In-House Counsel in The Middle

Boards of directors are particularly subject to shareholder and shareholder activist scrutiny where conflicts of interest arise. Although not a particularly “classic” kind of conflict of interest, the conflicted general counsel presents traps for the board of directors. As with other conflicts, the key practical issue is for the board to ask itself, “What is in the best interests of the shareholders we represent?” A related question might be, “If we are scrutinized, how is our conduct going to be viewed through the optics of fairness in hindsight?”

Counsel's Duty to Navigate Intra-Corporate Conflicts Of Interest

The general counsel owes his or her duties to the legal corporate entity, not to individual directors, officers, or employees. ABA Model Rules of Prof. Conduct (Mod. Rul.) 1.13, Cal. Rules Prof. Conduct (C.R.P.C) 3-600. A lawyer is responsible only to “its duly authorized constituents.” Mod. Rul. 1.13(a). The California rule is a bit more specific, providing that counsel look to the entity's “highest authorized officer, employee, body, or constituent overseeing the particular engagement.” C.R.P.C. 3-600(A).

So, when general counsel is working on an “engagement” from the board of directors he or she reports to the board of directors. More typically, the general counsel will be working at the direction of the CEO or other officers in dealing with the day-to-day business of the company.

Especially when constituencies within the organization may have different interests and general counsel provides advice to all of them on a multitude of matters, counsel must continually clarify whom he or she is working for at any given time. In fact, counsel has a duty to advise as to the identity of the client when the organization's interests are adverse to those of the constituents with whom the lawyer is dealing. Mod. Rul. 1.13(f), C.R.P.C. 3-600(D).

Constantly reminding the individuals within the corporation to whom the lawyer is responsible with respect to each separate “engagement” is particularly important because only the “client” holds the right to the lawyer's confidentiality. Mod. Rul. 1.6, C.R.P.C. 3-100. So, the lawyer should not only remind individuals within the corporation who the lawyer reports to, but also when they do or do not have confidentiality rights as to what they communicate with each other. This has to be accomplished in the context of multiple demands by a wide range of constituencies in a time-challenged environment.

Overriding the general obligation of the lawyer to keep information of the “client” confidential are specific duties related to violations of law. If counsel discovers that an agent of the organization is about to violate law, for instance, counsel has an obligation to report it. That report must be made to the highest authority within the organization in serious circumstances, which could mean the board of directors rather than management in some cases. Mod. Rul. 1.13(b), C.R.P.C. 3-600(B).

So, even for a general counsel without conflicting personal feelings and relationships within the organization, keeping straight the following can be daunting:

1. who the organizational client is;
2. who is owed a duty of confidentiality;
3. what is supposed to be confidential and what is not;
4. who must be informed that the general counsel is not working on their behalf; and
5. if a violation of law is discovered, who must be informed.

Protecting the Attorney-Client Privilege in Board-Level Proceedings

Finally, we must add to this panoply a particular area of risk that concerns every board of directors, the protection of the attorney-client privilege. The following discussion focuses on California law, but the same questions of privilege are presented in each jurisdiction. Counsel and boards of directors should consult the law of the applicable jurisdiction.

When the board or a committee of the board calls in the general counsel, it typically expects that: 1) the discussions in the meeting will be privileged; and 2) the activities and report of the lawyer will be privileged. See generally, California Evidence Code Section 950 et seq.; Upjohn Co. vs. United States, 449 U.S. 383 (1981), applying the privilege in the corporate context.

With in-house counsel, it is often difficult to know what is truly privileged and what is not privileged. Many activities of an in-house counsel are not legal in nature, but involve business advice as part of the management team. The privilege may not attach to services that do not include the rendering of legal advice. See Costco Wholesale Corp. v. Sup. Ct., 47 Cal 4th 725 (2009).

For these reasons it is important when boards or committees deal with in-house counsel, in particular, that they confirm with in-house counsel which conversations and reports are privileged. In addition, it is wise to indicate the specific steps that counsel and the board or committee will take to maintain the privilege and prevent loss of the privilege through inappropriate disclosure.

Practical Steps

If we add to our analysis of duties, the issues outlined in the hypothetical at the beginning of this article related to personal relationships within the corporation, the need for assuring both internal clarity and appropriate protection of board processes is readily apparent.

There are several steps that a board of directors and management can take to deal with these issues.

Communicate Confidentiality And Privilege Obligations Clearly

The board or a committee should be clear about what it deems to be confidential, and precisely who within the organization is included within the circle of confidentiality. Ideally, there will be a discussion of precisely what the in-house counsel is going to do and who is to be involved. The issue of the extent of the attorney-client privilege should be explored. If either directors or the in-house counsel have doubts regarding the issues, consult with outside counsel for guidance. Confirmation of the portion of deliberations that the board believes to be privileged should be documented in the minutes of each meeting. Consider segregating out portions of the minutes subject to privilege in the corporate records so that there is a clear written record of the same.

