Can a California lawyer jointly represent a close corporation and the controlling shareholder in a lawsuit brought by the only other shareholder against both, and who provides the corporation's consent?

State Bar of California COPRAC Formal Opinion 1999-153: Joint Representation of a Close Corporation and a Controlling Shareholder in Suit by a Minority Shareholder

Short answer: The opinion concludes that under the limited facts presented, a lawyer may jointly represent both the corporation and the controlling shareholder where the lawyer has not previously represented the corporation on the dispute, the joint representation is permitted under former Rule 3-310(C)(1) only so long as the two clients do not have actually opposing interests, the lawyer's representation of the corporation complies with former Rule 3-600, and the corporation's informed written consent under former Rule 3-310(C)(1) is obtained. On who consents for the corporation, former Rule 3-600(E) permits consent by either an "appropriate constituent" other than the jointly represented individual or by the shareholder(s); the suing minority shareholder is not an appropriate constituent due to adversity, and the controlling shareholder may consent on the corporation's behalf where authorized to retain counsel and where the corporation has no other shareholders to consult.

Currency note

This opinion was issued in 1999, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former Rules 3-310 and 3-600. Current Rules 1.7 and 1.13 now address concurrent representation conflicts and the organization-as-client framework; the analysis below is rooted in the framework as it stood in 1999. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule reference.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The hypothetical: a corporation had two shareholders, A and B. A was the corporate president and CEO, authorized to oversee daily business and (under the articles and bylaws) to retain and oversee legal counsel. A and B disagreed about whether earnings should be distributed or reinvested. B sued the corporation and A individually. A sought to retain Attorney for both the corporation and A's defense; Attorney had not previously represented the corporation in any matter.

On whether the joint representation was permissible, the committee located the framework in former Rule 3-600(A) (the lawyer represents the entity acting through its highest authorized constituent) and the line of cases requiring corporate counsel to stay out of shareholder control disputes (Meehan v. Hopps (1956), Skarbrevik v. Cohen, England & Whitfield (1991), Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995), Goldstein v. Lees (1975), Woods v. Superior Court (1983)). The committee read those cases together with the principle that corporate counsel may take action on the corporation's behalf even when it negatively impacts a shareholder. The committee concluded the joint representation was permitted only while two conditions held: the corporation and A did not have actually opposing interests that the lawyer would have to advance simultaneously (citing Tsakos Shipping & Trading, SA v. Juniper Garden Townhomes (1993) and Klemm v. Superior Court (1977)), and the lawyer's representation of the corporation conformed to former Rule 3-600. As B was the adversary, B was not entitled to the corporation's lawyer's assistance.

On consent, the committee identified former Rules 3-310(C)(1) (potential conflicts require informed written consent) and 3-310(C)(2) (actual conflicts require additional consent). The committee inventoried six conflict scenarios that could establish a potential conflict in a multiple-client engagement: conflicting client instructions; conflicting client objectives; advocacy of antagonistic positions; inconsistent expectations of confidentiality; a prior relationship with one client that would adversely affect independent judgment; and conflicting demands for the original file at the end of the engagement. The committee held that a potential conflict requiring consent existed when (1) a change of corporate control was reasonably possible (which would trigger one or more conflict scenarios) or (2) it was reasonably possible the lawyer might be required to disclose joint-representation confidential information to someone other than the controlling constituent. The committee added that under Evidence Code section 962, the joint clients' communications were not privileged as between themselves, while the broader section 6068(e) duty (citing Goldstein and California State Bar Formal Opinion 1993-133) still applied.

On who consents, the committee read former Rule 3-600(E) to provide two routes: consent by an "appropriate constituent" other than the jointly represented individual, or consent by the shareholder(s). The committee held that B was not an appropriate constituent because B was the plaintiff and an adversary, and A could not consent under route one because A was the jointly represented individual. Under route two, A could consent on the corporation's behalf because A was the only other shareholder and, as president, was authorized to retain corporate counsel; the two facts together allowed Attorney to obtain corporate consent through A. The committee cautioned that the conclusion was facts-dependent and that A's fiduciary duties (citing Jones v. H.F. Ahmanson & Co. (1969)) might separately constrain A's ability to consent; the committee declined to opine on those underlying legal questions.

Common questions

Q: Can the same lawyer defend the company and the controlling shareholder against a minority shareholder's lawsuit?

