Problems Facing In-House Counsel

http://delvacca.acc.com

Graham R. Laub, Dilworth Paxson LLP James J. Rodgers, Dilworth Paxson LLP

ETHICAL ISSUES IN MERGERS & ACQUISITIONS

Topics for Discussion • Multi-Jurisdictional Practice • Conflicts and Waivers

• Conflicts in transactional settings • Organizational Clients and Attorney-Client Privilege • Standing waivers • Implied waivers

• Alternative Fee Structures • Success-based fees • Equity interests in clients

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Avoiding the Unauthorized Practice of Law in a Transactional Setting

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Multi-Jurisdictional Practice • In-house counsel may be asked to represent their clients

in contracts or transactions governed by the law of different jurisdictions.

• Must look to the rules in the governing jurisdiction to determine if lawyer may undertake the representation.

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Rule of Professional Conduct 5.5

• Governs the permissible scope of multi-jurisdictional practice.

• Rules 5.5 in PA and DE are very similar to the ABA Model Rule; NJ’s rule differs.

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Model Rule 5.5

• Legal services can be provided on a temporary basis where the services “arise out of or are reasonably related to a jurisdiction in which the lawyer is admitted to practice.”

• Rule in PA and DE follows the Model Rule.

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New Jersey Rule 5.5

• Narrower than Model Rule.

• Lawyer may engage in extra-jurisdictional practice only if it falls into one of three “safe harbor” provisions.

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New Jersey Rule 5.5, continued Three situations where out-of-state lawyer may practice:

• For the “negotiation of the terms of a transaction on behalf of an

existing client in a jurisdiction where the lawyer is admitted and where the transaction originates in or is related to such a jurisdiction.” NJ RPC 4.4(b)(3)(i) (emphasis added);

• Where the “practice is occasional and the lawyer associates in the matter with, and designates and discloses to all parties in interest, a lawyer admitted” in New Jersey, to be responsible for the lawyer’s work NJ RPC 5.5(3)(iv); or

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New Jersey Rule 5.5, continued • Where the “practice activity arises directly out of the lawyer’s

representation of an existing client in a jurisdiction in which the lawyer is admitted, provided such practice [in New Jersey] is occasional and is undertaken only when the lawyer’s disengagement would result in substantial inefficiency, impracticality or detriment to the client.” NJ RPC 5.5(3)(v).

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NJ – Procedural Requirements • A transactional lawyer must file with the Clerk of the

Supreme Court a consent to service through the Clerk for any action against the lawyer.

• Must also follow the registration and payment provisions under the New Jersey Lawyers’ Fund for Client Protection and the Lawyers Assistance Program.

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Opinion 49 Interpreting New Jersey Rule • Committee on the Unauthorized Practice of Law issued

Opinion 49 in 2012.

• Any practice in New Jersey by an attorney not licensed there must be “temporary or occasional” and must not be “recurring or frequent.”

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Opinion 49, continued • Question whether out-of-state lawyer representing an out-

of-state client may participate in a commercial transaction in New Jersey.

• If lawyer doesn’t associate with local counsel, may only negotiate terms of contract if representing existing client in transaction arising out of jurisdiction where lawyer is admitted to practice.

• May only negotiate terms, not prepare a deed or other documentation of a real estate transaction, and perhaps a contract or other legal documents.

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Rule 5.5 for In-House Counsel • For all versions of Rule 5.5, counsel not admitted in the

jurisdiction where his or her corporate office is located may perform legal services for an organizational employer

• Counsel may not provide legal services or advice to officers, directors or other employees for matters of a personal nature.

• All versions of Rule 5.5 have some mechanism for the limited practice of law by out-of-state attorneys.

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Limited Licenses • PA Bar Admission 302 – Counsel must obtain a Limited

In-House Corporate Counsel License.

• DE Supreme Court Rule 55.1 – Counsel must obtain a Certificate of Limited Practice.

• NJ Court Rule 1:27-1 – Counsel must obtain a limited license.

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Conflicts

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Current Clients • Rule 1.7 governs relationship between attorney and

current client and sets out basic underlying ethical duties.

• A lawyer may not represent a client whose interests are directly adverse to the interests of a current client.

• Also bars representation where significant risk exists that the representation of one or more clients may be materially limited by the lawyer’s duty to a current or former client or a third person, or the lawyer’s personal interest.

