Q: I’ve been advised to seek “independent legal advice,” or “ILA,” but I don’t really know what it means.
Anna: Why have you been advised to seek ILA?
Q: I’m the principal shareholder of a local technology company. We’re negotiating our first significant debt financing, and the lender is requesting a personal guarantee from my spouse and me of all our assets. I thought I could just rely on the advice of our corporate legal counsel, but the lender and our counsel are both saying we should obtain ILA. What exactly is ILA?
Anna: ILA is a kind of limited retainer necessary in certain situations where there is an unrepresented person, or where there is the prospect of a conflict of interest. In these situations, the lawyer giving ILA doesn’t represent the client, but rather advises the client. The lawyer giving ILA ensures that the client understands his or her right to independent representation even if the client waives that right.
Q: Can’t my company counsel act for both the company, and my spouse and me?
Anna: Company counsel can act for both a company and its principals in a joint retainer situation, but this must be handled with care. Joint representations should always include an invitation, in fact a recommendation, to the more vulnerable, less sophisticated party to seek ILA.
In your situation, both the company and lender counsel would be in a conflict of interest were they to represent you and your spouse. It could be claimed that undue influence was used to procure your guarantee. The guarantee could ultimately be financially disadvantageous to you and your spouse, and the lender in particular has the onus of proving that, in this kind of situation, no undue influence was used to secure the financing details.
Avoiding a conflict of interest or perception of conflict is key.
Q: What kind of conflicts of interest can arise?
Anna: Conflicts tends to break down into three areas: (i) a conflict between the interests of a lawyer and a client (such as a malpractice allegation) (ii) a conflict between one client and another client and (iii) a conflict between the client and a lawyer’s professional obligation to avoid taking advantage of one client.
Most ILA situations involve the giving of guarantees, finalizing paperwork related to departing employees, settling shareholder disputes, concluding transactions between lawyers and clients, and joint retainer situations.
Q: What else should I know?
Anna: One additional item to note is that where spouses are providing joint guarantees, particularly where one spouse may be involved in the business of the principal debtor and the other spouse is not, ILA should ideally be obtained from two different legal counsel.