Resolving Ethical Dilemmas in Private Equity Negotiations

While the Solicitors’ Practice Rules and the Hong Kong Solicitors’ Guide to Professional Conduct (the “Guide”) provide detailed guidance for litigation solicitors on professional conduct, there is a relative dearth of guidance in the Guide on how Hong Kong solicitors should conduct themselves in transactional situations. The Hong Kong professional ethics regime adopts high-level conduct principles with a limited number of fact-specific commentaries as opposed to detailed, prescriptive rules. While this approach allows for flexibility and case-by-case assessment, it has the potential to cause uncertainty and confusion. During a recent webinar conducted by the authors for private equity clients, many expressed concern at the lack of clear guidance. This article takes a look at common ethical dilemmas faced by in-house counsel and transactional solicitors in private equity negotiations and provides practical guidance for addressing those situations. 

Scope of Application

This article looks at the position under the Guide. The Guide applies to all solicitors, trainee solicitors, and registered foreign lawyers, whether in private practice or in-house (Guide, Principle 1.02, Commentary 2 of Principle 2.08). In the course of negotiations, lawyers on either side of the transaction may have different ethical obligations depending on the jurisdiction where they are registered. Even if unregistered foreign lawyers engage in any misconduct in Hong Kong, the Law Society can report that misconduct to their home jurisdiction of those lawyers.

Dilemma 1: A Call from Your Represented Counterparty

What do you do when a member of your represented counterparty’s business team calls you directly?

This is a common scenario faced by in-house counsel and transactional lawyers alike. The Guide is clear: a solicitor should not interview or otherwise communicate with a represented counterparty unless he/she has the opposing solicitor’s consent (Guide, Principle 11.02). This applies equally to outside counsel and (if no outside counsel been retained) in-house counsel (Guide, Commentary 6 on Principle 11.02). The purpose of the prohibition is to protect clients from interference, undue influence and possible intrusion by another solicitor into the confidentiality of the solicitor-client relationship. 

In the context of pressured and often time-sensitive negotiations, many in-house counsel and transactional lawyers may find this prohibition on communications with a represented counterparty unrealistic and unpragmatic. It is, however, a bright-line rule in the Guide and must be complied with. The only exception is where the counterparty’s solicitor has failed to reply to communications, or where he/she has refused for no adequate reason to pass on a message to his/her client (Guide, Commentary 2 on Principle 11.02). However, a solicitor should only contact a represented party in those circumstances after warning the opposing solicitor of his/her intention to write directly to the represented counterparty. 

When a member of your represented counterparty’s business team calls you, you should inform him/her that ethical rules prevent you from discussing the matter without the consent of the counterparty’s solicitor. If the caller insists and describes the matter as urgent, you could offer to try to conference the counterparty’s solicitor into the call to ask for his or her consent; if this is not possible or if the matter is not urgent, you should say that you need to speak to the counterparty’s solicitor first (explaining that you will not involve them in that communication because of ethical requirements) and politely end the call. After the call, you should call or send an e-mail to the counterparty’s solicitor only (not copying the caller) informing the solicitor of the call and asking for consent to speak to the represented counterparty’s business team (Guide, Commentary 1 and 2 of Principle 11.02). 

Dilemma 2: A Misstatement or Misunderstanding of Fact or Law During Negotiations

What do you do when an incorrect statement of fact or law is made during negotiations?

The appropriate course of action turns on how the misunderstanding came about and on whether any misrepresentation has been made to the counterparty. It goes without saying that solicitors should not lie about matters of fact or law in negotiations, but this sort of misconduct does occur from time-to-time in commercial negotiations. The Guide imposes two principles prohibiting solicitors from engaging in fraudulent or deceitful conduct vis-à-vis other solicitors and third parties (Guide, Principles 11.01 and 13.01). Any fraudulent or deceitful conduct by one solicitor towards another will render the offending solicitor liable to disciplinary action and possibly civil or criminal proceedings (Guide, Commentary 1 on Principle 11.01). A finding of fraud and/or deceit requires proof of dishonest intent on the solicitor’s part—a high standard (A Solicitor v Law Society of Hong Kong (20/2014) [2015] 2 HKLRD 802). 

