II. The “Cooperation Revolution” and Its Impact on Business Executives and Entity Counsel
The “Cooperation Revolution” can have serious, real-life ramifications for entity officers, directors, and other constituents—including those who are innocent of any wrongdoing—when the entity they once served or continue to serve becomes the target of law enforcement. Lost jobs, damaged reputations, seriously adverse health impacts, and financial ruin are very real risks for these individuals.
In a March 3, 2022 speech to the American Bar Association’s (ABA) 37th National Institute on White Collar Crime, Attorney General Merrick Garland made it clear that “the prosecution of corporate crime is a Justice Department priority,” and that the Department will focus on individuals in seeking to hold business entities accountable. Mr. Garland stressed that “the prosecution of individuals is our first priority because it is essential to Americans’ trust in the rule of law. . . . [T]he rule of law requires that there not be one rule for the powerful and another for the powerless; one rule for the rich and another for the poor.”
Referring to Deputy Attorney General Lisa Monaco’s statement in her October 2021 keynote address to the ABA’s 36th National Institute on White Collar Crime, Mr. Garland reiterated that the Justice Department is restoring “prior Department guidance making clear that, to be eligible for any cooperation credit, companies must provide the Justice Department with all non-privileged information about individuals involved in or responsible for the misconduct at issue,” and emphasized that the entity must identify all individuals involved in the misconduct, regardless of their “position, status, or seniority” and regardless of whether the entity deems an individual’s involvement as “substantial.”
Mr. Garland was explicit about the implications of this guidance for the private sector: “When the Justice Department offers a company the opportunity to enter into a resolution for its misconduct, it is in that company’s best interest to provide us with a full picture of what happened and who was involved. When we give a company an opportunity to come clean, it must come clean about everyone involved in the misconduct, at every level.” In a subsequent September 2022 guidance memorandum, Ms. Monaco stressed that companies must report information pertaining to individuals “on a timely basis” to receive full cooperation credit and instructed prosecutors that they “must strive to complete investigations into individuals—and seek any warranted individual criminal charges—prior to or simultaneously with the entry of a resolution against the corporation.”
As the remarks of Attorney General Garland and Deputy Attorney General Monaco illustrate, the Biden Justice Department is breathing new life into policies requiring business organizations seeking credit for cooperating with the government in criminal and civil enforcement proceedings to turn over information on individuals that it gains through corporate compliance programs and internal investigations. For more than two decades, these policies have served as an increasingly effective means of leveraging prosecutorial resources in federal investigations of corporations and other business entities.
Understanding the genesis and evolution of the “Cooperation Revolution” is critical to appreciating the importance of carefully designed executive protection plans to both individual executives and business organizations. Appreciating the impact of the “Cooperation Revolution” on individual directors and officers is essential for corporate drafting. This section offers a brief summary of key developments.
A. The Emergence of the “Cooperation Revolution”
The publication of the United States Sentencing Commission’s Organizational Sentencing Guidelines in 1991 set the stage for the “Cooperation Revolution.” The Organizational Sentencing Guidelines, promulgated as part of the reforms mandated by Congress in the Sentencing Reform Act of 1984, included provisions that allowed for downward departures—i.e., lower penalties—for businesses that had “effective” compliance programs in place at the time of the events that led to their prosecution.
Five years later the Delaware Chancery Court decided In re Caremark International, Inc. Derivative Litigation. In reviewing a proposed settlement agreement in a shareholders’ derivative action, the court concluded that in some circumstances directors of corporations convicted of criminal wrongdoing could be held personally liable in shareholder litigation for sustained or systemic failures to ensure that their companies had effective compliance programs in place. Caremark added powerful personal incentives for corporate boards to focus on establishing the kinds of compliance programs called for by the Organizational Sentencing Guidelines. Taken together, the Organizational Sentencing Guidelines and the Caremark decision laid the foundation for a new prosecutorial focus on corporate compliance and disclosure and set the stage for the criminalization of legal risk to corporate officers and directors.
Deputy Attorney General Eric Holder added a critical piece to the emerging framework in 1999. In a guidance document issued to DOJ attorneys (the “Holder Memorandum”), Mr. Holder instructed federal prosecutors to consider eight factors in determining whether to bring criminal charges against business entities. The Holder Memorandum specifically identified the “corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate” with the government as one of these factors. Mr. Holder also admonished that “[p]rosecution of a corporation is not a substitute for the prosecution of criminally culpable individuals within or without the corporation.”
