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Lawyer serving as director of corporate client

By Peter H. Geraghty
Director, ETHICSearch

You work in a firm that concentrates in business law.  One of your clients who owns a small computer retail and repair company has asked you to serve as a director on its corporate board of directors.

If you decide to act as a director, what are the ethics issues that you should keep in mind?

In ABA Formal Opinion 98-410 Lawyer Serving as Director of Client Corporation the ABA Standing Committee on Ethics and Professional Responsibility addressed this issue, noting that clients frequently ask their lawyer to serve as director on their corporate boards.  The committee began its analysis under Rule 1.7 Conflict of Interest: Current Clients of the ABA Model Rules of Professional ConductParagraph 35 of the Comment to Rule 1.7 states:

A lawyer for a corporation or other organization who is also a member of its board of directors should determine whether the responsibilities of the two roles may conflict. The lawyer may be called on to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer's resignation from the board and the possibility of the corporation's obtaining legal advice from another lawyer in such situations. If there is material risk that the dual role will compromise the lawyer's independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation's lawyer when conflicts of interest arise. The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer's recusal as a director or might require the lawyer and the lawyer's firm to decline representation of the corporation in a matter.

Note, that at the time the committee issued this opinion, what is now paragraph 35 of the Comment to Rule 1.7 was formerly paragraph 14.  In 2002, the ABA Ethics 2000 Commission (E2k) renumbered this comment and added the last sentence to paragraph 35 to emphasize that the lawyer should warn the client about the potential conflicts that could arise if the lawyer were to agree to act as director of a corporate client.   The E2k official reporter’s Explanation of Changes Memo regarding paragraph 35 states:

This Comment maintains current Comment [14] with modifications designed to reflect that, when problems arise with a lawyer-director, the lawyer may either resign as director or cease acting as the corporation's lawyer, and to advise the lawyer of the possible consequences of discussing matters at board meetings while the lawyer is present in the capacity of director.

In Opinion 98-410, the committee stated that while the Rules of Professional Conduct do not prohibit a lawyer from serving as director, there are several ethical issues that the lawyer should keep in mind if he decides to do so.  These include conflicts of interest that may require the lawyer to either withdraw as legal counsel or to resign as director, confusion over whether the lawyer’s views on a matter while serving as director will be construed as legal advice as opposed to an opinion of a board member, and concerns about protecting client confidences and the attorney-client privilege.  The committee noted that these concerns can be either cured or at the very least ameliorated if the lawyer makes full disclosure to the corporate client:

…Ideally this discussion will occur before the lawyer becomes a board member. It is at this stage that the ethical lawyer should reasonably assure herself that those in authority understand the ethical and practical pitfalls that lie along the way. When in-house corporate counsel employed as a corporate executive is available, a discussion with him often will suffice. In other situations, the lawyer should take the time to explain the risks to the executive officers and other board members herself. –

ABA Formal Opinion 98-410 at page 4

The committee noted further that under some circumstances, it may be necessary to have additional discussions with the client if situations arise that may pose conflicts issues that could require the lawyer to withdraw either as lawyer or director.  The committee also suggested that in addition to an oral explanation, the lawyer/director should consider providing the client with a written memorandum explaining the potential risks inherent in the dual role, and also the differences between the roles of lawyer and director.

The committee pointed out that when a lawyer acts as director, there is a chance that the attorney-client privilege may be lost even when the lawyer gives purely legal advice.  Some authorities that have analyzed whether the privilege applies base their conclusions on whether business or legal advice was given.  Therefore, the committee cautioned, when the lawyer/director gives legal advice, he should make it clear that the meeting is for that purpose only, and should even consider having another member of the firm present at the meeting to provide the advice.

The committee also stated that the lawyer/director may find himself in the position of being obligated to disclose information to third parties that he would normally not be able to disclose without client consent due to the blending of the two capacities:

The director’s fiduciary obligations as a director and her professional obligations as a lawyer cannot “be placed in convenient separate boxes.”16 The knowledge of a corporate director and officer, with respect to transactions in which she is authorized to act, is imputed to the corporation. Similarly, the knowledge of a partner in a law firm gained during confidential relationships with clients is imputed to the other partners in the law firm. There is a risk in some circumstances that the files and work processes of the law firm could become as available for discovery as are the files and records of the corporation itself…

- ABA Formal Opinion 98-410 at page 7

The committee also addressed the types of conflicts that the lawyer/director must confront should he decide to become a director.  These include situations where the lawyer is (1) asked to provide legal advice to pursue a corporate policy that he objected to as director, (2) providing legal advice on past board action in which he participated, (3) making decisions involving retention of the lawyer’s law firm to handle legal matters for the corporation and (4) representing the corporation in certain types of litigation.  

