (5)The time limitations imposed by the client or by the circumstances. (6)The nature and length of the professional relationship with the client. (7)The experience, reputation and ability of the lawyer or lawyers performing those services.
(8)Whether the fee is fixed or contingent.
(See Simon’s New York Code of Professional Responsibility Annotated, 2000 edition, at 148, 149 for discussion of these factors).
The foregoing factors are not meant to be all-inclusive. Determination of what is excessive is a fact-specific exercise. See ABA, Annotated Model Rules of Professional Conduct, 4th ed., at 48 (discussing Model Rule 1.5(a) of the Model Code of Professional Responsibility which identifies the same eight factors as assisting in the determination of whether a fee is excessive).
A determination of whether a fee is excessive is not always easily made. In the case of an arrangement in which securities are received for legal services, the decision is more complex, and there are additional factors which should be considered, especially where the securities to be received are those of a “”start up”” business, or are part of or in connection with a public offering of the securities. Examples of additional such “”factors”” are:
. . . (1) The likelihood the transaction in question will or will not close and whether there are any contingent plans for payment of legal fees; (2) the estimated current and future value of the equity [i.e. securities] interest considering all the normal risks of a start-up business and any specific risks to the business or its assets; (3) the liquidity of the interest, including whether it is now or may in the future be publicly traded; (4) any restrictions on transfer of the interest, whether by agreement with the client . . . or by law; (5) the percentage amount of the interest, and what, if any, degree of control it provides the lawyer over the business; and (6) what restrictions, if any, are placed on the money used to pay for the equity interest – for example that it must be used to pay future legal bills.
See Utah 98-13 (1998).
Many of these factors, especially in the case of securities in a startup company, obviously cannot be determined with any degree of assurance, at least until the transaction or matter is completed. As such, a crucial question in determining whether a fee in the form of securities is “”excessive”” is the time at which the value is measured. An equity stake in a corporation that turns out to be successful might seem excessive in relation to the services rendered if the value is determined only after the success is achieved. But to make this evaluation at that end point – and with the wisdom of hindsight – would not value the fee that the client agreed to pay or the lawyer accepted, because it would eliminate the risk that the lawyer undertook that the venture would fail and the securities, i.e. the fee, would have little or no value. Accordingly, we conclude that a determination of whether a fee accepted in the form of securities is excessive requires a determination of value be made at the time the agreement is reached. To be sure, this test may allow attorneys to receive fees that turn out to be spectacular windfalls in relation to the compensation that would normally be received on a cash basis. But as long as the reward stems from the investment risk accepted, not from an excessive fee, the result will equate to a lawyer’s investing cash, not services, in the venture. We hasten to add that not all payments in the form of client securities will pass muster under this test. In cases where the risks are minimal and the amount of securities received by the lawyer is excessive in relation to the services to be rendered, the fee would not cease to be “”excessive”” merely because the venture was not a sure thing.
The importance of estimating the value of the arrangement whereby payment is made in the form of client securities instead of cash is not limited to issues of professional responsibility. In addition to being subject to professional discipline under DR 2-106(A) if a fee were found to be excessive, a lawyer might also face possible civil liability or a justified refusal on the part of the client to make payment of the agreed-upon fee. The problem is compounded by the rule that an attorney, as a fiduciary, bears the burden of proving that the transaction entered into with a client is reasonable and not the fruit of undue influence. See Mallen & Smith, Legal Malpractice, 3rd ed. 1989, Section 11.19.
A lawyer accepting payment in the form of client securities should seriously consider engaging an investment professional to advise as to the value of the securities so given. The attorney and client can then make their own advised decisions as to the reasonableness of the transaction.
In considering the lawyer’s obligations under DR 2-106, attention must also be given to whether the taking of client securities as payment instead of a cash fee constitutes the making of a contingent fee arrangement. We have seen above that there is difficulty in estimating the value of the securities or the size of the fee until the success or failure of the matter or transaction has been established. There are obvious elements of contingency in such an arrangement. At least one committee on ethics of a sister state has concluded that a contingent fee is created where securities are given as an attorney’s fee in payment for legal services furnished in a public offering. See Kansas Bar Association, Ethics Opinion 98-6 (September 25, 1998). The rationale for such a conclusion is that the failure of the offering will likely lead to no securities being given, or whatever is given being worthless.
