Can a lawyer who is also a director, officer, and shareholder represent the corporation in an acquisition?

Plain-English summary

A lawyer who was a director, officer, and roughly 12% shareholder of a corporation was asked by the company to represent it and its shareholders in the company's proposed acquisition by a larger corporation. He planned to have a securities firm and himself review the documentation, intended to represent all interests on his side equitably, and was concerned that some very small shareholders might be unable to fund their stock options, and that they might later claim his negotiations favored the directors and major shareholders.

The Disciplinary Commission concluded he may represent the corporation and its board of directors in the matter, provided he makes full disclosure of his personal interests to the board and the board, on that disclosure, consents to his continued representation. It reasoned that the board, elected by the stockholders, serves as their representative; so long as the board acts within its scope and authority in retaining counsel, the lawyer may represent the corporation and its interests as the board defines them, even though some individual stockholders may disagree with or be imperiled by that representation.

The Commission added two cautions. If the lawyer's personal interests, now or in the future, would preclude his full and vigorous representation of the corporation or dilute his loyalty to it, he should decline or withdraw. And it commended retention of outside counsel to review the transaction documents, warning that if his personal involvement became a focal point of the negotiations and detracted from the interests of the corporation, the board, and the stockholders, he should strongly consider whether to continue.

Currency note

This opinion was issued in 1990, under the former Alabama Code of Professional Responsibility (EC 5-18, DR 5-101(A)) and before the Alabama State Bar's January 1, 1991 adoption of the Rules of Professional Conduct and the 2002 Ethics 2000 revisions to the ABA Model Rules. The entity-as-client principle is now in Rule 1.13, and the personal-interest conflict in Rule 1.7. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer who sits on the board and owns stock represent the company in a deal?

A: Per the opinion, yes, if he fully discloses his personal interests to the board and the board consents; the board defines the corporation's interests, even over the objection of some individual shareholders.

Q: Whose interests does the lawyer serve, the company or the shareholders?

A: The opinion applied EC 5-18: a lawyer for an entity owes allegiance to the entity, not to any individual stockholder, director, or officer, and the elected board defines the entity's interests.

Q: When must the lawyer-director step aside?

A: The opinion concluded he should decline or withdraw if his personal interests would preclude full, vigorous representation or dilute his loyalty, and should strongly reconsider continuing if his personal involvement becomes a focal point detracting from the corporation's interests.

Background and rules framework

The opinion interpreted EC 5-18 (a lawyer for an entity owes allegiance to the entity, not to its constituents) and DR 5-101(A) (no employment where the lawyer's professional judgment may be affected by his own financial, business, property, or personal interests, absent client consent after full disclosure). The entity-as-client rule is now Rule 1.13, and the personal-interest conflict Rule 1.7.

Citations and references

Rules of Professional Conduct:

• Former Ala. Code of Prof. Resp. EC 5-18 (allegiance to the entity, not its constituents); now Model Rule 1.13
• Former Ala. Code of Prof. Resp. DR 5-101(A) (personal-interest conflict; consent after full disclosure); now Model Rule 1.7

See also

• AL Ethics Op. 2007-04: representing a corporation and its individual directors
• AL Ethics Op. 1992-20: representing a subsidiary while adverse to the parent
• AL Ethics Op. 1981-533: insurer house counsel defending insureds

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/1990-06/
• Original PDF: https://www.alabar.org/assets/2019/02/RO-90-06.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

ETHICS OPINION

RO-90-06

QUESTION:

"In brief, I am a director, an officer, and a shareholder (approximately 12%) in a corporation based here in [redacted] which is proposed to be acquired by a larger corporation based principally in [redacted].

I have been requested by my company to represent the interests of the company and its shareholders in this acquisition. I intend to have the documentation (primarily to be prepared by the acquiring company's counsel) to be reviewed by a [redacted] based law firm, as well as by me, since the acquisition involves points of securities law and regulations with which I am not intimately familiar.

I intend to represent all interests involved on our side of the transaction as equitably as possible. It is possible, however, that some of the very small shareholders may not be able to raise funds to exercise stock options which they hold in our company in order to obtain exchange of shares in the acquiring company.

Every effort will be made to obtain financing from the acquiring company to assist these shareholders in exercising their options. However, this may not be possible in the overall context of this acquisition as now envisioned. I would add that no contractual obligation has been entered into to provide the small shareholders with financing in order to allow them to obtain shares in our company through their options and then trade their shares for shares of the acquiring company.

One of my principal concerns is the possibility that one or more of the small shareholders might make a claim that my negotiations and representation were tailored to suit the interests of the directors and major shareholders."

ANSWER:

Ethical Consideration 5-18 states as follows:

"A lawyer employed or retained by a corporation or similar entity owes his allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity. In advising the entity, a lawyer should keep paramount its interests and his professional judgment should not be influenced by the personal desires of any person or organization. Occasionally a lawyer for an entity is requested by a stockholder, director, officer, employee, representative, or other person connected with the entity to represent him in an individual capacity; in such case the lawyer may service the individual only if the lawyer is convinced that differing interests are not present."

Disciplinary Rule 5-101(A) provides as follows:

"DR 5-101 * * * (A) Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests."

It is our opinion that you may represent the corporation, and its Board of Directors, in the matter referred to in your request provided that you make full disclosure of your personal interests to the Board of Directors and that, based upon that full disclosure, the Board of Directors consents to your continued representation. The Board of Directors serve, by election, as representatives of the stockholders and so long as the Board of Directors is acting within its scope and authority in retaining counsel, then you may proceed to represent the corporation and its interests as defined by the Board of Directors, notwithstanding the fact that some individual stockholders may disagree with or be imperiled by that representation.

Another obvious point is that, should your personal interests, as they now exist or as they may exist in the future, be such as to preclude your full and vigorous representation of the corporation, or should your personal interests act to dilute in any way your loyalty to the client, then you should either decline representation or withdraw from representation if you have already commenced the same.

We would commend to you and recommend retention of outside counsel to review the documentation to be used in the transaction. We would further caution you that, should your personal involvement in this matter become a focal point of the negotiations and detract from the interests of the corporation, the Board of Directors, and the stockholders, then we believe that you should strongly consider the propriety of your continued participation in this matter.

AWJ/vf

1/18/90