The Investor with 40% and a Seat on the Management Committee
Boadi & Mensah is a two-partner firm in Kumasi with three associates and two support staff. Its work is mostly mining-services contracts and SME conveyancing. The partners want GH¢500,000 to refurbish the office, buy a case-management system and hire two associates. Their bank will lend only against personal guarantees at 32% interest. A wealthy businessman, Mr Owusu, who owns a construction group and has referred two conveyancing matters, offers GH¢400,000 for 40% of the shares in a proposed company, 40% of distributable profits, a seat on the management committee, and a right of first refusal on his group's legal work. Partner Boadi supports the offer; Partner Mensah is uneasy. The firm also owes one associate three months' salary. The partners ask whether they can accept the investment and, if not, how to raise the money without losing the opportunity.
1. Can the partners lawfully accept Mr Owusu's proposal as structured? Analyse the professional-conduct and business-structure issues.
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Conclusion: no, not as structured.
1. Fee-sharing with a non-lawyer. The practice of law in Ghana is reserved to lawyers enrolled and regulated under the Legal Profession Act, 1960 (Act 32). The Professional Conduct and Etiquette Rules, 1969 (L.I. 613) prohibit a lawyer from sharing professional fees with a non-lawyer or allowing a non-lawyer to control or influence professional work. A 40% shareholding plus 40% of distributable profits is a direct share in the firm's professional income. Calling it a 'return on investment' does not change its character.
2. Control and independence. The management seat would give Mr Owusu influence over hiring, billing, client selection and case strategy. The right of first refusal over his construction group's work converts the firm's independence into a commercial bargain: the firm may hesitate to advise against his group or to act for a subcontractor adverse to it. That is a conflict of interest waiting to happen.
3. Business vehicle. The partners should not assume that a company limited by shares under the Companies Act, 2019 (Act 992) is a compliant vehicle for legal practice. Even if a company holds premises or equipment, the practice must remain owned and controlled by lawyers; incorporation does not shield the partners from professional discipline.
4. Pressure is not a defence. Salary arrears and the need for capital are real, but financial pressure does not justify a conduct breach. The proposal should be rejected in writing, with reasons, so that Mr Owusu understands the position.
2. Assume the proposal cannot be accepted as structured. What lawful financing and referral alternatives should you recommend, and what safeguards should accompany them?
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Financing options that preserve independence
- Bank facility. A term loan or overdraft at 32% is expensive, but fixed interest is not fee-sharing. Negotiate the amount, security and repayment schedule; partners' personal guarantees are a commercial risk, not a conduct issue.
- Partner capital and retained profits. Reduce drawings, defer the refurbishment, lease equipment instead of buying, and phase the two associate hires.
- Admit a lawyer as equity partner. Capital and profit share then remain with enrolled lawyers, and the new partner can share management responsibility.
- Invoice discounting or a charge over book debts. Permissible if the lender takes a fixed discount or interest and does not share in fees or control client files.
The referral relationship
Mr Owusu may continue to refer work on merit, but there must be no fee split, no payment for introductions and no obligation to accept every instruction. When his construction group becomes a client, the firm must run a conflict check, define the retainer, and remain free to advise against his commercial interest. He must never see other clients' files or influence their advice.
Safeguards
Record the decision in a partnership minute; give Mr Owusu a written explanation; keep a register of referrals and conflicts; and review any continuing financial relationship annually. If a loan is taken, document a fixed repayment schedule and ensure the lender has no profit share, management seat or control over client money.
3. Mr Owusu offers instead to lend GH¢400,000 repayable from 40% of the firm's net profits over five years, with no shares or management seat. Does this cure the problem?
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Not automatically. The absence of shares and a management seat removes two obvious objections, but the profit-participation feature still looks like a disguised share in professional fees.
The test is substance, not labels. A genuine lender charges interest for the use of money and expects repayment on a fixed schedule, with security. A return measured by 40% of the firm's net profits is contingent on the firm's professional earnings and rises with them. That is economically equivalent to equity and may breach the prohibition on sharing fees with a non-lawyer, particularly if the lender can inspect accounts, approve expenditure or influence which work the firm takes in order to protect repayment.
What would be acceptable. A fixed-rate loan with a defined repayment schedule, security over equipment or book debts, and no participation in profits or control over professional decisions. If the firm cannot service a fixed loan, that is evidence that the expansion is not currently affordable; it should scale down rather than sell a share of its professional income.
What to check. Read the draft loan agreement for default rights over client files, a right to appoint an administrator, or a right to approve partners' drawings. Any of these gives a non-lawyer control. If the agreement is a genuine fixed-interest loan, document it and disclose the relationship to clients only where it could affect the advice.