Under the first conflicts scenario, the lawyer must determine whether his representation of the client would be “materially limited” by his previous opposition to the policy.  If so, he lawyer would then have to determine whether the representation would be adversely affected.  If the lawyer reasonably believes it would not be, and the client consents, the lawyer would not be disqualified.  However, the committee cautioned that even if the lawyer were able to satisfy the requirements of Rule 1.7, it may not be adviseable to undertake the representation personally since he believed that the policy was unwise, and may wish to have another lawyer in the firm handle the matter.

If the lawyer were to decide that he was personally disqualified under Rule 1.7, the disqualification would be imputed to all members of the lawyer’s firm, and depending on the circumstances the lawyer should consider resigning from the board.

Conflict scenario (3), involves a two-fold analysis both under the rules of professional conduct and the applicable law of corporate governance.  When the lawyer acts as director, he would have to make a determination under applicable corporate governance law whether he should recuse himself from participating in the decision and also whether he should remove his firm from consideration to perform the legal services.  Under the applicable rules of professional conduct, he would have to be careful not to take advantage of his position as director to influence the board to retain the lawyer’s firm.   The committee stated that under such circumstances, the lawyer should refrain from participating in decisions that involve the relationship of the law firm with the corporation.

In summary, the committee formulated six suggestions to help the lawyer who is considering acting as director avoid disciplinary violations, emphasizing the lawyer’s duty to make full disclosure to the corporate client of the potential risks involved if he were to act as director, the obligation to maintain independent professional judgment and the obligation to be ever vigilant regarding the potential conflicts that can arise between the two roles.

State bar opinions; Other authorities
 
There have been some state bar opinions that have addressed lawyer as director.  See, e.g. Oregon Opinion 2005-91 (2005), Utah State Bar Opinion 98-10 (1998), New York City Bar Op. 1988-5 (1988), New York State Bar Opinion 589 (1988), Maryland Opinion 87-29 (1987) and Illinois State Bar Association opinion 86-14 (1986).  Supreme Court of Ohio Board of Commissioners on Grievances and Discipline Opinion 2008-2 (2008) addressed a conflict issue where the lawyer served as corporate director but was not the corporation’s lawyer.  A digest of this opinion that appears at page 1301:6854 of the ABA/BNA Lawyers’ Manual on Professional Conduct states:

A lawyer who serves as a corporation's director but not as its corporate counsel may not represent a client in a suit against the corporation, nor may any member of the lawyer's firm. The conflict cannot be waived because the client and corporation would be directly adverse in the same proceeding and the lawyer's fiduciary duties to the corporation cannot be isolated from the lawyer's professional duties.

For further information on this topic, See, Rotunda and Dzienkowski, The Lawyer's Deskbook on Professional Responsibility, section 1.7-6(L) West Pub. Co (2010) at page 394,  Stewart, “Lawyer Directors:  Just a Bad Idea,”  SP054 ALI-ABA 361 (2009).  See Also the following excerpt from the annotations to Rule 1.7 as they appear in the 2007 edition of the ABA Annotated Model Rules of Professional Conduct that states as follows:

When a lawyer for a corporation serves on the corporation's board of directors, the two sets of duties may come into conflict. See generally ABA Formal Ethics Op. 98-410 (1998) (suggesting ways to minimize risk of violating ethics rules); Kim, Dual Identities and Dueling Obligations: Preserving Independence in Corporate Representation, 68 Tenn. L. Rev. 179 (2001); Smith, Note, Sitting on vs. Not Sitting on Your Client's Board of Directors, 15 Geo. J. Legal Ethics 597 (2002); Straub, ABA Task Force Misses the Mark: Attorneys Should Not Be Discouraged from Serving on Their Corporate Clients' Board of Directors, 25 Del. J. Corp. L. 261 (2000); Zaloom, Status of the Lawyer-Director: Avoiding Ethical Misconduct, 8 U. Miami Bus. L. Rev., Spring 2000, at 229; Am. Bar Ass'n Section of Litig., The Lawyer-Director: Implications for Independence: Report on the Task Force on the Independent Lawyer (1998).

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