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                                         106 N.J.L.J. 429
                                        November 20, 1980


Appointed by the New Jersey Supreme Court


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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