A judge in the British Virgin Islands scolded lawyers at Kirkland & Ellis and Latham & Watkins for work on a financial transaction that could lead to disciplinary steps.
The lawyers may have subverted their client’s interest in order to help Chinese corporation Kaisa Group Holdings Ltd. maintain control over a publicly traded company, Nam Tai Property Inc., Judge Adrian Jack of the Islands’ Commercial Court said.
That would be “a very grievous breach of the most fundamental imperatives of legal ethics,” Jack said. He sent the March 3 judgment to senior partners at the firms so that they could “consider the ethical issues.”
Experts on lawyer ethics rules said the judge’s decision to send his opinion to firm leaders is a less severe reprimand than referring the behavior directly to state bar associations. Still, they said the bars that enforce legal ethics rules don’t need referrals if they decide to open investigations and discipline lawyers.
The judgment listed the lawyers representing Nam Tai only by their last names: Dusek and Drewry. Daniel Dusek is a Hong Kong-based Kirkland partner and Christopher Drewry is a Latham partner in Chicago, according the firms’ online attorney rosters and bio pages for the lawyers. Dusek and Drewry did not return messages seeking comments.
Latham & Watkins served as legal advisor to Nam Tai in the transaction, known as a PIPE, which means private investment in public equity. The firm was appointed on September 22, and the PIPE was announced Oct. 5—a short turnaround that the judge said led to higher-than-usual legal fees. Kirkland advised the company for at least a week leading up to Latham’s appointment, the judgment said.
Some lawyers advised the company to avoid discussing some questions in writing, according to an email attributed to lawyers at Kirkland and an international law firm, Walkers.
The lawyers cited “privilege and discovery obligations” in the British Virgin Islands that could make their work product discoverable in a lawsuit. The judge called the move a “deliberate decision” to “generate no paper trail.”
“The law firms were, it seems to me, preferring the interests of the directors and managers who were instructing them (but who were not even clients) over the interests of their true clients, the shareholders in the incorporated form of the company,” Jack wrote.
Jamie Zuieback, a Latham & Watkins spokeswoman, said in a statement, “While we cannot comment on ongoing litigation, we respectfully, yet adamantly, disagree with any suggestion that the firm acted improperly in connection with this matter.”
Kirkland & Ellis declined to comment.
The two law firms are the largest in the U.S. based on annual revenue.
The PIPE transaction occurred during a battle over placing directors on the board of Nam Tai, which holds real estate in mainland China, according to the court decision.
U.S. investors, including IsZo Capital Management and Railroad Ranch Capital, in previous statements, have argued that existing Nam Tai shareholders were under the sway of Kaisa Group., a Chinese-based real estate company that was a large holder of the company.
IsZo pushed to name as many as six new board members. In September, shareholders voted to hold a special meeting where they could install board members.
But the special meeting never took place. Instead, in early October, Nam Tai completed a $170 million private placement that boosted Kaisa Group’s ownership of the company to nearly 45%.
At the time of the share sale, Nam Tai said the action was necessary to prevent “liquidity issues” that could arise from the purported change in its board.
IsZo sued over the share sale in October, arguing it was an attempt to dilute the company’s equity to avoid board changes.
The British Virgin Islands court sided with IsZo, and Jack’s March 3 decision unwound the share sale to Kaisa. He found the directors who voted in favor of the sale did so to avoid a change of control at the company, rather than to avoid a liquidity crisis.
IsZo is “alarmed that major global law firms—paid for with shareholder resources—may have acted unethically when helping Nam Tai orchestrate its now voided private placement,” Brian Sheehy, founding partner at the firm, said in a statement. “Law firms specializing in ‘activism defense’ should not be helping companies undermine corporate democracy and trample shareholders’ rights.”
The lawyers’s effort to avoid written documentation regarding the PIPE transaction isn’t necessarily an ethics violation, said Jan Jacobowitz, a lawyer ethics expert and a former professor at University of Miami School of Law.
“If they were trying to hide the ball and involved in some unscrupulous activity, that’s one thing,” Jacobowitz said. “But if they were just saying this won’t be protected under your system, so let’s just meet in person, on Zoom, or on the phone, there is really nothing wrong with that.”
Mike Frisch, ethics counsel at Georgetown University Law Center, said any potential investigation into the behavior would likely center around a professional rule that guides lawyers to operate in the best interest of an organization that is their client rather than an individual.
“Conduct that favored individuals over the entity’s best interest,” Frisch said, “could well be a violation of U.S. ethics rules.”