Determination of whether a fee paid in whole or in part in securities should be characterized as a “”contingent fee”” is of importance in determining whether the lawyer is required by DR 2-106(D) to “”provide the client with a written statement at the outset of the engagement stating the method by which the fee is to be determined”” as well as a statement “”at the conclusion of the contingent fee matter,”” providing “”the client with a written statement stating the outcome of the matter. . . .”” Although the foregoing disciplinary rule would seem to have been drafted with litigated actions in mind, there is no exception made in the provision for transactional matters
Moreover, we note that New York State Bar Association Ethical Consideration 2-20, which is not a binding ethical rule but is aspirational in nature, states that a lawyer “”generally should decline to accept employment on a contingent fee basis by one who is able to pay a reasonable fixed fee.”” Thus, to the extent a “”securities for fees”” transaction includes a “”contingent”” element, such an arrangement is disfavored where the client could pay a reasonable cash fee. However, given the fact that many, if not most, of the clients seeking to exchange their securities for legal services to be performed are start-up companies that are strapped for cash, we view such arrangements to be consistent with EC 2-20. In addition, the Committee notes that Ethical Consideration 2-24 states that “”even a person of means may be unable to pay a reasonable fee, which is large because of the complexity, novelty, or difficulty of the problem or similar factors.”” As most of the matters in which client securities provide the currency for paying a lawyer’s bill are complex corporate transactions, even well-established commercial clients may not readily be in a position to be “”able to”” pay a cash fee for the legal services they require.
Finally, a lawyer who accepts securities in whole or in part as a substitute for cash fees is bound in the event of his or her premature discharge or withdrawal to receive no more in value than the work to the date of discharge or withdrawal justifies. To the extent the work has not been completed, it is clear that receipt of the entire fee contemplated to be charged at the outset would be excessive and must be credited or refunded to the client. N.Y. State 599 (1988). See In re Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d 465 (1994). That principle is equally applicable to an arrangement whereby securities are given by the client in payment for legal services to be rendered.
 See, e.g., “”Who Wants to Be a Millionaire?””, ABA Journal, February 2000;Cravath’s $35 Million Fee Wager, New York Law Journal, January 20, 2000;D.C. Firms: It’s Time to Take Stock, Legal Times, April 3, 2000.
 See, e.g., Report: Business and Ethics Implications of Alternative Billing Arrangements, American Bar Association, Committee on Lawyer Business Ethics, published in Business Lawyer, November 1998.
 It is beyond our scope, and, therefore, we do not address significant potential legal issues that may impact a lawyer’s determination to accept securities for legal services, including the possible heightened exposure to lawsuits and the impact on the lawyer’s insurance coverage for malpractice.
 See also Arizona 94-15 (1994) (finding that lawyer could ethically accept interest in client’s patent instead of cash fee, provided lawyer complied with requirements of Arizona Rule 1.8(a)).
 Compare N.Y. DR 5-104(A) with Miss. RPC Rule 1.8 (1999); Pa. St. RPC Rule 1.8(a) (1999); Utah Code Jud. Admin. R. 1.8(a) (2000); D.C. Bar Appx. A, Rule 1.8 (2000). Under the analogous rule in Virginia, which is similar to New York’s rule in this respect, the ethics committee of the Virginia Bar concluded that “”an attorney may, under DR 5-104(A), provide legal services to a corporation in consideration of the stock issued so long as he feels his independent professional judgment will not be affected by his status as a stockholder, the client consents after full disclosure by the lawyer of the potential conflicts of interest, and provided that the transaction is not unconscionable, unfair or inequitable when made.”” Va. No. 1593 (1994).
 However, it has been suggested that modifications to a fee agreement after the representation is under way are subject to the strictures of DR 5-104(A). Simon’s Code of Prof’l Resp. Ann., DR 5-104(A), Commentary at 310 (“”material changes in fee arrangements made after the attorney-client relationship has begun generally do constitute business relationships between lawyers and clients and are governed by DR 5-104(A)””) (emphasis in original).
