When a New York lawyer is general counsel to a closely held corporation, must the lawyer raise an issue that helps the company but hurts some directors personally, and whom does the lawyer represent?

Plain-English summary

A lawyer served as general counsel to a closely held corporation whose directors were also its sole shareholders, and did not represent them individually. Ongoing discussions about the by-laws and shareholder agreements would let the corporation take advantage of a tax/property benefit, but the change would personally disadvantage half the directors. The lawyer foresaw the directors' personal interests diverging from the entity's, feared a board deadlock, and asked whether he must raise the issue for the organization or must stay quiet because he knows of the divergent personal interests.

The opinion concludes the lawyer must raise the issue. Rule 1.4(b) requires a lawyer to explain a matter to the extent reasonably necessary to let the client make informed decisions, so if knowledge of the issue is reasonably necessary for the organization to decide, the lawyer must raise it. Rule 1.13(a) then governs how: because the matter may be adverse to certain directors or shareholders, the lawyer must explain that he represents the organization, not any of them personally. Quoting Comment [2A] to Rule 1.13, the opinion lists what the lawyer should tell a constituent whose interests differ: that a conflict or potential conflict exists, that the lawyer does not represent the constituent in the matter, that the constituent may wish to obtain independent representation, and that any attorney-client privilege belongs to and may be waived by the organization.

In practice

The opinion holds that, under the New York rules as they stood at the time, an entity's lawyer must raise a matter the organization needs to know to make an informed decision, even when it cuts against some constituents personally, and must clarify under Rule 1.13(a) that the lawyer represents the entity alone. Per the opinion, the lawyer should, as appropriate, advise the affected directors or shareholders that a conflict exists, that the lawyer does not represent them, that they may wish to retain their own counsel, and that the privilege belongs to the organization.

Common questions

Q: Whom does a corporation's general counsel represent, the company or its owners?

A: The opinion concludes the lawyer represents the entity, not its directors or shareholders, even in a closely held corporation where the directors are the sole shareholders.

Q: Must the lawyer raise an issue that benefits the company but hurts some directors personally?

A: Yes. The opinion holds that under Rule 1.4(b), if the issue is reasonably necessary for the organization to make an informed decision, the lawyer must raise it.

Q: What must the lawyer tell the affected directors?

A: Per the opinion and Comment [2A] to Rule 1.13, the lawyer should advise them that a conflict or potential conflict exists, that he does not represent them, that they may wish to obtain independent counsel, and that the privilege belongs to the organization.

Background and rules framework

The opinion interprets New York Rule 1.13(a) (organization as client, the analog of Model Rule 1.13) and Rule 1.4(b) (explaining a matter so the client can make informed decisions, the analog of Model Rule 1.4). Comment [2A] to Rule 1.13 supplies the specific warnings owed to a constituent whose interests differ from the entity's.

Citations and references

Rules of Professional Conduct:

• MR 1.13 / NY Rule 1.13(a) (entity client; Comment [2A] warnings to constituents)
• MR 1.4 / NY Rule 1.4(b) (explaining a matter to permit informed decisions)

See also

• NY State Bar Op. 990: representing both lender and borrower clients in a loan
• NY State Bar Op. 986: guardianship conflict for an incapacitated client's sister

Source

• Landing page: https://nysba.org/ethics-opinion-978/