The avoidance of conflicts of interest is central to the ethical practice of law. The obligation of attorneys to provide clients with truly independent judgment and advice is, together with the obligation to maintain client confidences, one of the primary cornerstones of the attorney-client relationship. This article will consider some potential conflicts that can arise in one discrete area of practice — the representation of a corporate entity, either by in-house counsel or by an attorney in private practice.
It may seem self-evident that when an attorney represents a corporation, the corporation is the client. Rule 1.13(a) says as much — "A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." One of the keys to understanding conflicts in the corporate arena, however, is contained in the reference to "duly authorized constituents." Corporations communicate to their attorneys through "constituents"—officers, directors, employees, shareholders and the like. Corporate attorneys deal with corporate constituents on a daily basis. In order to avoid conflicts, corporate attorneys must remember that their client is the corporation and not its constituents.
This is not to say that the corporate attorney may not also represent constituents. Rule 1.13(e) specifically provides that joint representation is permitted "subject to the provisions of Rule 1.7"— that is, so long as the attorney reasonably believes the representation of either will not be adversely affected, and the clients consent. Even when the constituents control the management of the business, the attorney must remember that the corporation is a separate entity entitled to the attorney's independent judgment. Remembering this separation will help the attorney through a number of problematic situations that may arise in representing a corporation. Two such situations will be discussed here — discovery by the attorney that corporate wrongdoing is taking place, and an internal dispute over control of the corporation.Corporate wrongdoing What is an attorney supposed to do when he or she finds out that a corporate client's senior financial officer is taking kickbacks from a vendor? Or that a plant manager is concealing production-line accidents that have compromised the safety of the corporation's products?
Rule 1.13(b) provides that an attorney faced with such misconduct "in a matter related to the representation" "shall proceed as is reasonably necessary in the best interests of the organization" if the misconduct "is likely to result in substantial injury to the organization." The rule further provides:
In determining how to proceed, the lawyer shall give due consideration to the seriousness of the violation and its consequences, the scope and nature of the lawyer's representation, the responsibility in the organization and the apparent motivation of the person involved, the policies of the organization concerning such matters, and any other relevant considerations. Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization.
The rule also lists possible approaches to the problem, such as asking that the person involved reconsider the matter, recommending a second opinion and bringing the matter to the attention of higher authority within the organization.
Application of the above factors to any given situation obviously requires that the attorney exercise a high degree of judgment and discretion on behalf of the corporate client. The situation may be particularly difficult if it involves constituents with whom the attorney has been working for a long period of time. The judgment required on the corporate client's behalf underscores the need for independence unclouded by loyalty to the constituents involved, either the wrongdoers or the individuals to whom disclosure may be required.
Assume you have brought information of wrongdoing by a corporate employee to the president's attention, and he or she has asked you to investigate the matter further. This assignment requires a heightened sensitivity to potential conflicts. Rule 1.13(d) cautions that in dealing with constituents, a lawyer "shall explain the identity of the client when it is apparent that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing." Comment 7 to Rule 1.13 also advises that in such circumstances the attorney should advise the constituent that he or she "may wish to obtain independent representation" and that their discussions "may not be privileged." Such explanations should be considered whenever corporate counsel interviews any employee in connection with an investigation of corporate wrongdoing.
If, after all is said and done, the corporation's "highest authority" thanks you for the information and decides not to pursue the wrongdoing, what are your options? Rule 1.13 provides that the attorney may resign if he or she believes that the decision of the highest authority is unlawful and will injure the corporation. Resignation would be required under Rules 1.16(a)(1) and 1.2(d) if the attorney's services were being used in connection with criminal or fraudulent activity. As a general rule, however, the attorney may not "blow the whistle" in an attempt to protect the corporation. Any further disclosures concerning the wrongdoing can only be made in accordance the narrow exceptions to client confidentiality contained in Rules 1.6, 3.3, 4.1 and 8.3.Internal power struggles
What are the obligations of an attorney who finds that there is an internal dispute among constituents over control of a corporate client? Since the attorney's obligations are to the corporation and not to any of its constituents, the attorney's obligation is to stay out of the dispute and assist neither side.
In 1932 the American Bar Association Ethics Committee concluded that a corporation's general counsel could not act as a proxy or solicit proxy votes for management in connection with an attempt by a group of shareholders to elect a new board of directors. ABA Formal Opinion 86 (1932). The committee reasoned as follows:
In acting as the corporation's legal adviser he must refrain from taking part in any controversies or fractional differences which may exist among stockholders as to its control. When his opinion is sought by those entitled to it, or when it becomes his duty to voice it, he must be in position to give it without bias or prejudice and to have it recognized as being so given. Unless he is in that position his usefulness to his client is impaired.
This duty to stay out of internal power struggles prohibits assistance to management, as in the ABA's 1932 opinion, as well as assistance to minority factions. See Matter of Wise
, 433 Mass. 80, 88-89 (2000) (six-month suspension for attorney who, among other things, breached duty of neutrality by assisting in attempt to take over control of corporate client).
The duty of neutrality in the face of a struggle for control of a corporate client can present the attorney with a never-ending stream of conflict traps. Although the attorney cannot assist management in the struggle, the attorney must continue to represent the corporation as directed by its "duly authorized constituents"— i.e., management. The line between assisting management in managing the corporation's business and assisting management in maintaining control of the corporation can be very blurred.
The dispute also may be so consuming that the identity of controlling management becomes difficult. The attorney may be called upon to determine who has the right to direct his or her actions. This requires a review of the corporation's organizational documents and possibly statutes and caselaw on corporate organization. If organizational authority itself is in dispute or if the disputants are deadlocked, the attorney must avoid the impulse to take over the client's decision-making processes and may be required to seek court direction or withdraw. Some of these problems can be avoided if separate counsel is retained to represent the interests of the various factions vying for control of the corporation.
The analysis of conflicts issues in the formation and representation of close corporations presents unique problems for practitioners. They will be the subject of a separate Bar Overseers article to be published in the coming months.
But in all circumstances, the representation of corporations requires a keen awareness of client identity in order to avoid conflicts of interest. The attorney who provides his or her corporate client with the most competent and skilled representation will be the attorney who is able to separate the corporation's interests from the interests of management, shareholders and other constituents.
For thorough discussions and analyses of these and other issues raised by corporate representation, see ABA/BNA Lawyers' Manual on Professional Conduct, at 91:2001-2022 (2000) ("Client Identity"); Annotated Rules of Professional Conduct, at 195-207 (4th Edition, ABA 1999) ("Rule 1.13").John W. Marshall is assistant bar counsel with the Board of Bar Overseers.