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Current Clients, continued • Generally, such conflicts can be waived upon the informed

consent of each affected client.

• Some conflicts are non-waivable if the lawyer would be unable to comply with his or her duties to each client.

• Just like law firms, in-house counsel may need to have procedures in place to screen new clients/matters for existing conflicts of interest.

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Former Clients – Ongoing Confidentiality

• Rule 1.9 - Lawyer must obtain informed consent from a former client in order to represent, in the same or substantially similar matter, a new client whose interests are materially adverse to the former client’s.

• Rationale of Rule 1.9 is to bar the use of a former client’s information from use against the former client.

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“Hot Potato Rule”

• Idea that counsel may not suddenly end a client relationship in order to undertake a new client with materially adverse interests.

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Example: Airgas / Air Products • Cravath, Swaine & Moore served as legal advisor to Air

Products on the company’s hostile takeover bid for Airgas in 2010.

• Airgas filed suit against Cravath after the initial bid, claiming conflict of interest and breach of fiduciary duty.

• Cravath had served as counsel to Airgas for several financings over 10 years, earning about $2 million in fees.

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Airgas, continued • Cravath ended its role as counsel to Airgas only four

months before rival Air Products made its hostile bid.

• Airgas argued Cravath had violated their fiduciary duty, as they had access to confidential information about the company as client while working to help Air Products prepare a bid for a hostile takeover.

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Airgas, continued • Delaware courts did not disqualify Cravath from

representing Air Products (standard was not just a breach of rules, but that the violation “materially advanced” Air Products in its bid).

• Parties eventually settled suit for breach of fiduciary duty.

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Hypothetical: Former clients • In-house counsel for Company A works on deal to sell

business unit of A to Company B.

• Several months later, Counsel leaves Company A to join Company B, and realizes Company B has an indemnity claim for a breach of the sale contract.

• Counsel’s involvement in any claim against Company A on the basis of the sale would be a per se conflict of interest.

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Hypothetical, continued • Company B must wall off Counsel from all matters related

to the sale until all related claims are expired/no longer applicable. Rule 1.10 imputes conflicts to all affiliated lawyers absent an effective “ethical wall.”

• Best practice for Company B: Procedures in place for conflict screens at the time of hiring, so don’t risk compromising any potential claims.

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Conflict Rules for In-House Counsel • Importance of record-keeping for corporate law

departments for proper conflict-screening.

• Conflict screens for representation in adverse matters and for “material information” related to any current matters and gained through representation of an adverse party.

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Example: Former Clients What obligations does former in-housel counsel owe to a previous employer?

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Example, continued • Example: In-house counsel for Corporation A leaves for a

job with Firm B, a patent licensing company. Firm B sues Corporation A several months later for patent infringement in a product that Counsel had direct knowledge of through her work in Corporation A. Corporation A sues Counsel for theft of trade secrets.

• Firm B should have procedures in place to identify this conflict and screen the new lawyer.

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Disqualification of Department • Disqualification of an entire corporate law department

from participation in a matter is highly unusual, but is a risk.

• It is within the court’s power to do so based on imputed conflict from a single lawyer under Rules 1.9 and 1.10.

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Restrictive Covenants • In-house counsel may be asked to sign restrictive

covenants as a condition of their employment.

• The ABA and New Jersey Advisory Committee on Professional Ethics Opinion 708 reject the use of broad restrictive covenants on lawyers designed to protect the employer’s confidential business information and trade secrets. Rule 5.6 prohibits agreements under which a lawyer agrees not to represent a client or group of clients in the future.

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Restrictive Covenants, continued • Corporate counsel may be required to sign a non-

disclosure or confidentiality agreement if it does not interfere with the lawyer’s practice of law and does not seek to expand the confidential nature of information obtained by the in-house lawyer in the course of performing legal functions beyond the scope of the rules.

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Organizational Clients • Rule 1.13 declares the basic rule that a lawyer “employed

or retained by an organization represents the organization acting through its duly authorized constituents.”

• The lawyer must make it clear to directors, officers or other constituents that the lawyer represents the organization;

• While a lawyer may represent such constituents along with the organization, such a concurrent representation is subject to the conflict rules of Rule 1.7.

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Rule 1.13, continued • Counsel employed by an organization has a duty to

“report up” through the organization.