Difficulties arise more commonly for solicitors in negotiations where: (a) their client makes a misstatement of fact or law; or (b) the solicitor realises that the counterparty or its solicitors are mistaken as to matter of fact or law. In both scenarios, a solicitor should never immediately correct the misstatement or misunderstanding without first consulting with his/her client: to do so would potentially violate the duty of confidentiality owed to the client (Guide, Principle 8.01). 

In both scenarios, the solicitor should—professional conduct obligations aside—quickly act to protect the deal by discreetly informing his/her client of the misstatement or misunderstanding and discussing potential risks associated with it. A misrepresentation by your client runs the risk of a claim seeking rescission of the contract and/or damages if the misrepresentation relates to a material aspect of the transaction and the other side relies on the false statement to enter into the contract. A mistake could also lead (in rare cases) to rescission of the contract if the non-mistaken party is aware of the mistake and tried to take advantage of the mistake (Brennan v Bolt Burdon [2003] EWHC 2493; Smith v Hughes (1871) LR 6 QB 597). In practice, this risk is minimised by the frequent inclusion of a term acknowledging that the parties have not relied on anything other than the representations in the agreement. 

The Guide contains no fact-specific professional conduct principle relevant to scenarios (a) and (b) and provides no guidance on whether misstatements by a client or uncorrected misunderstandings by a counterparty in negotiations could engage the solicitor’s duties of good faith and fair dealing under Principles 11.01 and 13.01. Misstatements by third parties likely do not implicate the solicitor’s own duties of good faith and fair dealing: Wilkinson & Sandor explain in The Professional Conduct of Lawyers in Hong Kong that “[a] distinction is usually drawn between passive misrepresentation, which is consistent with the duty of confidentiality owed to the client, and active misrepresentation which could, if it was of a substantial nature, be grounds for legal action” (Paragraph 13.19). The Guide does not impose any general duty of candor outside the court litigation context (Guide, Principle 10.03). Review of disciplinary decisions reprinted in Hong Kong Lawyer from 1998 to 2019 show no disciplinary action in such circumstances.

While the Guide imposes no specific ethical obligation to correct a misstatement by a client or a counterparty, solicitors should be mindful of the risk that the counterparty might nevertheless argue that any failure to correct by a solicitor amounts to dishonesty or acting without integrity (Guide, Commentary 3 on Principle 11.01 and Principle 13.01), particularly if the misstatement or misunderstanding is material to the deal. 

Some English decisions have acknowledged that a failure to correct a counterparty’s misunderstanding or the solicitor’s own client’s misstatements as to material aspects of a transaction might—in certain circumstances—constitute a breach of ethical duty (Thames Trains Ltd v Adams [2006] All ER (D) 320 (Dec); Wingate & Or. v SRA & SRA v Malins [2018] EWCA Civ 366; Williams v SRA [2017] EWHC 1478). In fact, since 25 November 2019, the Code of Conduct of the (English) Solicitors Regulation Authority (SRA) has obliged English solicitors not to mislead the client, the court, and others through their acts or omissions (Section 1.4). The scope of the rule is potentially wide (given the use of the term “others”). Unfortunately, the SRA provides no practical guidance on the application of Section 1.4 to commercial negotiations. 

In the United States, New York City Law Association Ethics Op. 731a requires a lawyer to withdraw any inaccurate material misrepresentation made during settlement negotiations, whether made by the lawyer or client. This rule can apply in other contexts. It is, of course, commonplace for negotiators to make statements as to their position in the negotiations (eg, “this is my bottom line” or “head office said no way”) that are not wholly truthful. ABA Formal Opinion 06-439 addresses this: it advises that “statements regarding a party's negotiating goals or its willingness to compromise, as well as statements that can fairly be characterized as negotiation ‘puffing,’ are ordinarily not considered ‘false statements of material fact’ within the meaning of the [ABA] Model Rules.” 

