Can one lawyer represent both a corporation and its director defendants in a shareholder derivative suit?

Plain-English summary

The opinion frames the governing rules: "while joint representation of a corporation and its constituents is generally authorized under Rule 1.13(e), Rule 1.13(e) also states that such representation is 'subject to the provisions of Rule 1.7.'" So a concurrent conflict under Rule 1.7(a)(1) or (a)(2) may preclude joint representation unless the requirements of Rule 1.7(b) are met. The opinion concludes that "whether the same lawyer may represent the corporation and the individual defendants in a derivative action depends upon the nature of the allegations against the individual defendants."

The controlling distinction is between serious wrongdoing and mere mismanagement. The opinion holds that "allegations involving 'serious charges of wrongdoing,' such as fraud, self-dealing or other intentional acts, unless patently frivolous, give rise to a non-consentable conflict under Rule 1.7(b)(1), and preclude such joint representation." It relies on the Third Circuit's decision in Bell Atlantic v. Bolger, which stated it had "no hesitation in holding that, except in patently frivolous cases, allegations of director's fraud, intentional misconduct, or self-dealing require separate counsel," while distinguishing such conduct from mere mismanagement (a breach of the duty of care) that may permit joint representation with informed consent. The opinion adds that the individual defendants cannot themselves decide whether facially valid serious charges are "patently frivolous," citing Musheno v. Gensemer.

On consent, the opinion concludes that even where joint representation is otherwise permissible, Rule 1.13(e) requires the corporation's informed consent to be given by a disinterested, authorized official who is not the individual being represented, and that "if there is no disinterested person who is authorized to give informed consent on the corporation's behalf, then joint representation is precluded," for example where the board is deadlocked or the only directors are themselves the accused.

In practice

Under this opinion, a Pennsylvania lawyer assessing joint representation in a derivative action looks first to the nature of the allegations: mere mismanagement may permit joint representation, but facially valid charges of fraud, self-dealing, or other intentional wrongdoing create a non-consentable conflict that bars it. The opinion holds that consent for the corporation must come from a disinterested, authorized official who is not among the accused, and that joint representation is precluded if no such person exists.

Common questions

Q: Can the same lawyer represent the company and its directors in a derivative suit?

A: The opinion concludes it depends on the allegations: joint representation may be permissible for mere mismanagement claims, but not where there are serious charges of wrongdoing such as fraud or self-dealing.

Q: Why do fraud or self-dealing claims change the answer?

A: The opinion concludes such serious charges, unless patently frivolous, give rise to a "non-consentable conflict under Rule 1.7(b)(1)" and preclude joint representation.

Q: Can the accused directors decide the claims are frivolous and proceed jointly?

A: No. The opinion concludes the individual defendants cannot properly decide whether facially valid serious charges are "patently frivolous."

Q: Who gives the corporation's consent?

A: The opinion concludes consent must come from a disinterested, authorized official who is not the individual being represented; if none exists, joint representation is precluded.

Background and rules framework

The opinion interprets Pennsylvania Rule of Professional Conduct 1.13 (organization as client), particularly 1.13(e) (representing the organization and its constituents) and official Comments [10] and [11], together with Rule 1.7 (concurrent conflicts), including 1.7(a)(1), 1.7(a)(2), 1.7(b), and 1.7(b)(1). These track ABA Model Rules 1.13 and 1.7.

Citations and references

Rules of Professional Conduct:

• Pa.R.P.C. 1.13, including 1.13(e) and Comments [10]-[11]; ABA Model Rule 1.13
• Pa.R.P.C. 1.7, including 1.7(a)(1), 1.7(a)(2), 1.7(b), 1.7(b)(1); ABA Model Rule 1.7

Cases:

• Bell Atlantic v. Bolger, 2 F.3d 1304 (3d Cir. 1993), derivative-action joint representation
• Musheno v. Gensemer, 897 F. Supp. 833 (M.D. Pa. 1995), fraud allegations require independent counsel
• Lewis v. Shaffer Stores Co., 218 F. Supp. 238 (S.D.N.Y. 1963), independent corporate counsel

Secondary authority:

• Restatement (Third) of the Law Governing Lawyers § 131 cmt. g

See also

• ABA Formal Op. 514: Advising an Organization About Constituent Legal Risk
• ABA Formal Op. 497: Conflicts Involving Materially Adverse Interests

Source

• Landing page: PBA Ethics Opinions (Public)
• Original PDF: F2023-100.pdf