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106 N.J.L.J. 429
November 20, 1980
ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the New Jersey Supreme Court
OPINION 462
Conflict of Interest
Attorney - Director of Client Corporation
A New Jersey corporation has a board of directors, which
includes two attorneys who are partners in different law firms. At
this time, neither of these firms is representing the corporation
in any litigation or other business. The question is whether it is
proper for either attorney, or other members of their respective
firms, to represent the corporation on any business or perform
research or other tasks which will result in a fee being charged to
the corporation for such legal services.
Although the practice of an attorney's serving as both a
director of, and counsel to, a corporation is a long-standing and
prevalent one (see "Outside Counsel: Inside Director",The Directory
of Lawyers on the Boards of American Industry, Law Journal press
(1977), it has not heretofore been the subject of an ethics opinion
by this Committee or that of the American Bar Association.
Moreover, while there have been many articles on the subject, they
express conflicting views consisting largely of personal opinion
and unsupported generalization. See e.g., "Panel Discussion,
Lawyers as Directors", 30 Business Lawyer 41-64 (March 1975);
Mundheim, "Should Code of Professional Responsibility Forbid
Lawyers to Serve on Boards of Corporations for which They Act as
Counsel", 33 Business Lawyers 1507 (March 1978); Riger, "The
Lawyer-Director - 'A Vexing Problem'", 33 Business Lawyer 2381
(July 1978).
Although there has been no official policy on the practice it
is interesting to note that the New Jersey Law Journal has in
recent years twice editorialized on the practice, and called for
further "consideration and guidance" from the organized bar. See
101 N.J.L.J. 188 (1978); 104 N.J.L.J. 285 (1979). In the earlier
editorial, entitled, "Inside Director-Outside Counsel," the Law
Journal noted:
Because the parameters of the two positions may vary
from law firm to law firm and from corporation to
corporation, defining the obligations of such an attorney
is difficult. What little legal attention has been
devoted to this problem has been cursory and tangential
in nature. Furthermore, the disparate factual patterns
in which attorneys have simultaneously served as outside
counsel and directors have frustrated consistent ethical
rulings. 101 N.J.L.J. 188 (1978).
The Law Journal noted that resort to the Code of Professional
Responsibility itself may provide instructive insights into this
question and cited by way of example, Ethical Consideration 5-18,
which provides:
A lawyer employed or retained by a corporation or
similar entity owes his allegiance to the entity and not
to a stockholder, director, officer, employee,
representative, or other person connected with the
entity. In advising the entity, a lawyer should keep
paramount its interest and his professional judgment
should not be influenced by the personal desires of any
person or organization.
In its more recent editorial, the Law Journal discussed several
provisions of the Proposed Revised Code of Professional
Responsibility which is currently being drafted by a commission of
the American Bar Association. See, infra, page 13. One of the
most interesting series of these proposals concerns the duties of
corporate counsel. The Law Journal stated:
Under the proposed disciplinary rules, a lawyer is
prohibited from serving as general counsel of a
corporation of which he is a director. Further, if a
corporate lawyer learns of an impropriety, he is
obligated to take suitable measures to protect his client
- the corporation. It becomes his obligation to refer
the matter to a higher authority in the corporation, seek
a separate legal opinion, or, if that is insufficient, to
report the infraction to the Board of Directors. If
that, too, fails, the attorney must resign or inform
appropriate public officials. 104 N.J.L.J. 285 (1979).
There is much to be said both for and against the practice of
an attorney's serving both on the corporate board of directors and
as counsel to that corporation. Among the arguments cited in favor
of the practice are that, as a director, a lawyer has (1) improved
access to information regarding the corporate structure, (2)
greater opportunity to persuade the other board members within the
"inner sanctum" of the boardroom, (3) improved credibility with the
other board members and (4) a single liaison between counsel and
client. It is argued that lawyers, by virtue of their training and
experience, can and usually do make good directors. Panel
Discussion, supra, at page 58. By virtue of his legal training,
the lawyer as a board member comes equipped with his full
complement of legal knowledge to attach the myriad of legal and
administrative problems which confront the corporation in its day-
to-day activities. Finally, and most importantly, it is argued
that both the present Code of Professional Responsibility and
general fiduciary responsibilities sufficiently prevent a conflict
of interest situation.
In this regard, panelist Sam Harris See footnote 1
1
cites the New York case
of Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (Ct. App. 1928),
in which fiduciaries are to be judged. On the basis thereof, Mr.