When your client or his/her counterparty makes a misstatement in negotiations, you should not immediately correct the misstatement. This could potentially breach your duty of confidentiality to your client. Instead, you should take care not to endorse the misstatement or give the impression that it is accurate and you should confer with your client about the misstatement as soon as possible. If the misstatement is material to the transaction and not a mere statement of negotiating positions, you should recommend that the client bring the misstatement to the counterparty’s attention. If the client refuses to do so, and if the misstatement is material to the transaction, you should consider seeking written or telephone advice from the Law Society’s Standards and Development Department or an opinion from the Guidance Committee on a confidential basis (Commentary 2 to Principle 1.05). Alternatively, you could withdraw from the representation, although it would be unusual to do so in practice.

Dilemma 3: An Inadvertent E-Mail from Opposing Counsel

What do you do when the counterparty’s counsel accidentally copies you on an email with information or documents not intended for you?

The Guide provides that when it becomes obvious to you that the documents were mistakenly disclosed to you, you must immediately stop reading the documents, inform the other side, and return the documents without making copies (Guide, Commentary 6 on Principle 8.03). This is a bright-line rule and must be followed. Where the counterparty’s counsel sends you a follow-up e-mail requesting that you delete his or her first e-mail, you should not read the first e-mail if you have not already (Guide, Commentary 6 on Principle 8.03). 

If you have already read the e-mail before receiving an instruction to delete, however, you must inform your client about the information gleaned from the e-mail, but warn him or her that a court would likely grant an injunction to prevent the overt use of that information if sought (Guide, Commentary 6 on Principle 8.03). This is likely to be of marginal concern in the context of commercial negotiations (as opposed to litigation), Even if an injunction were obtained, it is unclear how it would operate or how it could be used in negotiations because the recipient cannot would not proceed to negotiate as if it were unaware of crucial information (eg, that the counterparty has participated out all of the economic and voting rights associated with the shares it holds in a joint venture to a competitor). Instead, you should encourage your client to speak with the counterparty frankly about the information gleaned from the inadvertent e-mail and continue negotiations on that basis. 


While the Law Society has developed guidance on certain dilemmas commonly faced in private equity negotiations, the absence of guidance provided as to others – particularly the handling of third-party misstatements or misunderstandings in negotiations – is inadequate and places in-house counsel and transactional solicitors in the difficult position of applying abstract principles to real-life situations scenarios. The Law Society should consider taking input from transactional lawyers when preparing additional commentaries and/or other revisions to the Guide. In the meantime, solicitors in negotiations should conform their conduct to the principles and commentaries set forth in the Guide, even where those may seem unpragmatic or uncommercial. Where doubt remains, solicitors should consider seeking written or telephone advice from the Law Society’s Standards and Development Department or an opinion from the Guidance Committee on a confidential basis. 


Managing Partner, Morrison & Foerster’s Hong Kong office

Timothy Blakely is Managing Partner of Morrison & Foerster’s Hong Kong office. He is also head of the firm’s Hong Kong Litigation Department and a partner in the firm’s Securities Litigation, Enforcement, and White-Collar Criminal Defense practice group. Mr. Blakely’s practice focuses on government and internal investigations and complex commercial litigation and international arbitration matters.

Co-head, Morrison & Foerster’s Asia Private Equity Practice

Marcia Ellis is the co-head of Morrison & Foerster’s Asia Private Equity Practice and a member of the firm’s global board of directors. Her practice focuses on private equity transactions and complex mergers and acquisitions involving companies and assets located in Asia.

Partner, Morrison & Foerster’s Hong Kong office

Sarah Thomas is a partner in Morrison & Foerster’s Hong Kong office. Her practice focuses on international arbitration, internal investigations and commercial litigation throughout the Asia-Pacific region, and she has particular experience in matters relating to China, Hong Kong, India, Singapore, Malaysia and Japan.