California Bar Journal
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Self-Assessment Test
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Answer the following questions after reading the MCLE article on legal ethics. Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. Please allow at least eight weeks for MCLE certificates to reach you in the mail.

1. A lawyer’s acquisition of a client’s stock in exchange for legal services should be fair and reasonable to the client.

2. Valuation of stock should be set by some objective measurement such as the price set for founders shares, or ‘friends and family’ shares or by the market.

3. Another method of valuation is to value the stock at the amount per share that cash investors, knowledgeable about its value, have agreed to pay for their stock about the same time.

4. Since the value of stock to be issued is always reasonably ascertainable, the lawyer can easily set the price of the stock to be exchanged for legal services.

5. The percentage of stock agreed upon should reflect the value, as perceived by the client and the lawyer, at the time of the transaction.

6. When the value of the stock is not reasonably ascertainable, a lawyer is required to engage an investment professional to advise the client regarding the value of the securities. 

7. Vesting of the stock is never a consideration in determining fairness and reasonableness.

8. Since all the principles of start-up companies are sophisticated, no writing other than the transfer of stock is necessary to comply with the writing requirement of rule 3-300.

9. Another means of compliance with the writing requirement of rule 3-300 is to have the terms of the transaction and the consent of the appropriate directors or officers recorded in the corporate minutes.

10. The client must be advised in writing of the opportunity to seek independent counsel of the client’s choice, even though the client is sophisticated.

11. The written advisement to seek independent counsel is only a formality for the sophisticated client; the sophisticated client  need not be afforded an opportunity to seek the advice of independent counsel on the transaction.

12. It is not necessary to document which independent counsel the client consulted

13. It is also good risk management to document the client’s acknowledgement that the client did not desire to seek independent counsel after being advised in writing to do so and after having been afforded an opportunity to do so.

14. After full compliance with the first four steps, the client’s written consent to the terms of the transaction is really unnecessary.

15. A lawyer must determine whether an ownership interest in the client reasonably might affect the exercise of independent professional judgment on behalf of the client.

16. Where it is possible that the lawyer’s interest may create economic pressure to ‘get the deal done,’ and that this pressure in turn may impact the lawyer’s independent judgment on disclosure issues, the lawyer should orally explain the conflict to the client.

17. One practical method of lessening the diminution of a lawyer’s independent judgment is to limit the firm’s stake in its clients to 1 percent or less.

18. Preserving independence of judgment in taking equity in client companies involves lawyer consideration of 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.

19. In ensuring that taking stock in client companies in lieu of legal fees does not violate the prohibition against unconscionable fees, a lawyer must consider 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.

20. The value of the lawyer’s interest in client stock will be determined at the time the client makes a claim of misconduct against the lawyer.