Harris lists a number of activities in which directors should not
engage: seizing corporate opportunities, competing with the
corporation, dealing with the corporation, on advantageous terms,
purchasing corporate shares below price, etc. In his view, none of
those prohibited activities should trouble any honest director, be
he an attorney or layman. Thus, in the view of Mr. Harris, a lawyer
who is invited to serve as a director of a sound, reputable
corporation should accept; provided - and these are important
provisos - that he sincerely believes that he can make a genuine
contribution to the well-being of the corporation, that he is able
and willing to devote the time and attention to the affairs of the
corporation which the expanding role of corporate director now
demands, and that he recognizes that his posture vis-a-vis
management should be that of "loyal independence." This means that
the attorney should loyally serve management, but if the occasion
should ever arise where loyalty to management collides with the
interest of the body of shareholders, the interest of the
shareholders must prevail. Mr. Harris makes reference to a
statistical survey which shows that approximately 2,000 public
companies have directors who are attorneys and whose law firms are
also employed by them as outside counsel. On that basis, he submits
that "2,000 corporations, 2,000 lawyers, and 2,000 law firms can't
be wrong." 30 Business Lawyer, supra, at page 58-59.
Unfortunately, the problem is not as simple as Mr. Harris
would have it appear. Arguments against the practice of an
attorney's serving on the board of directors and rendering legal
services to the corporation include:
1. A lawyer-director is nonetheless an attorney, and may be
faced with a greater burden of care than his nonlawyer colleagues
on the board. In this regard, see Escott v. Bar Chris, 283 Fed.
Sup. 643, (S.D.N.Y.,1968), where the court imposed a higher
standard of care on the lawyer-director for the accuracy of a
registration statement because the lawyer-director drafted the
statement. Apparently, in response to that decision, some prominent
New York City law firms have established policies to discourage
their partners from serving on corporate boards. "Inside Director-
Outside Counsel," supra, at page 3.
2. There is a danger that the lawyer's credibility as an
attorney will be diminished when he sits on the board. The
rationale here is that the other board members will tend to regard
the attorney as just "one of the boys" and pay less attention to
his legal advice. Here, panelist Professor David S. RuderSee footnote 2
2
notes
that regular participation by the lawyer-director in a business
atmosphere involving nonlegal considerations may make it less
likely that his fellow directors will heed his legal advice when
the occasion for a strong position arises. He writes:
There lawyer-director's dilemma is that if he
participates too strongly as a businessman his ability to
press for legally oriented decisions may be reduced and
that he refrains from exercising his business judgment
his ability to serve the normal director's role may be
lost. 30 Business Lawyer, supra, at page 51-52.
3. Perhaps the greatest danger, however, and hence, the
greatest ethical pitfall, of the role of lawyer-director is the
fact that an attorney may sacrifice his professional independence
when he joins his client's board of directors. Normally, the
corporation employs a lawyer to provide legal rather than business
advice, and the corporate decisions makers should be able to turn
to the lawyer for legal analysis which is independent of business
considerations. To the extent that a lawyer allows business
considerations to influence his legal judgment, he may be losing
his ability to render independent advice. In this regard, Canon 5
of the Code of Professional Responsibility dictates that a lawyer
must exercise independent professional judgment on behalf of a
client. This statement is interpreted in Ethical Consideration 5-1
as forbidding any reference to the attorney's personal interests,
the interest of other clients, or the desires of third persons.
The lawyer owes his undivided fidelity to his clients, and, as
Ethical Consideration 5-18 makes clear, the client in this regard
is the corporation, and not the stockholders, officers, directors
or employees thereof. One might ask in passing: If the lawyer owes
his allegiance to the entity and not to a director, how can he
himself be a director? The wording can be read as impliedly
forbidding the very practice under discussion. There is small
comfort, however, in the ambiguities of the Code or the metaphysics
involved in serving an entity. The pragmatic starting point is the
fact that a lawyer employed or retained by a corporation is
employed or retained by the management of the corporation. Being
so employed, his allegiance is necessarily to the management with
whom he consults and with whom he advises in matters relating to
management's duties in running the corporation. Short of a clear-
cut case of broad or gross overreaching, requiring his withdrawal
from the representation in any event, management is the client.
Riger,See footnote 3
3
supra, at page 2384.
An additional consideration arises when a law firm receives
large legal fees from a corporation.See footnote 4
4
In such a case the lawyer may
avoid expressing his views in a forceful manner for fear of losing
a valued client. At the very least, a director whose firm receives
large legal fees may be tagged as a management director rather than
an outside director. 30 Business Lawyer, supra, at page 52. In
this regard, Professor MundheimSee footnote 5
5
notes in his articles that:
The major structural impediment today for counsel to
properly serve the corporation is the fact that
management retains and fires counsel. Although corporate
counsel is admonished by the Code that he represents the
corporation, it may become hard, as illustrated by Harold
Marsh's hypotheticals, for counsel to know and do his
duty when the interests of management and the company
diverge. So, that problem is imbedded in the relationship
of counsel to the corporation.
This problem may be compounded by counsel's service
as a director. As a director, there is a quite proper
tendency to go along with management on a proposal if it
seems to be within a band of reasonableness. A director's
function encompasses making the business decision on how
much risk a company should undertake. A lawyer, on the
other hand, has the function to identify risk and alert
decision makers of the legal consequences of risk taking.
