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What are the rules around law firms owning equity in outside businesses that generate its revenues from that same law firm's clients?

• Business "Y" Inc. provides a service and gets client referrals from Law Firm "X" LLP. Law firm provides Business Y with their clients' contact details so that Business Y can provide their commercial service to the Law Firm's clients (Law Firm provides leads for free). Can Law Firm X (or firm partners individually) own equity in Business Y? I'm hoping the answer to that question is yes... (PS in case it matters, law firm is based in CA)

• Answer:

  Each state has is own rules. I wouldn't. You are really talking about two different things.   1.  Taking stock in clients.  In California, this is govern by Rules of Professional Conduct 3-300, avoiding interests adverse to clients.  Generally, an attorney can do that with written disclosures and if the transaction is fair and reasonable to the client.  The rule reads as follows:   A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:   (A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and   (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and   (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.   While this is doable, it is not a matter to be undertaken lightly.  Many lawyers will not do it. I do it routinely with equity interests in clients and, blessedly, the hypothetical has not come up . . . some important shareholder vote and you are the deciding vote (abstain).   2.  On top of that you add the referral issue which would involve both that rule (since you have a pecuniary interest in the referral) and your general fiduciary duty to your client.   It just seems like compounding ethical issue upon ethical issue.   It seems to me some large law firms considered doing something like this with related consulting services a while back and either it was determined that it did not meet ethical muster, or it met it but they found it too risky, or they otherwise decided it was a bad idea.This answer is not a substitute for professional legal advice....