GPSOLO September 2009
Business and Commercial Law
Lawyers’ Service on Nonprofit Boards
At some point in your career, a local charity, church, or other nonprofit will ask you to serve on its board of direc-tors. Because most nonprofits have limited resources, they may expect a lawyer-director to provide some form of legal services on a pro bono basis.
A lawyer-director must be mindful of the fiduciary duties imposed on directors of nonprofit organizations, the ethical duties imposed on lawyers, as well as the potential issues that arise as a result of a lawyer’s serving on a non-profit board. Although there are some risks associated with such service, there are ways that these risks might be managed.
A director has fiduciary duties to the organization. The main duties are the duty of care and the duty of loyalty. In terms of the ethical obligations imposed on lawyers in their representation of clients, Rule 1.7 of the American Bar Association (ABA) Model Rules of Professional Conduct (Model Rules) provides that a lawyer may not represent a client if such representation involves a concurrent conflict of interest.
Potential conflicts of interest. Conflicts can arise for lawyers serving as members of a nonprofit’s board of di-rectors because of the duties imposed on nonprofit directors as well as the lawyers’ ethical duties to clients as set forth in the Model Rules. As part of the duty of loyalty, a director is required to act in the best interests of the or-ganization, which can include, for example, not using confidential information of the organization to the detriment of the organization. With such a duty to the organization, a lawyer’s service on the board of directors of a nonprofit might preclude the lawyer or the lawyer’s law firm from being adverse to the organization.
Conflicts also can arise for a lawyer- director when the lawyer’s firm represents a client that is a grant recipient of the nonprofit. To the extent such situations occur infrequently, the organization and lawyer-director should be able to handle them by following conflict-of-interest requirements that are imposed by state statute and the organization’s conflict-of-interest policies.
Other types of conflicts can arise when the lawyer-director is serving as the lawyer for the nonprofit. ABA For-mal Ethics Opinion 98-410 identifies four possible conflict situations, and although the focus of the formal ethics opinion is primarily on for-profit organizations, the rationale can apply to nonprofit organizations as well. The first situation is when the lawyer is asked to pursue objectives of the organization that as a director the lawyer opposed. According to the formal ethics opinion, a lawyer needs to determine whether his or her representation of the organi-zation may be materially limited by the lawyer’s opposition to the action the organization has decided to undertake such that Model Rule 1.7 precludes the representation. The second situation occurs when a lawyer is asked to opine on board actions in which the lawyer participated. The third situation described in the formal ethics opinion is when the board is taking action affecting the lawyer’s law firm, such as when the board is determining whether to retain the law firm. In such a situation, it would be important to comply with the applicable conflict-of-interest procedures and make sure the lawyer-director is not part of the decision process. The fourth situation described in the formal ethics opinion is when the lawyer or lawyer’s law firm represents the organization in litigation that includes the or-ganization and directors as defendants. Among other things, it notes the need for the organization and directors to have independent representation in any controversy between the organization and its lawyers (including the lawyer-director).
Attorney-client privilege waivers. Assuming there is a lawyer-client relationship, the lawyer-director’s dual roles can, in some situations, make it difficult to ensure that the attorney- client privilege protects communications between the lawyer and the nonprofit organization. A basic element of the privilege is that the lawyer act as legal counsel rather than as a business advisor to protect communication from disclosure in litigation. In the for-profit context, communications from a lawyer-director that involve business issues (as opposed to legal advice) have been held not protected by the attorney-client privilege. The same argument could be made in the nonprofit context.
Although the lawyer-director should understand when he or she is acting as legal counsel as opposed to a busi-ness advisor, these separate roles may not be clear to nonlawyer directors and officers of the organization. The comments to Model Rule 1.7 provide that a lawyer needs to warn a corporate client of the potential loss of the attor-ney-client privilege when the lawyer is also a board member.
Protections for lawyers. The protections available to directors of nonprofit organizations and lawyers are also available to lawyer-directors. In terms of protections for nonprofit directors, the ABA’s Model Nonprofit Corpora-tion Act (third edition), as well as many states’ nonprofit statutes, provide a liability shield for directors and officers acting in such capacity. This shield will protect the directors from liability to the organization and its members for money damages unless their conduct is deemed to fall under an exception to the shield.
Directors and officers (D&O) insurance coverage can be very helpful in protecting lawyers in their service as di-rectors of a nonprofit organization. In addition, professional liability coverage should provide protection for the law-yer-director when acting in the role of the lawyer for the organization. Still, it is important to recognize that profes-sional liability coverage generally does not cover claims arising out of a lawyer’s service as a director, and D&O policies often limit claims arising solely out of service as a director or officer.
Considerations for lawyers. Before agreeing to serve as a director or officer of a nonprofit organization, a lawyer should review:
- The expectations of the lawyer- director regarding legal representation.
- The organization’s governance documents and applicable state nonprofit law.
- The organization’s D&O liability coverage.
- The lawyer’s professional liability coverage.
The lawyer also should consider the likelihood that the lawyer’s role as a director will present conflicts in representation of clients that may be adverse to the nonprofit organization.
In accepting a position on the board of directors of a client organization, a lawyer-director should provide an explanation of the potential conflicts of interest and how they might preclude the lawyer-director from acting as either the director or a lawyer on some issues or require safeguards, such as engaging the services of counsel other than the lawyer-director or the lawyer-director’s law firm.
It is important to make the other board members aware of the potential conflicts. Moreover, in order to address a potential conflict adequately, a lawyer-director should not participate in board or committee deliberations or actions on the relationship of the organization with the lawyer.
When a lawyer-director speaks to the board as a lawyer for the organization, he or she should communicate that fact and remind the board of the methods of preserving the lawyer- client privilege.
If the lawyer-director agrees to take on a specific, limited representation of the organization, such as preparing restated articles of incorporation or an employment agreement for the executive director, the lawyer should make clear—preferably in writing to the organization—the extent of the representation.FOR MORE INFORMATION ABOUT THE SECTION OF?BUSINESS LAW
- This article is an abridged and edited version of one that originally appeared on page 35 of Business Law Today, November/December 2008 (18:2).
- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
- Website: www.ababusinesslaw.org.
- Periodicals: Business Law Today, bimonthly magazine; The Business Lawyer, quarterly law journal; eSource, monthly e-newsletter.
- Books and Other Recent Publications: A Manual of Style for Contract Drafting, 2d ed.; Practice under Article 9 of the UCC; SEC Executive Compensation Disclosure Rules; Hereof, Thereof, and Everywhereof, 2d ed.; Model Business Corporation Act, 2007 ed.; Portable Bankruptcy Code and Rules, 2008 ed.; New Bankruptcy Code, 2d ed.; Intangible Assets Handbook; Intellectual Property Deskbook; In-House Counsel’s Essential Toolkit; Corporate Director’s Guidebook, 5th ed.; Bankruptcy Deadline Checklist, 3d ed.; Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley; Model Asset Purchase Agreement with Commentary; The Practitioner’s Guide to the Sarbanes-Oxley Act; The M&A Process: A Practical Guide for the Business Lawyer.
Willard L. Boyd III is a shareholder in Nyemaster Goode, P.C., in Des Moines, Iowa, and chair of the Nonprofit Organizations Committee of the ABA Section of Business Law. He may be reached at firstname.lastname@example.org.