A: Per the opinion, yes under the limited facts presented, so long as the corporation and the controlling shareholder do not actually have opposing interests, the lawyer complies with former Rule 3-600 in representing the corporation, and both clients give informed written consent to the potential conflict under former Rule 3-310(C)(1). The committee noted the result is highly facts-dependent.

Q: Doesn't corporate counsel have to stay out of shareholder disputes?

A: Per the opinion, generally yes when the lawyer is being asked to choose between shareholders, but here the suit is also against the corporation, which is entitled to defend. The committee distinguished the Goldstein / Skarbrevik line of cases from a scenario in which the corporation is a defendant entitled to representation.

Q: When does the joint representation require consent?

A: Per the opinion, when any of six conflict scenarios is reasonably possible: conflicting instructions, conflicting objectives, antagonistic positions, inconsistent confidentiality expectations, an adverse prior relationship with one client, or conflicting demands for the file at the end. In particular, the committee held that potential conflict consent is needed where a change of corporate control is reasonably possible, or where the lawyer might be required to disclose joint-representation confidential information to someone other than the controlling constituent.

Q: Who can give the corporation's consent?

A: Per the opinion, former Rule 3-600(E) allows consent either by an "appropriate constituent" other than the jointly represented individual, or by the shareholder(s). On the facts, B (the plaintiff) is adverse and cannot consent; A is the jointly represented individual so cannot consent under route one; but A may consent on the corporation's behalf under route two because A is the only other shareholder and is authorized to retain counsel.

Q: Does the opinion apply to derivative actions?

A: Per the opinion, no. The committee expressly limited its analysis to the direct-suit hypothetical and noted that derivative actions involve different policy considerations. The committee referenced Forrest v. Baeza (1997) and similar cases as raising questions outside the scope of the opinion.

Q: What about A's fiduciary duties to B?

A: Per the opinion, the committee did not resolve those underlying legal questions, but flagged Jones v. H.F. Ahmanson & Co. (1969) and observed that controlling-shareholder fiduciary duties may bear on A's ability to consent and that the attorney may need to consider those issues when advising A.

Background and rules framework

The opinion interprets former California Rules 3-310 (conflicts of interest) and 3-600 (organization as client), together with Business and Professions Code sections 6068(e) and 6068(m) and Evidence Code section 962 (no privilege between joint clients). The committee also cross-references former Rules 3-110 (competence), 3-500 (client communication), and 3-700 (withdrawal and client property) within the conflict-scenario inventory. Functionally these correspond to current Rules 1.7 and 1.13.

Citations and references

Rules of Professional Conduct (former, in effect at time of opinion):

• Former California Rule 3-110 (competence)
• Former California Rule 3-310, particularly 3-310(A)(1), 3-310(A)(2), 3-310(C)(1), 3-310(C)(2)
• Former California Rule 3-500 (client communication)
• Former California Rule 3-600, particularly 3-600(A), 3-600(B), 3-600(C), 3-600(E)
• Former California Rule 3-700, including 3-700(D) (client file release)

Statutes:

• California Business and Professions Code sections 6068(e), 6068(m)
• California Code of Civil Procedure section 128(a)(5)
• California Evidence Code section 962 (no privilege between joint clients)

Cases:

• Meehan v. Hopps (1956) 144 Cal.App.2d 284, corporation is client, not shareholders
• Skarbrevik v. Cohen, England & Whitfield (1991) 221 Cal.App.3d 692, corporate counsel may dilute minority interest
• Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995) 36 Cal.App.4th 1832, counsel out of control disputes; disqualification standard
• Goldstein v. Lees (1975) 46 Cal.App.3d 614, former corporate counsel in proxy fight
• Woods v. Superior Court (1983) 149 Cal.App.3d 931, corporation as primary focus
• Tsakos Shipping & Trading, SA v. Juniper Garden Townhomes, Ltd. (1993) 12 Cal.App.4th 74, opposite-sides representation
• Klemm v. Superior Court (1977) 75 Cal.App.3d 893, antagonistic positions cannot be waived
• Hammett v. McIntyre (1952) 114 Cal.App.2d 148, insured-insurer conflict
• Pennix v. Winton (1943) 61 Cal.App.2d 761, insurer-favored representation
• In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572, disqualification standard
• Responsible Citizens v. Superior Court (1993) 16 Cal.App.4th 1717, partnership-shareholder factors
• Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93, controlling-shareholder fiduciary duty
• Forrest v. Baeza (1997) 58 Cal.App.4th 65, derivative actions
• Jacuzzi v. Jacuzzi Bros. (1963) 218 Cal.App.2d 24, derivative actions
• Hicks v. Edwards (Wash.App. 1994) 876 P.2d 953, closely held organization interests
• In re Brownstein (Ore. 1979) 602 P.2d 655, closely held entity counsel

