Red Flag Issues to Consider When Serving on a Client's Board of Directors

by Christian Stiegemeyer, Director of Risk Management
The Bar Plan Mutual Insurance Company

It is not uncommon for corporate clients to invite their lawyers to serve on its Board of Directors. In Missouri, such arrangements are a conflict of interest under M.R.P.C. 4-1.8(a) that can be waived with appropriate consultation.¹ This article cannot address all possible issues to consider and consult the client on, however commonly encountered concerns are the potential for:

• Loss of the attorney-client and work product privilege;
• The appearance of a loss of independence under the business judgment rule or diminished ability to exercise independent judgment in either capacity;
• Conflicts of interest that prohibit the lawyer from giving advice on previous Board decisions the lawyer participated in, limit the lawyer's ability to pursue objectives that the lawyer opposed as a director or, restrict participation as a director in issues affecting the lawyer's firm;
• Disqualification of the lawyer from representing the corporation in the future;
• Disqualification from participating in discussions of Board issues and voting;
• Increased risk of malpractice claimed by the corporate client against the lawyer and the lawyer's firm.

Issues for the lawyer and the lawyer's firm to consider include such things as:

• Insurance coverage under the firm's Lawyer's Professional Liability (LPL) policy and/or the corporation's D&O policy;
• Dual allegiance of fiduciary duties;
• Increased liability risks under federal securities law;
• Vicarious liability of the firm for the lawyer's actions as a director;
• Disqualification of the firm from representing the corporation.

The decision to sit on a client's Board is in itself potentially conflicted by the lawyer's interests. A directorship should not be seen as a business opportunity, resume builder, or revenue enhancer. The only appropriate consideration is whether the benefits to the client outweigh the potential risks, and whether the benefits could be achieved other than by being a director (e.g. attendance at board meetings). Past, present and future issues dealt with by the Board should be reviewed for possible conflicts of interest.

The corporation's management and directors should understand the different responsibilities of a lawyer and director, that the lawyer represents only the corporation and not any individual manager or director, and that conflicts of interest may at times require hiring outside counsel on specific matters. A full written explanation to the management and directors of all pertinent issues is necessary so they can make an informed decision on, and accept the risks of, the lawyer's participation as a board member.

If the directorship is accepted, the lawyer should implement procedures to protect the lawyer's and client corporation's interests against the risks outlined above.

For example, take care to maintain the attorney-client privilege. In all communications, the content should make it clear whether it is to or from the lawyer in her capacity as lawyer or director. Educate the person taking notes and drafting minutes of board meetings about the privilege issue. To avoid waiver do not include privileged communications in the minutes of Board meetings, in the drafter's notes taken at the meeting, or preliminary drafts of the minutes.

Also, the lawyer should be keenly aware of the risks of conflicts of interests anytime the Board considers issues affecting the lawyer's firm.

Law firms should designate a person or committee to review invitations for board service. In addition to the above issues, the firm should consider the client's financial condition, reputation, management, history, and industry group (e.g., regulated financial institutions). It should also review the corporation's by-laws to determine whether they contain appropriate provisions for immunity and indemnification, whether the corporation provides adequate D&O coverage, and how the firm's LPL coverage and the corporation's D&O coverage will apply.

Do not begin and end the research on the risks of serving as a director of a client corporation with this article. Numerous articles have covered this topic in far greater depth and detail than is possible here. Go find them and read them. And like any other area of the law, stay abreast of changes and developments affecting the duties in the dual roles of lawyer to and director of a client corporation.

¹See Missouri O.C.D.C. Informal Opinion 940022. "QUESTION: Attorney is the corporate attorney for a corporation. The corporation would like Attorney to serve on its Board of Directors. May Attorney do this and remain the corporate attorney? ANSWER: This would be a conflict of interest but Rule 4-1.8(a) sets out the steps an attorney must follow to enter into such a business relationship. This situation creates numerous opportunities for conflicts under Rule 4-1.7(b). Attorney should study the last paragraph under the heading "Other Conflict Situations" in the comments to this rule."