September 01, 2013

Privilige: Who Is the Client in the Closely Held Corporation?

Edna Selan Epstein

Download a printable PDF of this article (membership required).

You represent a closely held corporation. Whom do you represent—the corporation or the chief operating officer who owns all the shares?

Lawyers! No wonder ordinary mortals find us exasperating.

Lawyers get hired and paid to worry about things no one else expects to, or much less wants to, worry about. Just imagine what your client would think if you voiced these dark-of-the-night worries: “I thought you were my friend! I thought I could rely on you to solve my problems for me, not to create ones where none exist.”

Let’s assume there is a lawsuit, and the chief executive officer (CEO) is being deposed. He is asked, “When you had your conversations with the lawyer, was she representing you or was she representing the company?” The CEO answers, truthfully and perplexedly, “I never thought about it.”

 

So is the attorney-client privilege safe? It probably is. The default assumption with respect to the privilege is that it is the corporation who is the client. But to shift that assumption, courts apply what are known as the “Bevill factors” before they will set aside the default option. In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120, 125 (3d Cir. 1986). The Bevill factors are (1) that the corporate employee sought legal advice, (2) in an individual rather than a representative capacity; (3) the attorney, aware of the potential conflict of interest, gave the advice sought; (4) the conversation was confidential; and (5) the substance of the conversation did not involve corporate matters.

The problem with the default assumption in the context of the closely held corporation is that the CEO probably considers, correctly, the closely held corporation to be an “asset” he owns. You, The Lawyer, are hardly likely to stop a conversation by stating, “Before you ask for my legal advice, we have to decide whether you are consulting me individually or as CEO of your company.” Your client would probably think he needs a new lawyer.

Even though in privilege law the default option is that the corporation and not the individual owner of the corporation is the client, courts will look to the following questions:

  1. Whom did the lawyer think he was representing? It is the lawyer’s understanding and not the client’s that is dispositive. Therefore, do a mental check. Is there a potential conflict of interest between what the CEO wants and the company needs?
  2. Who is paying the bills? Is it the owner/CEO directly, or is it the corporation? If there is good reason to be certain that the CEO is deemed the primary client for privilege purposes, have the CEO pay the legal bills rather than expensing them through the corporation.
  3. Who is consulting with the lawyer? Is it only the owner/CEO, or are consultations on corporate matters being held with other employees?

The genius of the common law is that it is not “theoretical” and code bound. It is not impervious to how business is conducted. Therefore, even where the communications with counsel are on the issue of the individual officer’s personal rights and potential liabilities, the CEO of a closely held corporation may be able to invoke the privilege. He or she may be the only officer of the company who can successfully do that. In re Grand Jury Subpoena, 274 F.3d 563, 572 (1st Cir. 2001); In re Grand Jury Proceedings, 156 F.3d 1038, 1041–42 (10th Cir. 1998).

Stay alert for situations where a potential conflict of interest arises. Does the patriarch want to give up the reins of control and bring in family members to help him run the company? The question of who is the client and whom does the lawyer represent needs to be squarely faced. Consider engaging separate counsel to represent potentially conflicted interests, just as you would if you were drafting a prenuptial agreement. Do not rely just on a waiver signed without independent representation.

Common questions—Who is the client? Who can assert or waive the privilege?—arise most often when criminal activity by the CEO has occurred. Then the testimony of the lawyer as to whom he or she considered to be the client—the CEO or the corporation—is likely to be dispositive.

The issue of who may raise and waive the privilege also arises in the context of bankruptcies. It is the corporate trustee in bankruptcy and not the CEO of the defunct corporation who has the right to assert or to waive the privilege. In the bankruptcy context, closely held corporations do not differ from publicly held corporations when it comes to asserting or waiving the privilege.

But rest easy. There must be thousands of situations in the United States where the CEO of a closely held company seeks legal advice without the question of who is the client ever being confronted. Yet, there are precious few cases of the privilege being litigated in the context of the closely held corporation, although in our society we can safely make the assumption that what is problematic will find its way into litigation.

Edna Selan Epstein

The author, an associate editor of Litigation, is the author of Attorney-Client Privilege and the Work-Product Doctrine, Fifth Edition, published by the American Bar Association.