Other opinions cited:

• Los Angeles County Bar Formal Opinion 471 (joint-representation conflicts)
• California State Bar Formal Opinion 1993-133 (section 6068(e) scope)
• California State Bar Formal Opinion 1994-134 (file ownership)

See also

• CA COPRAC Op. 2001-156: City Attorney Conflicts Among Constituents
• CA COPRAC Op. 1998-152: Imputed Knowledge and Former Client Consent
• CA COPRAC Op. 2014-191: Concurrent Representation Debtor-Creditor

Source

• Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
• Original HTML: https://www.calbar.org/ethics/Opinions/1999-153.htm

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

THE STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT

(Funded, in part, by the Foundation of the State Bar.)

FORMAL OPINION NO. 1999-153

ISSUE:

1. May a lawyer, who is not currently and has not previously represented a close corporation as to the subject of a dispute, be retained to represent the corporation and Shareholder A, who is authorized to retain and oversee counsel for the corporation, in a lawsuit brought by Shareholder B, the only other shareholder of the corporation, against both the corporation and Shareholder A?

2. To the extent such a representation is permitted, to what extent is informed written consent required from the corporation and Shareholder A and who provides the consent for the corporation?

DIGEST:

Under the particular facts presented, and subject to any limitations created by any fiduciary duties of Shareholder A, a lawyer may ethically represent both the corporation and Shareholder A in the lawsuit. To the extent a potential conflict of interest exists between Shareholder A and the corporation, the lawyer must obtain the informed written consent of both the corporation and Shareholder A before commencing the representation under rule 3-310(C)(1) of the California Rules of Professional Conduct. Under the facts presented, the corporation's consent to the joint representation may be obtained from Shareholder A. Consistent with rule 3-310(C)(1), this joint representation is permissible only for so long as the corporation and A do not have opposing interests in the lawsuit which the attorney would have a duty to advance simultaneously for each. Additionally, the lawyer must fulfill those duties to the corporation described in rule 3-600.

AUTHORITIES INTERPRETED:

Rules 3-310 and 3-600 of the California Rules of Professional Conduct.

STATEMENT OF FACTS

Corporation has two shareholders, A and B. A is the corporate president and CEO, who is authorized to oversee Corporation's daily business affairs. A is also authorized under Corporation's articles of incorporation and bylaws to retain legal counsel for Corporation and oversee legal counsel's representation of Corporation.

A and B disagree on the important issue of whether Corporation should adopt a policy of distributing earnings generously, rather than reinvesting them as it has done for many years. Frustrated by the disagreement over this important policy decision, B files a lawsuit against Corporation and against A individually. A seeks to retain Attorney to defend both A and Corporation in B's lawsuit. At the time of the engagement, Attorney is not currently and has not previously represented Corporation as to the subject matter of the dispute. In addition, Attorney has not previously represented Corporation in any matter.

DISCUSSION

The preceding facts raise three basic issues. First, may Attorney ethically represent both Corporation and A in B's lawsuit? Second, to what extent is the consent of Corporation and A required for such a representation? Finally, who consents for Corporation in the circumstances presented?

I. Can Attorney Represent Corporation and Constituent?

The manner in which a lawyer represents a corporation is governed by rule 3-600 of the California Rules of Professional Conduct (hereinafter "rule(s)"), which addresses a lawyer's duties when representing organizations such as a corporation. Rule 3-600(A) states:

In representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement.

Under rule 3-600 and the cases decided before the rule was adopted, a lawyer does not represent the individual shareholders or officers of a corporation by virtue of representing the corporation itself. (Meehan v. Hopps (1956) 144 Cal.App.2d 284, 293; Skarbrevik v. Cohen, England & Whitfield (1991) 221 Cal.App.3d 692, 704.)

California law has long recognized that when a lawyer acts as corporate counsel, the lawyer's first duty is to the corporation. (Meehan v. Hopps, supra, 144 Cal.App.2d at p. 293.) As a result, courts have held that corporate counsel should refrain from taking part in any controversies or factual differences among shareholders as to control of the corporation so that he or she can advise the corporation without prejudice or bias. (Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995) 36 Cal.App.4th 1832, 1842; Skarbrevik v. Cohen, England & Whitfield, supra, 221 Cal.App.3d at p. 704; Goldstein v. Lees (1975) 46 Cal.App.3d 614, 622.) This rule generally applies when a lawyer who has been representing a corporation is asked to represent one shareholder against another shareholder in a dispute over control of the corporation. (Woods v. Superior Court (1983) 149 Cal.App.3d 931 (lawyer who for years represented corporation owned by husband and wife could not represent one shareholder against the other in a marital dissolution action when the corporation was the primary focus of the dispute); Goldstein v. Lees, supra, 46 Cal.App.3d 614 (former corporate counsel who had material confidential information could not represent one shareholder in a proxy fight for control of the corporation).)

