ER 1.13 Organization as Client
A lawyer for an organization represents the organization through its officers, employees and other “constituents” but also may jointly represent the organization and constituents so long as there is no impermissible conflict of interest and each client gives informed consent.
When dealing with an organizational client’s constituents and the lawyer knows or reasonably should know that the constituents’ interests are or may become adverse to the organization, the lawyer must explain who the lawyer represents. Under certain circumstances, a lawyer for an organization must act as is reasonably necessary in the organization’s best interests, which may include referring a matter to the highest authority in an organization and, in some cases, may include revealing information outside of the entity.
You could represent the individuals and not the resulting entity. Or, you could represent the entity only -- even during the formation process -- if the constituents who are acting on behalf of the yet-to-be-formed entity understand and agree that the entity will be the client. Once the entity is created, the constituents should ratify the lawyer’s services on behalf of the entity. See State Bar Ethics Op. 02-06. Subject to the conflict of interest rules, ER 1.13(g) would allow you to represent the individuals forming the entity and the resulting entity.
Because the client, as the sole member of the LLC, and the LLC will have the same interests, you could represent either or both. The key is that the client will be the LLC’s sole member.
In this situation you should decline representing all three members and the organization. It would be difficult to advise one member without the potential that your advice would be harmful or contrary to the interests of another member or the organization. It is also possible that in speaking with one member you may learn information that would be detrimental to one of the other members or the organization. The better practice is to represent solely the organization and advise the individual members to retain counsel to separately advise them regarding their rights and interests.
To answer this question, you must first analyze whether there is a conflict of interest between the organization and the CEO under ER 1.7. Is the sale of the business an appropriate business decision? Is the sale the only way to satisfy outstanding claims of creditors? Are there insufficient funds to carry on the business affairs of the company? If the answer is yes, then there is likely no conflict between the CEO and the organization, and with consent, you may represent both. However, if the CEO’s decision is based not on what is best for the organization, but rather what is best for the CEO personally, then joint representation may not be possible. If under ER 1.7, joint representation is possible, ER 1.13 (g) requires that such consent be given by an appropriate official of the organization or shareholders other than the individual who will be represented. In either event, the lawyer should explain the identity of the client, the scope of the representation, and what action will be taken in the event a conflict arises.
As with any common representation, there cannot be any conflicts, absent informed client consent. Sometimes, an attorney cannot even ask for consent. The chances of conflicts in this situation are great. “The potential for conflict of interest in representing multiple defendants in a criminal case is so grave that ordinarily a lawyer should decline to represent more than one co-defendant.” ER 1.7 comment .
If you are concerned that the marketing director will misunderstand your role, ER 1.13(f) directs you to “explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.” See also ER 1.13 comments 11 and 12. You also should consider whether you need to give so-called “Upjohn Warnings,” which deal with the related legal issue of attorney-client privilege. If you are concerned about your ability to competently and diligently represent the corporation considering your relationship with the marketing director, then you may have a personal interest conflict of interest in doing the investigation, and if so, you’d need to decline the representation.
ER 1.13(b) requires a lawyer to “proceed as is reasonably necessary in the best interest of the organization” if:
(1) the lawyer “knows”
(2) that in a matter related to the representation
(3) a constituent of the company
(4) is committing or plans to commit
(5) “a violation of a legal obligation to the organization, or a violation of law which might reasonably be imputed to the organization”
(6) that is “is likely to result in substantial injury to the organization.”
ER 1.13(b) further provides: “Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization as determined by applicable law.”
Whether your scenario meets criteria (5) and (6) is questionable. First, does the assistant’s conduct rise to the level of “a violation of a legal obligation to the organization”? Clearly the CFO embezzling from the corporation would, but the assistant taking -- apparently with the CEO’s implicit consent – minor amounts of coffee and tea supplies may not. Second, are the CEO’s inaction and the assistant’s action likely to result in “substantial injury” to the organization? If not, then ER 1.13(b) would not require you to report the matter up the chain of command.
Reasonably assure that management and the board of directors understand (i) the different responsibilities of legal counsel and director, (ii) that when acting as legal counsel, the lawyer represents only the corporate entity and not its individual officers and directors, and (iii) that at times conflicts of interest may arise under the rules governing your professional conduct that may require that you recuse as a director or require the corporation to retain independent counsel to represent its interests in a particular matter. Management and the board of directors also should understand that, depending on the applicable law, the attorney-client evidentiary privilege may not extend to matters discussed at board meetings when you are not acting in the role of corporate counsel.
You are being asked to provide legal services to an entity in which you are among the group of the highest authority. As a result, you will need to determine whether the two roles conflict. Best practices for navigating this situation include:
- Recusing as a director and from board committee deliberations when any relationship between the corporation and you or your firm is being considered.
- Maintaining the independent professional judgment required of a competent lawyer, and recommending against any course of action that is illegal or likely to result in harm to the corporation. For example, will the fact that you participated in the decision render the legal opinion less persuasive for its intended use than if the opinion was rendered by counsel who was not involved with the prior decision?
- Declining to provide legal services to the entity when your interests as a director would conflict with your responsibilities of competent and diligent representation, such as situations where your concern over potential personal liability as a director may materially and adversely affect your ability to represent the corporation.
Whether another lawyer in your firm may perform the work depends on whether your conflict as a member of the board is imputed to other lawyers in your firm.
Remember that ER 1.13(a) says that a lawyer for the entity represents it via the constituents. The general counsel would qualify as a constituent and would be the embodiment of the client. Any relationship you have with a client constituent would have to comply with ER 1.8(j), which prohibits a lawyer having “sexual relations” with a client unless the consensual sexual relationship existed between them before the lawyer-client relationship began. ER 1.7(a)(2) defines a conflict of interest as including a lawyer’s personal interests that have a substantial risk of materially limiting the lawyer’s obligations to the client. Even if you do not anticipate having a sexual relationship, dating the general counsel could result in a conflict of interest with the entity because of your personal relationship with the general counsel.