Instill a Corporate Culture That Understands the Role of In-House Counsel

Starting with the “tone at the top,” create uniform understanding by employees and management of the complex role of in-house counsel. Provide for regular discussions and written notices confirming that the role of in-house counsel is not to represent individuals. Guidelines on the conditions of confidentiality in discussions with in-house counsel may also be appropriate. Ideally, these guidelines would be embodied in employee manuals as well, but there is no substitute for repetitive reminders in multiple forms, especially with middle and upper management.

When in Doubt, Consult with Outside Counsel

In order to create a clear privileged process, whenever in-house counsel is conflicted or a matter is particularly sensitive, bring in outside counsel. In the Costco Wholesale case cited above, the company retained an outside law firm to conduct an internal investigation. The California Supreme Court found that the entire process of the investigation was privileged, despite the fact that some of the activities of counsel involved fact-finding and other activities not involving rendering legal advice.

Consider Bringing in 'Special Counsel'

Sometimes the same issues that beset an in-house counsel may overwhelm even a company's regular outside counsel. The latter may find it difficult to resist the persuasive powers and interests of managers with whom counsel works regularly. Bringing in a fresh set of eyes to a situation involving senior management, in particular, is always something a board or committee should consider.

Conclusion

So, whether in California or in another jurisdiction, with some thoughtful steps, a board of directors and counsel can set appropriate expectations among themselves and throughout the organization, and protect process and outcomes. Chairpersons, like Jeanette Halloway in the hypothetical, can rest at least somewhat easier. Better to lose sleep over cyber security than relationships with in-house counsel.

Kurt Kicklighter is a partner in the San Diego office of McKenna Long & Aldridge LLP. He represents financial institutions and other organizations in mission-critical decision-making and strategy execution, with a focus on innovative next-generation process and outcome improvement.

Jeanette Halloway, Chairperson of the Board, has a recurring nightmare ' The board meeting is tense. CEO Enzo Hernandez is droning on about having missed yet another quarterly target. He told the Comp Committee he wanted his objectives modified because “the market changed and the objectives the board set are no longer relevant.” In executive session, Jeanette will lead a review of Hernandez's performance, certain irregularities involving his use of company employees for personal business matters, and his alleged improprieties in dealing with the company's auditors.

Company in-house general counsel, Eugene Richards, will be sitting in on the executive session. Gene has worked closely with Enzo for many years. Enzo hired him, the two of them play golf together every other week and their wives are best friends.

Jeanette cannot depend on what Gene is going to advise, on his fully investigating in the first place, or on what he will do after the executive session. At best, Gene will be in a difficult position. Jeanette knows that Enzo will squeeze Gene to see if he can find out what is going on, and try to influence Gene's activities, at a minimum. What will Gene say to Enzo, she wonders?

Boards of directors are particularly subject to shareholder and shareholder activist scrutiny where conflicts of interest arise. Although not a particularly “classic” kind of conflict of interest, the conflicted general counsel presents traps for the board of directors. As with other conflicts, the key practical issue is for the board to ask itself, “What is in the best interests of the shareholders we represent?” A related question might be, “If we are scrutinized, how is our conduct going to be viewed through the optics of fairness in hindsight?”

Counsel's Duty to Navigate Intra-Corporate Conflicts Of Interest

The general counsel owes his or her duties to the legal corporate entity, not to individual directors, officers, or employees. ABA Model Rules of Prof. Conduct (Mod. Rul.) 1.13, Cal. Rules Prof. Conduct (C.R.P.C) 3-600. A lawyer is responsible only to “its duly authorized constituents.” Mod. Rul. 1.13(a). The California rule is a bit more specific, providing that counsel look to the entity's “highest authorized officer, employee, body, or constituent overseeing the particular engagement.” C.R.P.C. 3-600(A).

So, when general counsel is working on an “engagement” from the board of directors he or she reports to the board of directors. More typically, the general counsel will be working at the direction of the CEO or other officers in dealing with the day-to-day business of the company.

Especially when constituencies within the organization may have different interests and general counsel provides advice to all of them on a multitude of matters, counsel must continually clarify whom he or she is working for at any given time. In fact, counsel has a duty to advise as to the identity of the client when the organization's interests are adverse to those of the constituents with whom the lawyer is dealing. Mod. Rul. 1.13(f), C.R.P.C. 3-600(D).

Constantly reminding the individuals within the corporation to whom the lawyer is responsible with respect to each separate “engagement” is particularly important because only the “client” holds the right to the lawyer's confidentiality. Mod. Rul. 1.6, C.R.P.C. 3-100. So, the lawyer should not only remind individuals within the corporation who the lawyer reports to, but also when they do or do not have confidentiality rights as to what they communicate with each other. This has to be accomplished in the context of multiple demands by a wide range of constituencies in a time-challenged environment.