In 2003, in the aftermath of the Enron and WorldCom debacles, the implosion of Arthur Andersen, and other high-profile corporate scandals, Deputy Attorney General Larry Thompson issued new guidance on charging business organizations with criminal wrongdoing, emphasizing the need for increased “scrutiny of the authenticity of a corporation’s cooperation.” Among other things, Mr. Thompson reiterated the key elements of the Holder Memorandum and added a ninth factor pertaining to the adequacy of civil or regulatory enforcement actions to the list prosecutors should consider. The most significant change, however, was Mr. Thompson’s expansion of the definition of corporate cooperation to encompass “if necessary, the waiver of corporate attorney-client privilege and work product protection and apparent protection of ‘culpable individuals’ through fee advancement and other means unless required by law.”
The Thompson Memorandum’s focus on waiver of attorney-client privilege and work-product protections as indicia of corporate cooperation gave rise to a firestorm of protests. The ABA, the National Association of Criminal Defense Lawyers, and a number of other advocacy groups, practitioners, and scholars vehemently objected. They urged that these new cooperation criteria created unconstitutional pressure on companies to waive the attorney-client privilege and work-product protections and presaged dire consequences for individuals caught in the crossfire.
The dispute over the Thompson Memorandum came to a head in the course of a federal investigation of both KPMG, Inc. and a number of KPMG partners for promoting allegedly illegal tax shelters. KPMG decided to cooperate with federal authorities. It agreed to withdraw from joint defense agreements with potential individual defendants and to stop advancing legal fees and expenses to KPMG partners who were not cooperating with the investigation. In United States v. Stein, targeted partners challenged these actions. The partners argued that the pressure the government exerted on KPMG to cease advancing legal fees and to withdraw from joint defense agreements violated the partners’ rights under the Fifth and Sixth Amendments. The partners prevailed in the United States District Court for the Southern District of New York and the court dismissed the indictments in relevant parts. The United States Court of Appeals for the Second Circuit affirmed.
Following the district court’s June 2006 decision in Stein, the DOJ backed away from privilege waiver and anti-fee advancement demands. In December 2006, Deputy Attorney General Paul McNulty issued new guidance to federal prosecutors. Acknowledging the legal community’s concern that DOJ practices might “discourag[e] full and candid communications between corporate employees and legal counsel,” Mr. McNulty instructed: “Prosecutors may only request waiver of attorney-client and work product protections when there is a legitimate need . . . [after] a careful balancing of important policy considerations underlying the attorney-client privilege and work product doctrine and the law enforcement needs of the government’s investigation.” He stated that federal “[p]rosecutors generally should not take into account whether a corporation is advancing attorneys’ fees to employees or agents under investigation and indictment” in assessing cooperation.
Two years later, Deputy Attorney General Mark Filip issued yet another guidance memorandum, and the DOJ incorporated the approach into the United States Attorneys’ Manual. Mr. Filip prohibited prosecutors from seeking privilege and work product protection waivers except where “a corporation or one of its employees . . . asserts an advice-of-counsel defense, based upon communications with in-house or outside counsel that took place prior to or contemporaneously with the underlying conduct at issue” or where the “[c]ommunications [are] between a corporation (through its officers, employees, directors, or agents) and corporate counsel are made in furtherance of a crime or fraud.” The Filip Memorandum also acknowledged that “the mere participation by a corporation in a joint defense agreement does not render the corporation ineligible to receive cooperation credit” and that “prosecutors may not request that a corporation refrain from entering into such agreements.” Mr. Filip strengthened the McNulty guidance on fee advancement: “In evaluating cooperation, however, prosecutors should not take into account whether a corporation is advancing or reimbursing attorneys’ fees or providing counsel to employees, officers, or directors under investigation or indictment. Likewise, prosecutors may not request that a corporation refrain from taking such action.”
These developments removed any doubt that indemnification and advancement of fees to directors and officers subject to criminal and administrative proceedings arising from their service to an entity are permissible subjects of an executive protection plan.
