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A corporation doing business in today's world can no more function without legal guidance and assistance than it can function without raw materials or machinery. In fact, those who provide legal advice and assistance operate closer to the top of corporate hierarchical structures than those who provide raw materials and machinery, because their services are more immediately tied to the work of the executives who . . . [run the company].
Personal injury lawyers cannot try an automobile accident case without understanding the physical and medical facts of the accident and the resulting injuries. Similarly, corporate lawyers need to understand the business facts and potential business consequences of proposed transactions in order to recognize the legal problems . . . [and act upon them].
The use of the term 'business lawyer' to describe lawyers experienced in serving business executives in these transactions aptly recognizes the mixture of legal and business knowledge needed for doing the job right. In these matters, the most important role distinction between executive and lawyer is not so much a distinction between who decides what to do and who draws the papers, as it is a distinction between who defines and points out the risks and who decides whether or not the risks are acceptable.
. . . To serve the corporation in the lawyer's traditional role, the lawyer needs something more than the business knowledge and imagination to see the risks and pitfalls and to point them out. He needs also the objectivity that comes from not being himself the author of the transaction at hand, from not having a personal career interest in glossing over its risks and pitfalls in the hope of being remembered as an outstanding entrepreneur, and from not being himself obliged to weigh the risks he identifies and decide whether to accept or reject them. In short, he needs a client.
Birdzell, Ethical Problems of Inside Counsel at §6.01.
In representing a corporate client, attorneys, and particularly in-house counsel, need to be cautious of the lines between acting as a businessperson and acting as a lawyer. The need for the lawyer to be aware of his or her legal capacity are particularly pressing in two situations. As previously discussed, it is important for the attorney to carefully distinguish between business and legal advice in order to provide adequate protection for the attorney-client privilege. It is also crucial that the attorney respect the business judgment of corporate management in resolving issues of corporate decision-making. "Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer's province." M.R. 1.13, Comment (The Entity as Client).
The entire structure of Rule 1.13 is designed to prevent the attorney from substituting his or her views of what is in the corporation's best interest for that of corporate management. Where counsel disagrees with management's exercise of business judgment, the attorney may make his or her views known, M.R. 2.1, but ultimately, the judgment of the corporate decision-maker prevails. While this is, of course, true when dealing with individual clients as well, it is more difficult to apply in a corporate context because of the multiple layers of constituencies with whom the lawyer deals.
Where the duly authorized constituent of the organization "makes decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful." Comment (The Entity as Client). A lawyer cannot, on his or her own, take decisions over the head of management. It is only where counsel has a clear indication that management is acting in violation of a legal obligation to the organization or in violation of law that is likely to damage the corporation that counsel may go outside normal corporate channels of control and communication. Even then, extreme care must be taken. "Clear justification should exist for seeking review over the head of the constituent normally responsible for it. The stated policy of the organization may define circumstances and prescribe channels for such review, and a lawyer should encourage the formulation of such a policy." Id. See generally Annotated Rules, at 207-208; ABA/BNA Lawyers’ Manual, at 91:2408-2409.
While these rules appear clear on paper, they are much more difficult to apply in practice. Members of the Board of Directors have fiduciary duties and may feel the need for information to carry them out. Yet corporate management, with whom the lawyer deals on a day-to-day basis, may want decisions made, and information kept, at staff level. And ultimately, shareholders will be affected by any corporate decision. In order to properly resolve the difficult issues that may arise, the attorney representing a corporation must fully understand not only the "ethics" rules, but entity law and corporate policy as well.
"When a financial auditor's request for information concerning a client's legal status is referred to the client's lawyer, the Comment to Rule 2.3 directs the lawyer to the procedures set forth in the American Bar Association Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information, 31 Bus. Law. 1709 (1976). The Statement of Policy, "essentially a treaty between the ABA and the American Institute of Certified Public Accountants, reflects a compromise between lawyers' desires to protect client confidences fully, and accountants' desires to render audit reports without excessive qualifications regarding the underlying information." Annotated Rules, at 291.