 Although Professor Wolfram states that “”courts have applied the code to all business transactions, including situations in which the lawyer does not contemporaneously perform legal work or in which the technical lawyer-client relationship has ended,”” Wolfram, Modern Legal Ethics, 8.11.2 at 480, n.79 (West 1986), he writes elsewhere that strict scrutiny of lawyer-client business transactions “”applies to all business dealings between lawyer and client after the relationship of lawyer and client has been established. It extends to fee contracts themselves if they have been entered into or modified after the representation begins.”” Wolfram, 8.11.3 (emphasis added).
 Concerns regarding the lawyer’s liability arising out of a situation in which the client pays its fees in the form of its own securities are compounded by the fact that an attorney’s malpractice insurance may not cover a dispute with a client relating to such a fee arrangement. See “”Who Wants to Be a Millionaire?””, ABA Journal, February 2000, at 40.
 In order to assure that the disclosure requirements of DR 5-104(A) are met, the lawyer should disclose:
(1) the nature of the transaction and each of its terms; (2) the nature and extent of the lawyer’s interest in the transaction; (3) the ways in which the lawyer’s participation in the transaction might affect the lawyer’s exercise of professional judgment in concurrent legal work for the client, if any; (4) the desirability of the client’s seeking independent legal advice if the client is not already independently represented; and (5) the nature of the respective risks and advantages to each of the parties to the transaction.
Wolfram, 8.11.4, at 484-85.
 The analogous provision in the ABA Model Rules of Professional Conduct requires the client’s “”consent after consultation”” if the “”representation of [the] client may be materially limited . . . by the lawyer’s own interest.”” Model Rule 1.7(b). In addition, Model Rule 1.8(a) requires that the client be given a reasonable opportunity to seek independent counsel and that the client consent in writing if a lawyer “”knowingly acquire[s] an ownership, possessory, security or other pecuniary interest adverse to a client.””
 The Committee notes that ethical considerations have traditionally discouraged a “”contingency”” arrangement in situations where the client can afford to pay the fee in cash. NYSBA EC 2-20. See pp. 22 – 24 infra.
 This risk of compromising the lawyer’s independent judgment can be further exacerbated in situations where a lawyer’s compensation depends directly in whole or in part on the amount of fees generated for the firm and where the particular lawyer is also responsible for providing the legal services involved. In extreme cases, to minimize the possibility that the independent professional judgment of the lawyers working on behalf of the client would be compromised, a firm might consider taking measures such as prohibiting an attorney from working on matters of a client that she introduced to the firm and that is paying its fees in the form of its securities or at least placing some other partner in charge of the matters.
 For guidance on disclosures to clients entering into a business transaction generally, see Wolfram, � 8.11.4, at 484-85.
 Although it does not bear on the ethical propriety of accepting securities in a client for legal fees, it is noteworthy that if the securities are of significant value, they may foreclose the lawyer from accepting engagements for other clients that are adverse to the company. By owning securities in an entity with an interest adverse to a current client (whether such securities were purchased independently or were obtained from a former client in exchange for legal services), an attorney is at risk of putting her own financial or property interests in conflict with those of her client, plainly implicating DR 5-101(A). The question of whether a lawyer’s “”exercise of professional judgment on behalf of a client will be or reasonably may be affected by the lawyer’s own”” interests resulting from securities ownership involves both objective and subjective inquiries. See N.Y. State 712 (1998). The relevant objective factors to be considered include: (1) the nature of the attorney’s representation of the current client; (2) the likelihood that the value of the attorney’s securities in the former client will be significantly affected by the outcome of the current representation; and (3) the extent to which the lawyer’s judgment might be affected as a consequence. See N.Y. State 712 (1988). Although not necessarily required by the rules in each instance, the prudent course in such situations would be to obtain the subsequent client’s consent to the potential conflict after full disclosure.
 See ABA, Annotated Model Rules of Professional Conduct, 4th ed. at 48; Simon’s New York Code of Professional Responsibility Annotated, 2000 edition, at 146.