Mr. Filip’s guidance remained the last word until 2015 when Deputy Attorney General Sally Yates enunciated an aggressive policy to persuade businesses to “cough up” “high-level executives who perpetrated the misconduct.” Ms. Yates reiterated in a formal memorandum that the DOJ would continue to base cooperation credit calculations on established factors. But she emphasized: “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.”
The Yates Memorandum specified that business organizations seeking cooperation credit “must provide to the Department all relevant facts relating to the individuals responsible for the misconduct.” It instructed that both “criminal and civil corporate investigations [were to] focus on individuals from the inception of the investigation,” and directed DOJ attorneys not to “resolve matters with a corporation without a clear plan to resolve related individual cases, and [to] memorialize any declinations as to individuals in such cases.” This new guidance exacerbated the widening rift between business entities and individuals associated with them.
A few years later, in 2018, Deputy Attorney General Rod Rosenstein relaxed to some extent what he characterized as the “binary” proposition of the Yates Memorandum. Mr. Rosenstein stated that prosecutors would no longer take an “all or nothing” approach to cooperation. Rather, corporations that identified every individual “substantially involved in or responsible for the criminal conduct” could be given credit in criminal proceedings, and DOJ attorneys would have more discretion to offer partial cooperation credit in civil enforcement actions so long as companies “meaningfully assist[ed]” in the government's investigation and identified individuals “substantially involved in or responsible for the misconduct.” The DOJ incorporated Mr. Rosenstein’s revised policy into the Justice Manual (i.e., the DOJ publication formerly known as the United States Attorneys' Manual). Accordingly, the U.S. Attorneys’ Manual (now known as the Justice Manual) was revised to provide: “If the company is unable to identify all relevant individuals or provide complete factual information despite its good faith efforts to cooperate fully, the organization may still be eligible for cooperation credit.”
B. Corporate Cooperation Today
Although corporate criminal prosecutions declined during the Trump Administration, counsel assisting with executive protection plans in times when DOJ policies appear more favorable to individual businesspeople cannot count on those policies remaining in place if a “stormy day” arrives. While DOJ policy may swing back and forth with different administrations, the overall trend in prosecutions of both entity and individual defendants is upward. The Biden Administration clearly plans to move aggressively against corporate offenders. Deputy Attorney General Lisa Monaco’s fall 2021 announcement signaled the end of the Rosenstein approach and a return to the Yates Memorandum’s “full disclosure” mandate. Attorney General Merrick Garland’s spring 2022 remarks resoundingly confirmed the DOJ’s commitment to aggressive efforts to investigate and prosecute culpable conduct involving business entities and their managers, employees, and agents.
Review of the outcomes in a number of recent federal prosecutions demonstrates the DOJ’s commitment to prosecution of both business entities and individuals. In May 2022, for example, Swiss-based Glencore International A.G. pled guilty to bribery in violation of the Foreign Corrupt Practices Act, as well as fuel market manipulation charges, and agreed to pay more than $1.1 billion to resolve criminal proceedings against the entity. In June 2022, the former CFO and other senior managers of Dallas-based Earthwater Ltd. pled guilty to participating in a multi-million dollar high-yield investment scheme; others allegedly involved are awaiting trial in the Northern District of Texas. In April 2022, a jury in the United States District Court for the Eastern District of New York convicted Roger Ng, a former managing director of Goldman Sachs Group Inc., of conspiring to violate the Foreign Corrupt Practices Act and engaging in unlawful commodity market price manipulation in connection with alleged multi-billion dollar bribery and money-laundering activities involving Malaysia’s state-owned investment and development fund.
From a practical perspective, business organizations under investigation by the federal government often have little choice in how to respond. As a result of these DOJ policies and the threat of associated civil litigation, entities faced with federal criminal investigations, as well as significant civil enforcement actions, are likely to disclose any information they have pertaining to individuals connected in any way to the subject of federal investigations. And investigations are aggressive. Moreover, the expectation of corporate cooperation with law enforcement agencies against individuals has gained increasing traction globally as well as in the United States.