The Treaty limits the amount of disclosure counsel is required to make in response to a corporate auditor's request for information and should be carefully consulted. Generally, the attorney need only provide information "specifically requested" by the client. Even where counsel possesses information that might otherwise be relevant, there is no duty to disclose it under the Treaty absent a specific request. See TEW v. Arky, Freed, Stearns, Watson, Greer, Weaver & Harris, P.A., 655 F. Supp. 1573 (S.D. Fla. 1987), aff'd, 846 F.2d 753 (11th Cir. 1988); ABA/BNA Lawyers’ Manual at 91:2410. The fact that the Treaty does not mandate or permit disclosure, however, does not necessarily resolve the issues for corporate counsel. As noted in the ABA/BNA Lawyers’ Manual:
[C]orporate counsel must take care not to miss the forest for the trees. The Statement serves as a guide to an attorney's conduct but not as the boundaries of his obligations. In representing the client in its dealings with auditors, counsel is of course bound by the same ethics rules that apply to any other form of representation, and these rules include mandates against knowingly misleading third parties or assisting the client to commit fraud, as well as provisions on withdrawal from representation should the lawyer be unable to persuade the client not to engage or persist in criminal or fraudulent conduct. Moreover, the subject of a corporate client's financial statements is usually inextricably attached to the provisions of federal and state securities laws, which investors may use to hold a corporate attorney liable for fraud or for aiding and abetting a client in committing fraud. The Statement itself recognizes the existence of these legal and ethical responsibilities.
ABA/BNA Lawyers’ Manual at 91:2410, citing 31 Bus. Law. at 1714..
Apart from the Treaty itself, questions arise regarding the scope of protection of the attorney-client privilege when disclosing to accountants and auditors. Generally, statements to accountants and auditors unrelated to the seeking of legal advice are not privileged. In re John Doe Corp., 675 F.2d 482, 488 (2d Cir. 1982); see also Chevron Corp. v. Pennzoil, 974 F.2d 1156, 1162 (9th Cir. 1992). However, in many jurisdictions, "the disclosure of information resulting in the waiver of the attorney-client privilege constitutes waiver 'only as to communications about the matter actually disclosed.'" Id., quoting Weil v. Investment/Indicators, Research & Management, 647 F.2d 18, 25 (9th Cir. 1981). Thus, the entirety of documents relating to a subject matter are not necessarily rendered discoverable by limited disclosure to an auditor. This is an area of uncertainty, however, and care should be taken to determine the scope of the waiver that will be recognized. See generally, Hooker, Lawyers' Responses to Audit Inquiries and the Attorney-Client Privilege, 35 Bus. Law. 1021 (1980).
In Missouri, the issues are complicated by the existence of an accountant-client privilege. See §326.151, R.S. Mo. Although the privilege was created in 1967, State ex rel. Southwestern Bell Publications v. Ryan, 754 S.W.2d 30, 31 (Mo. App. 1988), its scope has not been clearly developed. Counsel seeking to rely on it should investigate further before proceeding.
Under what circumstances, if any, is it appropriate for an attorney who represents a corporation to serve on that corporation’s Board of Directors? Is there an inherent conflict, or can such service serve the interests of both parties? The Restatement notes that "[a] lawyer’s duties as counsel can conflict with the lawyer’s duties arising from the lawyer’s service as a director or officer of a corporate client," but concludes that such "[s]imultaneous service . . . is not forbidden by this Section." Restatement, § 216, Comment d. The Reporter’s Notes recognize that "[a] lawyer often should decline to serve as both lawyer for and director or officer of a corporate or similar organizational client." The Notes then cite to the Comment to Rule 1.7, which indicate that such service should be undertaken with caution. Comment, ¶ 14. See also N.Y. State Bar Association Opinion 589 (1988).
Various Ethics Committees have addressed the concerns in this area. Illustrative is a New Jersey opinion, which cautioned as follows:
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.
New Jersey Opinion 462 (1980). Similar concerns were expressed in Illinois:
Although it is not professionally improper for a lawyer to serve as director of a business corporation and also to represent that corporation as its attorney, he (1) must advise his corporate client of a possible loss of the usual attorney-client privilege, and (2) must be unusually vigilant to assure that he never allows his business function as a director to infringe upon the legal advice given to, and the representation of, his corporate client.
Illinois Opinion 483 (1975). Would a categorical prohibition be better? Why is there resistance to this approach?
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