• “Report up” duty is triggered if the lawyer perceives that a constituent is acting or planning to act in a manner that is unlawful or otherwise inimical to the interests of the organization. This obligation is in addition to any reporting obligation under Sarbanes-Oxley.

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Attorney-Client Privilege for In-House Counsel

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Attorney-Client Privilege • Attorney-client privilege can be complicated for corporate

counsel representing directors and officers who owe the corporation a fiduciary duty.

• Garner doctrine

• Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970).

• Attorney-client privilege does not prevent shareholder-plaintiffs from obtaining attorney advice to corporate managers in their capacity as fiduciaries to the shareholders.

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Attorney-Client Privilege, continued • Shareholders, as ultimate beneficiaries to the advice,

could not be prevented from discovering it in litigation.

• Delaware Supreme Court recently adopted the doctrine in shareholder suit against Wal-Mart.

• Wal-Mart Stores Inc. V. Ind. Elec. Workers Pension Trust Fund IBEW, 2014 BL 204502, Del., No. 614, 2013, 7/23/2014

• Held that the Garner doctrine applies in plenary stockholder/corporation proceedings as well as DGCL Section 220 actions.

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Wal-Mart Stores Inc. V. Ind. Elec. Workers Pension Trust Fund IBEW

• Wal-Mart was required to turn over to shareholder-plaintiffs documents it claimed was covered by attorney-client privilege.

• Stockholders alleging director wrongdoing had shown that the documents covered by the privilege were “necessary and essential” to their inquiry.

• Stockholders were permitted to “invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause.”

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Attorney-Client Privilege, continued • Wal-Mart decision is particularly notable:

• Influence of Delaware corporate law; and • Tendency of M&A activity to produce shareholder

litigation.

• In-house counsel must be aware that the corporation is their client when counseling directors and officers.

• When there is a change in control of a corporate entity, the right to control the privilege runs with control of the entity.

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Conflict Waivers

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Standing Waivers • Some clients may prefer to maintain a standing waiver

where minor conflicts may frequently arise.

• Standing waivers should be narrowly drawn, with both sides fully informed.

• When properly drafted, can be a useful tool.

• More likely to be enforceable when client is sophisticated and can properly give informed consent.

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Example: Standing Waiver • Example: Bank A may maintain a standing waiver with

outside counsel B for certain prescribed situations, e.g., representing a borrower in work-out of a delinquent loan.

• Counsel B may represent lenders against the Bank without obtaining a separate waiver from the Bank for each new lender.

• Bank and Counsel are confident such a representation will not compromise Counsel’s representation of Bank on other matters.

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Implied Waivers • Can waivers of a conflict of interest ever be implied?

• Generally, all waivers should be explicit.

• Occasionally, a situation may arise where a waiver is

implied .

• Usually, this occurs in cases of successor representation where the former or current client fails to raise an objection.

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Hypothetical: Implied Waiver • Firm A represents Client B in an auction of certain assets.

Company C, an existing client of Firm A on unrelated matters, enters a bid in the auction. Firm A did not know Company C would be bidding.

• Obligations of Firm A to Client B.

• Obligations of Firm A to Company C.

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Hypothetical: Implied Waiver

• May be more detrimental to either client to cease representation than to continue despite the conflict.

• As soon as the conflict is known, Firm A must obtain a written waiver based on informed consent.

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Transactions with Clients

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Transactions with Clients • Rule 1.8(a) deals with business transactions between a

lawyer and a current client.

• Such transactions are prohibited unless certain conditions are satisfied. The transaction must be: • Fair to the client; • Adequately explained in writing; and • The client must give written consent after an opportunity to consult

independent counsel.

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Alternative Fee Structures • Any fee structure must meet “reasonableness” standard

under Rule 1.5.

• Alternative fee arrangements which involve sharing risks and rewards must also meet the standards governing business relationships in Rule 1.8.

• Success fees may implicate conflict and breach of fiduciary duty principles.

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Taking an Equity Interest in a Client • Permitted by model rules so long as all the rules are

satisfied

• RPC 1.5 (reasonableness), • RPC 1.7(b) (conflicts between client and lawyer’s

interests), • RPC 1.8 (business transactions with client), and • RPC 2.1 ( lawyer’s duty to exercise independent

professional judgment and render candid advice).

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