If I am prepared to support a cause of action as a
director, how will that affect my lawyer's role in first,
articulating the risks involved in the course of action
I have decided to support as a director; and second,
having the other members of the board take my description
of the risks seriously and weigh them independently when
they know how I am going to vote as a director.
I recognize that this observation is a two way
street, because it is also possible to say that the
threat of personal director liability may make my advice
as a lawyer more cautious than it would otherwise be. 33
Business Lawyer, supra, at page 1509.
Mundheim observes that the dual role may make it difficult for
the lawyer-director to function effectively as an independent
director. The worry will always be that the director cannot act
independently as long as he is trying to protect an important
economic interest, namely maintaining the client for the firm.
There is also the additional problem of the freedom of the
corporation to switch control, or to switch some business from
counsel, where counsel is represented on the board. The lawyer-
director role makes such changes more difficult.
It is true that every director who sits on a board brings to
that board his own special background, expertise and knowledge and,
therefore, the attorney should not be barred from service on a
board anymore than a physician who sits on the board of directors
of a pharmaceutical company. Consequently, we are not in favor of
adopting a position which would discourage an attorney from serving
on a corporate board of directors. When, however, the attorney
attempts to fulfill both roles, i.e., that of director and that of
counsel to the very same corporation, those roles may conflict. In
this regard, it should be noted that the accountant is barred by
the code of his profession from taking directorships on client
boards. This is apparently in recognition of the need for total
independence in the accountant's expression of opinion on the
client's financial statements. Riger, supra, at page 2386. The
lawyer is in no less need of independence in the expression of his
legal opinion regarding his client's programs and actions. Ibid.
In our Opinion 33, 87 N.J.L.J., 249 (1964), we were asked to
rule on the propriety of an attorney's serving on the board of a
municipal library, while representing the library as its counsel.
Considerations of the public policy and public service aside, we
believe that the opinion is analogous to the instant situation upon
the issue of professional independence. In discussing that issue,
we said:
It would seem that many times his personal interest
in the performance of his public duties as a library
trustee must necessarily conflict with his professional
interest and duty as attorney to the board. There is an
inherent danger and seeming impropriety in this situation
comparable to dual representation proscribed by the
Canons of Professional Ethics, Canon 6.
An attorney should avoid conflicting interests and
situations which prevent him from giving candid,
objective opinions unaffected by his own personal
interests. Canons 6, 8 and 32.
A lawyer should be able to advise and act for his
client without any thought as to his individual interest.
Drinker, Legal Ethics (1953) 109-110.
We believe that the foregoing considerations are also
applicable to the corporate sector. We agree with the editorial
board of the New Jersey Law Journal that is clearly time to
recognize those ethical demands of the profession which affect
attorneys who sit on the boards of client corporations. It is our
opinion that the potential loss of professional independence
inherent in the attorney-director relationship raises serious
questions that may jeopardize the attorney's usefulness as director
and may compromise his effectiveness as the corporate attorney.
Accordingly, while we do not rule that such relationship is per se
improper, we hold that a lawyer should carefully consider the
potential for ethical problems and accept directorships of client
corporations only after he has satisfied himself by discussing the
matter with the directors on the nominating committee and top-
ranking members of the administration that his service as director
will probably not give rise to any conflict between his duties as
such and those as counsel.
In this connection, there might be justification for
distinguishing between large, publicly-held corporations and close
corporations. Perhaps in the former case it would be appropriate to
bring the matter to the attention of all present board members and
to disclose it as part of any proxy statement or other materials
utilized in the election of board members who also act as attorneys
for the corporation. In the case of close corporations, however,
it might be appropriate to require, as suggested by the ABA Model
Rules, informed consent of all persons having a financial interest
in the corporation. See Discussion Draft of the Model Rules of
Professional Conduct of the American Bar Association Commission on
Evaluation of Professional Standards, section 1.9(f) and comment
(January 30, 1980).
***
Footnote: 1 1
Sam Harris is a partner in the law firm of Fried, Frank, Harris,
Shriver & Jacobson, N.Y.C., N.Y.; member New York, California and
District of Columbia Bars; Fellow of the American Bar Foundation.
Footnote: 2 2
David S. Ruder, Professor of Law, Northwestern University, Chicago,
Illinois.
Footnote: 3 3
Martin Riger, Professor of Law Emeritus, Georgetown University Law
Center, and former vice president and general counsel of a New York
Stock Exchange listed corporation. Member of the New York, Ohio
and District of Columbia Bars.
Footnote: 4 4 Outside Counsel: Inside Director, supra, reports that in
1971 25 companies paid more than $500,000 each to directors' law
firms.
Footnote: 5 5
Robert H. Mundheim, Professor of Law, University of Pennsylvania
Law School, currently serving as the General Counsel of the U.S.
Treasury.
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