The General Counsel Is Not The Shareholders’ Agent
Wednesday, October 1, 2014

A recent paper by Adair Morse, Wei Wang, and Serena Wu, Executive Gatekeepers: Useful and Divertible Governance, tackles interesting questions about the the effectiveness of internal gatekeepers and the impact of equity incentives on those gatekeepers.  However, I couldn’t get past the second sentence of the paper that asserts, without authority:

These executive gatekeepers, typically holding the title of general counsel, are agents of shareholders, charged with both ensuring that the firm complies with regulations and monitoring for corporate misconduct.

In my view, this statement is wrong for two reasons.

Agency may be one of the “three great relations in private life” but it is not a relationship that general counsels typically enjoy with a corporation’s shareholders.  As Professor Stephen Bainbridge recently noted, “An agency relationship comes into existence when there is a manifestation by the principal of consent that the agent act on his behalf and subject to his control, and the agent consents to so act.”  Given the ethical responsibilities of a general counsel to her client, the corporation, I would expect that it would be a rare case indeed when a general counsel consents to act for, and subject to the control of, any particular shareholder.  More importantly, the notion that a lawyer representing a corporation also represents its shareholders is inconsistent with Rule 3-600(A) of the California Rules of Professional Conduct which provides:

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.

Consistent with this principle, the California Court of Appeal has held that a corporate lawyer’s duty of loyalty does not bar the lawyer from representing an interest adverse to the corporation’s sole shareholder. Brooklyn Navy Yard Cogeneration Partners v. Superior Court, 60 Cal. App. 4th 248 (Cal. App. 4th Dist. 1997)

At a more general level, the whole notion of lawyers as gatekeepers is anathema.   In fact, the last time I looked, I was unable to find a single reported decision in the U.S. holding that lawyers are gatekeepers.  Below are a few reasons why I gatekeeper status is incompatible with the function of attorneys:

Conflicts of Interest. If a general counsel were a gatekeeper, then she would have responsibilities beyond the client corporation.  This results in a situation akin to Justice Louis Brandeis’ notion of “counsel to the situation” rather than counsel to the client.  Even Brandeis ran into a lot of trouble with clients who thought that he should be looking out for their interests, and not the interests of the situation. See Melvin I. Urofsky’s fascinating biography, Louis D. Brandeis: A Life (pages 65-70).  Our legal system works best when a party has a lawyer that represents only that party and not the situation, the deal or an ever-changing and undefined mass of shareholders..

Attorney-Client Confidentiality. Gatekeeper status invites violations of the confidentiality of attorney-client communications.  For example, the Securities and Exchange Commission’s Part 205 rules purport to immunize attorneys who disclose client confidences in certain circumstances.  In California, the State Bar Act requires attorneys to “maintain inviolate the confidence[s], and at every peril . . . to preserve the secrets, of his or her client[s]. Cal. Bus. & Prof. Code § 6068(e).  This obligation is independent of an attorney’s obligations with respect to the attorney-client privilege as set forth in the Evidence Code (Sections 950-962) and the California Rules of Professional Conduct. Jim Fotenos, Steve Hazen, Jim Walther, Nancy Wojtas and I spilled alot of ink over this topic in this law review article.

Regulatory Capture. The lawyer as gatekeeper may be more encouraged to stay in the good graces of the regulatory agency than to act as a vigorous advocate for his or her clients’ interests.

 

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