Overriding the general obligation of the lawyer to keep information of the “client” confidential are specific duties related to violations of law. If counsel discovers that an agent of the organization is about to violate law, for instance, counsel has an obligation to report it. That report must be made to the highest authority within the organization in serious circumstances, which could mean the board of directors rather than management in some cases. Mod. Rul. 1.13(b), C.R.P.C. 3-600(B).

So, even for a general counsel without conflicting personal feelings and relationships within the organization, keeping straight the following can be daunting:

1. who the organizational client is;
2. who is owed a duty of confidentiality;
3. what is supposed to be confidential and what is not;
4. who must be informed that the general counsel is not working on their behalf; and
5. if a violation of law is discovered, who must be informed.

Protecting the Attorney-Client Privilege in Board-Level Proceedings

Finally, we must add to this panoply a particular area of risk that concerns every board of directors, the protection of the attorney-client privilege. The following discussion focuses on California law, but the same questions of privilege are presented in each jurisdiction. Counsel and boards of directors should consult the law of the applicable jurisdiction.

When the board or a committee of the board calls in the general counsel, it typically expects that: 1) the discussions in the meeting will be privileged; and 2) the activities and report of the lawyer will be privileged. See generally, California Evidence Code Section 950 et seq.; Upjohn Co. vs. United States, 449 U.S. 383 (1981), applying the privilege in the corporate context.

With in-house counsel, it is often difficult to know what is truly privileged and what is not privileged. Many activities of an in-house counsel are not legal in nature, but involve business advice as part of the management team. The privilege may not attach to services that do not include the rendering of legal advice. See Costco Wholesale Corp. v. Sup. Ct. , 47 Cal 4th 725 (2009).

For these reasons it is important when boards or committees deal with in-house counsel, in particular, that they confirm with in-house counsel which conversations and reports are privileged. In addition, it is wise to indicate the specific steps that counsel and the board or committee will take to maintain the privilege and prevent loss of the privilege through inappropriate disclosure.

Practical Steps

If we add to our analysis of duties, the issues outlined in the hypothetical at the beginning of this article related to personal relationships within the corporation, the need for assuring both internal clarity and appropriate protection of board processes is readily apparent.

There are several steps that a board of directors and management can take to deal with these issues.

Communicate Confidentiality And Privilege Obligations Clearly

The board or a committee should be clear about what it deems to be confidential, and precisely who within the organization is included within the circle of confidentiality. Ideally, there will be a discussion of precisely what the in-house counsel is going to do and who is to be involved. The issue of the extent of the attorney-client privilege should be explored. If either directors or the in-house counsel have doubts regarding the issues, consult with outside counsel for guidance. Confirmation of the portion of deliberations that the board believes to be privileged should be documented in the minutes of each meeting. Consider segregating out portions of the minutes subject to privilege in the corporate records so that there is a clear written record of the same.

Instill a Corporate Culture That Understands the Role of In-House Counsel

Starting with the “tone at the top,” create uniform understanding by employees and management of the complex role of in-house counsel. Provide for regular discussions and written notices confirming that the role of in-house counsel is not to represent individuals. Guidelines on the conditions of confidentiality in discussions with in-house counsel may also be appropriate. Ideally, these guidelines would be embodied in employee manuals as well, but there is no substitute for repetitive reminders in multiple forms, especially with middle and upper management.

When in Doubt, Consult with Outside Counsel

In order to create a clear privileged process, whenever in-house counsel is conflicted or a matter is particularly sensitive, bring in outside counsel. In the Costco Wholesale case cited above, the company retained an outside law firm to conduct an internal investigation. The California Supreme Court found that the entire process of the investigation was privileged, despite the fact that some of the activities of counsel involved fact-finding and other activities not involving rendering legal advice.

Consider Bringing in 'Special Counsel'

Sometimes the same issues that beset an in-house counsel may overwhelm even a company's regular outside counsel. The latter may find it difficult to resist the persuasive powers and interests of managers with whom counsel works regularly. Bringing in a fresh set of eyes to a situation involving senior management, in particular, is always something a board or committee should consider.

Conclusion

So, whether in California or in another jurisdiction, with some thoughtful steps, a board of directors and counsel can set appropriate expectations among themselves and throughout the organization, and protect process and outcomes. Chairpersons, like Jeanette Halloway in the hypothetical, can rest at least somewhat easier. Better to lose sleep over cyber security than relationships with in-house counsel.

Kurt Kicklighter is a partner in the San Diego office of McKenna Long & Aldridge LLP. He represents financial institutions and other organizations in mission-critical decision-making and strategy execution, with a focus on innovative next-generation process and outcome improvement.