Today, individual directors, officers, and entity managers necessarily operate in an environment in which they may face involvement in internal investigations, as well as investigations by the DOJ and other law enforcement authorities. Participating in any investigation, whether it is an internal investigation conducted by entity counsel or a government inquiry, raises potentially grave consequences for the individuals involved, particularly at the senior management level. The consequences are not merely financial. Involvement in investigatory proceedings, follow-on civil or administrative litigation or, worse yet, criminal proceedings, typically has acute adverse consequences for individuals. Directors, executives, and managers often turn to the corporate counsel they already know and trust for guidance on establishing executive protection plans and navigating their complexities. It is therefore critical for corporate counsel to understand the ethical issues that arise in connection with these requests.
III. Ethical Considerations of Advising on Executive Protection Plans
Advising boards and senior executives on executive protection plans requires counsel to navigate hazardous terrain. Four ethical pitfalls stand out among a host of potential perils: substantive complexity; possible client identification issues; potential conflicts between the interests of the entity and those of constituents seeking personal protection at the “clear day” drafting stage; and duties to constituents who collectively embody the client organization yet remain non-clients in their individual capacities.
A. The Complexity of the Law Pertaining to Executive Protection Plans
The very first of the substantive Model Rules of Professional Conduct requires lawyers to provide competent representation to their clients. The Rule goes on to define competent representation as encompassing “the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” The Comments to Rule 1.1 note that “relevant factors include the relative complexity and specialized nature of the matter,” and that “[p]erhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve.”
Given the current legal environment with respect to criminal prosecution and related civil actions, as well as the labyrinthine nature of advancement, indemnification, and insurance law in different states, designing executive protection plans is an “ethically dangerous, highly complex, and specialized area.” Indeed, a comprehensive executive protection program implicates numerous areas of law including, among others, the common law of indemnification, state statutes addressing corporate advancement and indemnification, criminal law, contract law, the law of equitable remedies, fiduciary duties of insurance brokers, and insurance law generally, including state specific and federal regulatory laws that may bear on an executive’s critical right to prevailing party attorneys’ fees.
Litigation abounds in high stakes matters involving indemnification, even when executives are cleared of wrongdoing. Case law is still developing with respect to insurance coverage for fines, penalties, and defense costs in the face of admissions made in settlements with the federal government and resolution of related litigation in the context of the “Cooperation Revolution.” Unfortunately, judicial decisions are sometimes inconsistent.
Despite these complexities, every lawyer who undertakes the representation of a client in a matter is ethically obligated to provide competent representation in that matter. Stated another way, every lawyer is ethically obligated not to undertake a representation for which the lawyer is not competent.
That said, Comment 2 to Rule 1.1 recognizes that “[a] lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar. . . . A lawyer can provide adequate representation in a wholly novel field through necessary study.” But this can be a tall order when it comes to executive protection plans. Perhaps a safer alternative would be to follow the Comment’s suggestion that “[c]competent representation can also be provided through the association of a lawyer of established competence in the field in question.”
Adding to the pressures here is the stress that creating or revising an executive protection plan can place on its drafters and their own personal interests. Executive protection plans generally come into existence or are renewed on a “clear day.” Plans are designed to be effective as a means of providing protection for events that most of those involved hope, and often firmly believe, will never occur. But when the “stormy day” arrives, the forces at work are likely to stress and strain every aspect of the plan. The beneficiaries of the plan fervently look for protection, but they may find that new directors in place following a change in control, SEC receivers, trustees in bankruptcy, foreclosing creditors, and the like are frequently hostile to the plan’s beneficiaries.
Counsel’s work begins with a review of an entity’s governing documents. Even where a corporation’s charter provides for indemnification to the “fullest extent permitted by law,” however, complex questions still may arise pertaining to the scope of insurance coverage, the availability of fee advancement, the consequences of settlements, interpretation of bylaw provisions, the availability of protections when the alleged misconduct is not indemnifiable, or unindemnified in fact, and a host of related matters. The drafting lawyers will be right in the middle, particularly if they have rendered substantive advice on the conduct under investigation.
In sum, it is critical for corporate counsel to understand the degree of substantive complexity they face when constituents seek their advice on creating, renewing, or even attempting to interpret executive protection plans. It is equally important for corporate counsel to take into account the practical difficulties constituent beneficiaries of the plan may face in enforcing critical advancement rights when the constituents are left defenseless should the protections fail or even if a remedy is merely delayed. Rendering advice in this area is fraught with uncertainty and demands both considerable expertise in numerous legal disciplines and awareness of the latest developments.
