By Edward McIntyre
Sarah and Duncan waited at Macbeth’s door.
“Please, come in. Meet Tim. He has some interesting questions for us.”
With all seated at the conference table, Macbeth nodded. “Tim, you have
our attention.”
“A long time friend from college and law school has this tech company. He’s CEO. I’ve been working this relationship for years. Anyhow, he just hired me as his outside general counsel. Also, secretary to the Board. Means our firm will get just about all his legal work. A lot.”
Duncan smiled. “Your effort paid off.”
“It’s taken a while. Anyhow, I hear there’s new ethics rules. Thought I’d ask if any applied.”
Sarah suppressed a smile. Macbeth had a question. “Have you represented your friend individually?”
“Of course. That’s how it began.”
“Do you think that will continue?”
“Hope so. I’m not doing this to lose business.”
“Fair point. Is your friend the sole owner?”
“Has a few investors. But he’s got effective control: 40%.”
“Fine. Let’s see what we have. Your friend has been and will be a client. His company will be a client. You will be Board secretary. Any other relationships? Investor perhaps?”
“Not yet.” Macbeth turned to Sarah. “Let’s start with the conflict of interest rule.”
Sarah handed Tim the blue-covered rule book. “Rule 1.7, the current clients conflict rule, is new for California.”
He turned to the text; she continued. “It requires each client’s informed written consent when one client’s interest is directly adverse to another’s in the same matter. Or a separate matter. Nothing new.” Tim shrugged.
“But it also requires informed written consent when there’s a significant risk the lawyer’s representation of one client will be materially limited” — air quotes to stress the words — ”by responsibilities to or relationships with” — here she ticked the categories off on extended fingers — ”another client; a former client; a third person; the lawyer’s own interests.”
Macbeth spoke. “Let’s pause and consider your new relationships. First, your friend and his company are not adverse to each other? Or any of the investors?”
“Of course not.”
“Nor to any client your firm represents? Or represented?”
“Nope.”
“Good. That clears the first hurdle. Next step. You and your firm have one client — your friend. A second client — the company. Third, you’ll be Board secretary. So, you’ll owe the company a separate fiduciary duty in that role.”
“OK. But everybody gets along. For the most part.”
“Wonderful. But does this matrix of relationships create a significant risk that representation of your friend, for example — or the company — will be materially limited by your responsibilities to the other one?”
Macbeth paused. “What happens, for instance, if most of the other investors want one thing? Your friend wants another? How can you advise the Board? And at the same time your friend? In addition, you have a separate fiduciary duty as secretary.”
“But it’s all theoretical. None of this has happened. Besides, getting this business is a big deal.”
“Tim, slow down. Nobody said you couldn’t. The rule just says you need each client’s informed written consent before you do.”
“What’s that mean?”
“It means explaining to each client — your friend; the company; perhaps the other investors — the facts and the material risks. Actual or reasonably foreseeable adverse consequences of the joint representation. And then get informed written consent.”
“In practical terms?”
“Tell them the company’s interests and your friend’s may become adverse. If that happens, your firm cannot advise both — maybe even either. If neither, each will have to get separate counsel. If you can still represent one, which client you’ll represent. Which client will have to get separate lawyers.”
“They have to go through this now?”
“Better than in the heat of the moment. Besides, these are foreseeable risks of the joint representation. Then, there’s the issue of you being secretary.”
“What’s that have to do with it?”
“As secretary, you owe the company a separate fiduciary duty. If a situation arose, for example, a conflict between your friend and the company. And the company elected to get separate counsel. Your firm represented your friend, the CEO. How could you fulfill your fiduciary duty to the company when your firm represented a person with an adverse interest?”
“You mean the ethics rules apply to me as secretary?”
“Yes, for reasons I’ll ask Sarah to explain in a bit. Let’s stay with the conflict rule. Informed written consent includes your role as secretary. Telling everyone you may have to withdraw should a conflict arise. Because of your personal relationship with the CEO.”
“Maybe the company won’t like that idea.”
“That’s why the rule requires informed consent — in advance.”
“Any more? This new rule doesn’t make things easier.”
“There’s more. But we’ve covered enough for now.”
Tim nodded.
“I agree with you on one point. ‘Material limitations’ — arising out of a whole spectrum of relationships — far beyond just clients and former clients — will require more sophisticated judgment. More data for conflict checks.”
“A lot more chances to screw up, if you ask me.”
“Likely that, too.”
Editorial Note: Sarah explained Tim’s fiduciary duty as secretary and the Rules of Professional Conduct. The State Bar Court, In the Matter of Schooler (Review Dept. 2016) 5 Cal. State Bar Ct. Rptr. 494, 503, rejected a lawyer’s contention that the rules did not apply to her — serving as trustee for a family estate, not acting as a lawyer. “The law is clear that even if Schooler was not practicing law, she was required to conform to the ethical standards required of attorneys …. An attorney who breaches fiduciary duties that would justify discipline if there was an attorney-client relationship may be properly disciplined for the misconduct. [citations omitted.]”
Edward McIntyre is a professional responsibility lawyer and co-editor of San Diego Lawyer.
No portion of this article is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.
To read this article in San Diego Lawyer, where it was originally published, click here.