On the other hand, a lawyer is not prohibited from taking actions on behalf of the corporation that negatively impact the interests of a shareholder or other constituents. (See Skarbrevik v. Cohen, England & Whitfield, supra, 231 Cal.App.3d 692 (holding that a lawyer for a corporation may render advice and draft documentation for the corporation that results in a dilution of a minority shareholder's interest in the company); Meehan v. Hopps, supra, 144 Cal.App.2d 284 (corporation's lawyer may bring an action on behalf of the corporation's receiver against a majority shareholder who had previously dominated the corporation).)

The scenario presented in this opinion is at the intersection of these rules. On the one hand, B's lawsuit involves a dispute between Corporation's constituents, A and B, in which Corporation's counsel must ordinarily not take part. On the other hand, B's lawsuit also involves a dispute between B and Corporation, in which Corporation is entitled to present a defense. Under rule 3-600, counsel retained to represent Corporation normally would be required to follow the instruction of A, who, under the facts presented, is the highest officer authorized to oversee the representation.

The Committee believes that under the limited facts presented, Attorney may ethically represent Corporation and A in B's lawsuit. Attorney may jointly represent Corporation and A only for so long as the following two conditions are met. First, Attorney can simultaneously represent the two so long as the corporation and A do not have opposing interests in the lawsuit which the attorney would have a duty to advance simultaneously for each. (See Tsakos Shipping & Trading, SA v. Juniper Garden Townhomes, Ltd. (1993) 12 Cal.App.4th 74, 95-96; Klemm v. Superior Court (1977) 75 Cal.App.3d 931.) Second, Attorney must conform his representation of the corporation to the requirements of rule 3-600. As an adversary of Corporation in the lawsuit, B is not entitled to the assistance of Corporation's counsel in connection with the litigation. At the same time, the rules that allow a corporation's lawyer to take action on the corporation's behalf which negatively impact a constituent remain applicable.

In such circumstances, there may be economic and practical reasons for the Corporation and A to be represented jointly in B's lawsuit. Given the nature of the lawyer's duties to the corporation in this case, the Committee concludes there is no reason why a corporation's options under the facts presented should be any more limited than any other defendant in a similar situation.

II. Is Informed Written Consent of Corporation and A Required?

The representation of Corporation and A involves two distinct clients. Representation of two or more clients in the same matter is governed by rules 3-310(C)(1) and (C)(2), which state that absent the informed written consent of both clients, a member of the State Bar shall not:

(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or

(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict.

Whether an actual or potential conflict of interest exists in a multiple client engagement, such as the representation of Corporation and A, depends on whether one or more of six conflict situations exist or may potentially arise during the representation: (1) conflicting instructions from the clients in which the lawyer cannot follow one client's instruction without violating another client's instruction; (2) conflicting objectives of the clients in which the lawyer cannot effectively advance one client's objective without detrimentally affecting another client's objective; (3) advocacy of antagonistic positions of the clients in which the lawyer is called on to advocate both sides of a negotiation or a legal position at the same time; (4) inconsistent expectations of confidentiality in which one client expects the lawyer not to disclose information the lawyer would be required to impart to the other client; (5) a preexisting relationship with one client that would adversely affect the lawyer's independent judgment on behalf of the other client; and (6) conflicting demands by the clients for the original file once the representation has ended.

To the extent that one or more of the foregoing conflict situations are reasonably possible, a potential conflict of interest exists that requires both clients' informed written consent under rule 3-310(C)(1). To the extent that any of the conflict situations arise during the representation, an actual conflict of interest exists, which, if not resolved before the lawyer must proceed, requires both clients' additional informed written consent under rule 3-310(C)(2). (See rule 3-310, Discussion.)

Under the facts presented, Attorney would be representing the common interests of Corporation and A in B's lawsuit. As long as A is the officer authorized to oversee Attorney's representation of Corporation, an actual conflict does not appear to be present. While there are two clients in the representation, only one person, A, is instructing Attorney.