B. Client Identification and Related Issues that Often Arise in Representing Entities
From a legal ethics standpoint, lawyers who represent entities must recognize that their client is the entity itself as ABA Model Rule 1.13(a) and the accompanying Comments make clear. Although lawyers for entities communicate with and receive direction from their entities’ constituents, it is critical that the lawyers remember that the constituents are not their clients. It is also essential for corporate counsel to take steps to ensure that the constituents themselves do not have the misimpression that corporate counsel represents them personally.
Consider the issues of client confidentiality and attorney-client privilege in the context of a lawyer (including in-house counsel) representing an entity. Rule 1.13 provides that communications between the lawyer and constituents acting in their organizational capacity are protected by Rule 1.6. Comment 2 notes: “[B]y way of example, if an organizational client requests its lawyer to investigate allegations of wrongdoing, interviews made in the course of that investigation between the lawyer and the client’s employees or other constituents are covered by Rule 1.6.” As the Comment continues, “[t]his does not mean . . . that constituents of an organizational client are the clients of the lawyer. The lawyer may not disclose to such constituents information relating to the representation except for disclosures explicitly or impliedly authorized by the organizational client in order to carry out the representation or as otherwise permitted by Rule 1.6.”
Likewise, the attorney-client privilege generally protects confidential communications between the attorney and constituents made to facilitate legal advice to the entity client. That privilege, however, belongs to the lawyer’s entity client and not to the individual non-client constituents. Consequently, corporate counsel requested or instructed to advise an entity’s directors and officers with respect to an executive protection plan often find themselves in an awkward and professionally challenging position.
Rule 1.13 recognizes that, when the interests of the entity and those of constituents are generally aligned, the lawyer may represent both the entity and the constituents with the informed consent, confirmed in writing, of the respective clients. However, the Rule also acknowledges that there are times when the interests of the entity and those of a constituent are, or may become, adverse. In these circumstances, a lawyer representing the entity should correct a constituent’s misunderstanding of the identity of the lawyer’s client (i.e., the entity).
In a similar vein, ABA Model Rule 4.3 provides: “In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.” Rule 4.3 cautions that lawyers are not to give advice to unrepresented persons “other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.”
One important reason for the corporate lawyer to clarify the identity of the client and to correct any misunderstanding a constituent might have about the identity of the client is to avoid the inadvertent creation of an attorney-client relationship with the individual constituent. The test for the existence of an attorney-client relationship may best be described as “the subjective reasonable belief ” of the would-be client, even though, as the Restatement (Third) of the Law Governing Lawyers recognizes, an attorney-client relationship typically is consensual, with the attorney consenting to the representation. Both aspects of the “subjective reasonable belief ” test must be present. Certainly, the would-be client must have a “subjective belief ” that the attorney is representing (or is willing to represent) the client with respect to a particular matter, but that belief must be a “reasonable” one based on objective criteria.
In-house corporate counsel work side-by-side with the non-lawyer client constituents who are their business counterparts. These corporate counsel, as well as many outside lawyers, often function as integral members of business teams and provide advice to a wide variety of constituents on the need to correct existing problems and the legality of proposed actions. In these situations, it can be difficult for non-lawyer constituents to recognize that their corporate counsel colleagues represent the entity and are not providing the constituents with individual legal advice. It therefore behooves the lawyers to clarify whom they represent. In addition, it is also important to clearly identify those within the organization who are authorized to direct lawyers in their representation of the organizational client. This is an ongoing concern.
C. Ethical Obligations to Directors and Senior Executives as Non-Clients
Clarifying just who is (and who is not) a lawyer’s client may be even more difficult when an entity’s organizers, directors, or officers request or instruct the lawyer to develop comprehensive executive protection plans. It can be particularly challenging for lawyers to respond to requests to design executive protection plans that provide for the advancement of legal fees, indemnification, and insurance coverage, to “the fullest extent permitted by law,” should the individual constituent be the subject of civil litigation or criminal investigation or indictment. Here, too, a number of Rules of Professional Conduct are implicated.
Assume that the lawyer has established that the entity’s individual constituents are not the lawyer’s clients and that the lawyer is comfortable that the affected constituents are likewise not confused. Even then, the lawyer nonetheless has a duty under ABA Model Rule 4.1 not to “knowingly . . . (a) make a false statement of material fact or law to a third person [such as a non-client constituent]; or (b) fail to disclose a material fact when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.”
Some of the most difficult ethical issues arise when an organizational client, acting through its governing body, instructs the lawyer to analyze an executive protection program in place and then evaluate it from the standpoint of providing maximum protection to the entity’s directors and covered executives. The affected constituents—i.e., the entity’s individual directors and officers—are not the lawyer’s clients. On a future “stormy day,” the “Cooperation Revolution” may result in one or more of those same directors and officers being personally identified as potential or actual targets of criminal prosecution. It may well be in the entity’s interests to see those individuals convicted. How should the entity’s counsel react?
Consider the frequent example of one or more concerned board members who seek assurance from the entity’s in-house counsel that they will be protected against future unknown and currently unanticipated claims. This inquiry goes to the very existence of the “Cooperation Revolution.” The lawyer’s response may have serious ramifications for constituents when they need those protections most. ABA Model Rule 2.3(a) provides little assistance; it merely recognizes that a lawyer may “provide an evaluation of a matter affecting a client for the use of someone other than the client if the lawyer reasonably believes that making the evaluation is compatible with other aspects of the lawyer’s relationship with the client.”
Surely this Rule applies to corporate closing opinions addressing routine matters such as the validity of an entity’s organization, its governing body’s valid adoption of deal documents, and their due execution. But Rule 2.3(a) provides scant comfort to an entity lawyer asked to assure non-client directors and covered executives that an executive protection program in place today will adequately protect them—or even offers the best possible protection—should they be falsely accused of complicity in a crime or fraud against the entity, the government, or a third party by a real malefactor or even an entity’s own investigatory counsel.
Application of Rule 2.3(a) would require the lawyer first to determine whether the instructions given by the board with respect to reviewing or drafting an executive protection plan are actually in the best interests of the entity client. That is often going to be the case, as a number of courts have recognized. Even so, this first step should not be overlooked because the ultimate beneficiaries of the lawyer’s work for the entity client will be the non-client entity constituents. Likewise, the lawyer should consider whether the lawyer’s work will “affect the [entity] client’s interests materially and adversely,” and—if that is the case—the lawyer may not provide the analysis unless the client consents. Granted, considering it is the board that is instructing the lawyer to proceed, the consent already has been impliedly given. As long as the lawyer reasonably believes that it is in the best interest of the entity client to comply with those instructions, the lawyer may go forward.
Now suppose the board goes further: it not only asks the lawyer to evaluate or design an executive protection plan, but also requests the lawyer to advise the constituents independently of the lawyer’s representation of the entity, with the sole objective of maximizing their personal protection. The lawyer is being asked, essentially, to provide legal advice to otherwise non-client (and perhaps unrepresented) entity constituents that will obligate the entity to advance defense costs to resist an investigation, on a future “stormy day,” of civil or criminal charges that the entity as a whole fervently wishes will succeed. Here, the lawyer is placed in a truly unenviable position.
In the end, while it remains the province of the entity’s officers and directors to make the decisions and to instruct corporate counsel on the entity’s goals and objectives, corporate counsel is often an integral part of the entity’s decision-making process. Consequently, the risks outlined above often cannot be avoided. The following discussion offers ideas for addressing these risks.
IV. Suggestions for Navigating Dangerous Terrain
Whenever an entity’s governing body instructs the entity’s lawyer, particularly in-house counsel, to evaluate or design an executive protection plan for the exclusive protection of entity constituents, it would be easy to interpret such an instruction as effectively causing counsel to assume the duties of an attorney to individuals he or she does not formally represent. Worse, these kinds of instructions essentially ask counsel to draft programs to protect those individuals from the adverse consequences of a future situation in which conflicts of interest may well exist as a result of the “Cooperation Revolution.” It is unlikely that the entity’s constituents will appreciate this conflict. As suggested earlier, it is essential for prudent corporate counsel to recognize these and related issues from the outset. Taking appropriate steps on the “clear day” can help to prevent future misunderstandings and mitigate the impact of any disagreements that subsequently may arise.