However, Corporation has another constituent, B. To the extent that B, or another person such as a receiver, obtains the ability to control the affairs of Corporation, an actual conflict of interest could arise. In that situation, Attorney could receive conflicting instructions from Corporation and A. Attorney could be called on to advance inconsistent positions or to pursue a claim by Corporation against A, or vice versa. Attorney could be required to disclose confidential communications with A in the course of the joint representation which A would not want disclosed. Both clients could make a demand on Attorney for the original file.

Even if a change of control does not occur, a conflict of interest could arise if B, as a constituent of Corporation, has or obtains a right to learn the substance of confidential communications Attorney has with A in the course of the joint representation, which A does not want disclosed to B. These concerns exist not only during the representation, but after the representation as well. While B or some other person might not have the ability to learn the substance of A's confidential information while the joint representation of A or Corporation is pending, in some cases they may attain a position in the Corporation in the future that would entitle them to obtain such information from Attorney.

Whether there is a potential for any of the foregoing conflict scenarios to arise as a result of jointly representing a close corporation and a controlling constituent must be determined on a case-by-case basis. The Committee concludes that a potential conflict of interest requiring the informed written consent of the corporation and the constituent (such as Corporation and A in this case) under rule 3-310(C)(1) will exist when (1) it is reasonably possible that a change of control in the corporation could occur that would trigger one or more of the conflict scenarios described above or (2) it is reasonably possible that a situation could arise in which the lawyer may be required to reveal confidential information related to the joint representation to someone other than the controlling constituent.

III. Who Consents for the Corporation?

Rule 3-600(E) states:

A member representing an organization may also represent any of its directors, officers, employees, members, shareholders, or other constituents, subject to the provisions of rule 3-310. If the organization's consent to the dual representation is required by rule 3-310, the consent shall be given by an appropriate constituent of the organization other than the individual or constituent who is to be represented, or by the shareholder(s) or organization members.

Read in conjunction with rule 3-310(C)(1) and rule 3-310(C)(2), rule 3-600(E) allows a lawyer to obtain a corporation's consent to the joint representation of the corporation and one of its constituents in one of two ways: (1) by "an appropriate constituent" other than the constituent being jointly represented, or (2) "by the shareholder(s)." In the case of a corporation, an "appropriate constituent" for purposes of the rule is someone who is authorized to execute an agreement to the joint representation on the corporation's behalf.

Although the "appropriate constituent" must be someone other than the constituent being jointly represented, there is no such limitation on "the shareholder(s)" who may consent under the rule. Thus, under rule 3-600(E) the consent by the shareholder or shareholders may include constituents who are part of the joint representation. While the rule does not indicate which shareholder or shareholders must provide the consent, the Committee believes that, at a minimum, the shareholder or shareholders must have sufficient authority to execute an agreement to the joint representation for the corporation.

Under the facts presented where a single attorney is sought to represent jointly both A and the corporation, B is not an appropriate constituent to consent to the joint representation of Corporation and A, because B is an opposing party in the lawsuit. To conclude otherwise would permit B, the Corporation's adversary in the lawsuit, to dictate how the Corporation would be represented in that proceeding. At the same time, because A is the individual being jointly represented with Corporation in B's lawsuit, A may not consent to the joint representation under the first of the two approaches set forth in rule 3-600(E).

Nevertheless, Attorney may obtain Corporation's consent to the joint representation from A under the second of the two approaches set forth in the rule. Under the facts presented, A may consent to the joint representation for the Corporation because (1) A is the only other shareholder, and (2) as president of Corporation, A is authorized to retain counsel for the Corporation and oversee the representation of the Corporation by that counsel. These two facts taken together allow Attorney to ethically represent Corporation and A jointly with A's consent for both.

In reaching this conclusion, the Committee emphasizes that the outcome is highly dependent on the facts. A different result might be obtained under circumstances in which one or both of the foregoing factors are not present. Moreover, the Committee observes that there may be circumstances in which A has corporate fiduciary obligations that may preclude A from consenting to being jointly represented with Corporation. (See, e.g., Jones v. H.F. Ahmanson & Co. (1969) 1 Cal. 3d 93, 110 (controlling shareholders owe minority shareholders fiduciary duty; "The rule that has developed in California is a comprehensive rule of good faith and inherent fairness from the viewpoint of the corporation and those interested therein.").) The legal questions with respect to such duties are beyond the Committee's purview to address. However, the attorney in the circumstances presented in this opinion may need to consider these legal issues in advising A about the dual representation.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.