In our view, the best approach is to educate the constituents about the lawyer’s role and fiduciary obligations and, depending on the specific circumstances, obtain informed consent, confirmed in writing, and take the specific steps outlined above: acquire necessary substantive expertise, clarify the identity of the client, communicate the possibility of future conflicts of interest (particularly if there is a change in control of the entity), and convey the limitations on corporate counsel’s advice pertaining to executive protection plans in the current legal environment. Perhaps most importantly, documenting associated communications helps mitigate the risk of “stormy day” hazy recollections of what was (or was not) disclosed or discussed, and what instructions the entity’s board did (or did not) give to the lawyer.
We consider these steps to be “best practices” rather than ethical mandates. As such, corporate counsel should judge for themselves what measures they should take in particular circumstances. But it is essential for counsel to ensure that there is clarity as to the identity of the client and as to the instructions of what the lawyer is to do. To the extent clarity is lacking, counsel should try to correct any perceived misunderstanding of counsel’s role and the limits of the representation.
A. Develop or Obtain Relevant Expertise
First and foremost, it is important for corporate counsel to be sensitive to the complexity of executive protection issues and the number of different legal disciplines they involve. Providing advice in this area is not something to undertake lightly. Doing so requires a significant level of expertise and familiarity with all of the relevant issues. Corporate lawyers who are instructed by entity constituents to provide advice on these matters need to consider whether to spend the time necessary to develop that expertise or, instead, obtain assistance from lawyers who regularly work in these areas. Admittedly, it will probably be the rare occurrence when the executive protection plan representation will go wrong; however, the potential magnitude of the consequences of a plan going wrong are immense. As a result, drafting or advising on an executive protection program is not an area of law in which a corporate lawyer should dabble.
For those who choose to proceed with evaluating an existing executive protection plan or designing a new plan, the ABA’s 2021 Checklist for Entity Counsel Supervising the Creation or Renewal of an Executive Protection Program is an invaluable tool. It offers steps to analyze the issues, as they presently exist, pertaining to a combination of the protections in the separate areas of exculpation, advancement, indemnification, and insurance. The Checklist also gives entity counsel an inventory to provide to specialty outside counsel to help ensure that the relevant steps required of the entity have been taken and that known drafting issues have been dealt with. The Checklist is updated as the law develops.
B. Clarify Who Is the Client
Corporate counsel must always keep in mind that the entity itself—not its constituents—is the real client. In-house counsel in particular must remain steadfast in their willingness to remind constituents tactfully, yet firmly, that the lawyer represents the entity and not individual constituents.
Admittedly, establishing and then maintaining in the eyes of non-client constituents the understanding that the entity’s lawyer represents the entity and not the individual constituents may be one of the most difficult and sensitive issues facing in-house counsel. In-house counsel and other lawyers who work regularly with entity constituents may want to begin on the “clear day” to lay the groundwork about their role and its limitations, as well as the constituents’ own fiduciary duties, before far more uncomfortable conversations need take place. Counsel should be very clear that constituents are not individually or collectively their clients. Conveying this understanding can take place early in counsel’s relationship with the entity, especially whenever constituents approach the lawyer with personal legal questions or the constituent makes off-hand remarks referring to counsel as “my lawyer.”
It is important for entity lawyers, particularly in-house counsel, to become adept at refraining from providing personal legal advice to constituents, reminding them that in-house counsel represents the entity, and perhaps even having a list of outside lawyers to whom in-house counsel can refer constituents. Where feasible, in-house counsel may want to organize routine training for both new and existing constituents to address not only each constituent’s fiduciary duties generally but also to explain counsel’s role as the lawyer for the entity and not for the individuals. These kinds of training sessions could involve outside counsel so that the message conveyed to the constituents comes from someone other than the in-house lawyer. Perhaps too, having the message conveyed by outside counsel may help constituents realize that even outside counsel with whom they regularly work owe their allegiance to the entity itself rather than to those who hire them.
Counsel should be able to explain not only the ethical obligations they have to their actual client—i.e., the entity—but that they necessarily owe a duty of loyalty to the entity itself rather than individual constituents. In addition, it would be helpful in such discussions for the corporate lawyer to address issues such as attorney-client privilege and the possible future ramifications of a rift between the entity and a particular constituent.
With respect to the client identification issue, it is useful to note the subtle but important distinction between (a) explaining a concept to a non-client—here, that an executive protection plan exists and is (or is not) intended to deal with developments and difficulties that may arise as a result of the “Cooperation Revolution”—and (b) providing legal advice to the non-client. In that regard, it behooves the prudent corporate lawyer explaining an executive protection plan to remind constituents that the lawyer is not providing the individual any legal advice, but is merely explaining what the plan says or what the plan is intended to cover.
In the context of discussing executive protection plans, a prudent lawyer would set forth in a writing shared among those constituents—and even perhaps a writing that the constituents sign—the lawyer’s understanding of who is (and who is not) the lawyer’s client(s) and evidencing both the disclosures and explanations that the lawyer provided the constituents on the above-noted issue, along with a recitation of the board’s directions to the lawyer following such explanations and disclosures.
Ordinarily, it is ultimately the entity’s senior constituents, namely its officers and directors, who decide what is in the entity’s best interest. If a “stormy day” arrives, however, documentation of both counsel’s disclosures to the board and the board’s instructions to counsel will serve both the lawyer and the entity client well.
Laying the groundwork about the roles and responsibilities of an entity’s counsel should allow for more comfortable conversations with constituents whenever individual legal issues arise and especially when the governing body asks counsel to draft or review an executive protection program.
C. Explain the Possibility of a Conflict and Obtain Written Consent Where Possible
Ideally, in-house counsel instructed by constituents on evaluating or designing an executive protection program would also explain to the constituents the possibility of a conflict between their individual interests and those of the entity. This is a difficult discussion at best. No one wants to hear that they will be left on their own if something bad happens. Central to this conversation is the “Cooperation Revolution.” Encouraging constituents to seek independent outside counsel (and perhaps offering to facilitate such independent outside representation) is the minimum counsel can do, if for no other purpose than to underscore the severity of the potential conflict. If, despite such disclosures, the directors or other constituents persist in demanding and instructing that in-house counsel provide advice on the protections being made available to them, it would behoove the prudent in-house counsel to have the constituents acknowledge the potential conflict and provide their informed consent, in writing, to waive the possible conflicts between the in-house counsel’s duties of loyalty to the entity and counsel’s duty to the constituents and covered executives.
D. Be Clear About the Limits of Your Advice
Even if every substantive point of the Checklist is considered and properly included in the resulting executive protection plan, there is, of course, no guarantee that courts will respect the drafters’ and beneficiaries’ intent. Prosecutorial policies continue to wax and wane. Judicial decisions and insurance law constantly evolve and develop nuances that the Checklist has not expressly considered. No lawyer can guarantee that all of the drafting suggestions that are recommended will be followed by judges who are asked to enforce the law in an atmosphere of entity hysteria, public opprobrium, or just plain “bad facts.” It is important to be clear about the limits of legal advice in this complex area.
The “Cooperation Revolution” has fundamentally altered the relationship between directors and officers, on the one hand, and the entities they serve on the other. Tensions between entities and their constituents are inevitable whenever allegations of wrongdoing arise, an investigation is initiated, or law enforcement authorities come knocking. Litigation over efforts to maximize executive protection has revealed a morass of issues pertaining to governance, indemnification, fee advancement, and insurance law.
It is the board’s obligation to make the ultimate decisions on the nature and scope of executive protection plans, but boards almost invariably turn to corporate counsel for assistance. When boards call for help, corporate counsel necessarily enter into complex substantive areas fraught with potential ethical hazards.
There are no easy answers when it comes to determining how to navigate these treacherous waters. The first step for counsel is to remind the board that it has the responsibility to determine whether the entity will provide contractually mandated protections to officers and directors at all. Once the board chooses to do so (as it usually does) and instructs counsel to oversee the task, prudent counsel should confirm that direction in writing. Counsel then need to recognize the risks associated with following these instructions, as well as attendant ethical obligations, and take steps to address them. Even where the entity’s charter already contains a “fullest extent” provision, counsel need to be cognizant of the perils inherent in interpreting the vague protection such a provision affords individual executives, as well as the complexities involved in enhancing them by means such as improved bylaws and insurance coverage. Counsel can address these risks by acquiring the appropriate expertise themselves or with assistance from other lawyers who are expert in the relevant fields. Counsel should help constituents understand that counsel represents the entity rather than individuals, obtain informed consent where appropriate, and clarify the limits of their advice. By taking these kinds of steps, entity counsel go a long way toward offering the best possible assistance to their clients and appropriately protecting themselves.