Editor's Note:
State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
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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?
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.
Rules 3-310 and 3-600 of the California Rules of Professional Conduct.
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.
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?
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 [301 P.2d 101]; Skarbrevik v. Cohen, England & Whitfield (1991) 221 Cal.App.3d 692, 704 [282 Cal.Rptr. 627].)1
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 [43 Cal.Rptr.2d 327]; Skarbrevik v. Cohen, England & Whitfield, supra, 221 Cal.App.3d at p. 704; Goldstein v. Lees (1975) 46 Cal.App.3d 614, 622 [120 Cal.Rptr. 253].) 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 [197 Cal.Rptr. 185] (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.2 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 [15 Cal.Rptr.2d 585] Klemm v. Superior Court (1977) 75 Cal.App.3d 931 [197 Cal.Rptr. 509].) Second, Attorney must conform his representation of the corporation to the requirements of rule 3-600.3 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.4
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;5 (2) conflicting objectives of the clients in which the lawyer cannot effectively advance one client's objective without detrimentally affecting another client's objective;6 (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;7 (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;8 (5) a preexisting relationship with one client that would adversely affect the lawyer's independent judgment on behalf of the other client;9 and (6) conflicting demands by the clients for the original file once the representation has ended.10
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.11
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.
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.12
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.13
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.14 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 [81 Cal. Rptr. 592] (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.
1 While a lawyer is not deemed to represent the individual constituents of a corporation under the rule, a lawyer-client relationship with one or more of the constituents can arise based on the parties' conduct. Not every interaction with a shareholder in a close corporation necessarily leads to a lawyer-client relationship. When the lawyer is acting for the benefit of the corporation, the fact that the act also benefits an individual shareholder because of that shareholder's interest in the corporation does not give rise to a lawyer-client relationship with the shareholder. (Meehan v. Hopps, supra, 144 Cal.App.2d at p. 293.) On the other hand, where the corporation exists to serve the personal interests of the shareholders, a lawyer-client relationship with individual shareholders may be deemed to exist, particularly when there is close interaction between the lawyer and the shareholder. (Woods v. Superior Court, supra, 149 Cal.App.3d 931.)
So far the courts have not adopted a clear rule concerning when a lawyer-client relationship arises with individual shareholders. In answering such questions in the future, courts may look to the factors that have been enunciated in cases involving partnerships. (See Responsible Citizens v. Superior Court (1993) 16 Cal.App.4th 1717, 1731-1733 [20 Cal.Rptr.2d 756] [whether lawyer for a partnership also represents individual partners depends on the existence of an express or implied agreement that the lawyer also represents one or more of the partners. Among the factors that support or undercut the implication of an attorney-client relationship with individual partners are (1) the type and size of the partnership, (2) the nature and scope of the lawyer's engagement, (3) the kind and extent of the lawyer's contacts with the individual partners and (4) the nature of the information to which the lawyer has access].)
2 As noted in the Statement of Facts, this opinion does not address a situation in which the lawyer seeking to represent Corporation and A has previously represented Corporation and in so doing has obtained confidential information that is material to the current dispute. Without deciding the question, the Committee observes that different considerations may apply in that situation. (See Goldstein v. Lees, supra, 46 Cal.App.3d 614, in which the court concluded that a corporation's former general counsel possessing a corporation's material confidential information could not monopolize that information for the benefit of one shareholder by representing that shareholder in a proxy fight.)
3 In representing Corporation and A, Attorney must take those actions which are consistent with Attorney's duty to competently represent Corporation. (See rule 3-110.) If while representing Corporation and A, Attorney knows that A is acting, intends to act or is refusing to act in a manner that is or may be a violation of law reasonably imputable to Corporation or which is likely to result in substantial injury to Corporation, Attorney may take such actions as appear to Attorney to be in the lawful interest of Corporation, subject to Attorney's duty not to reveal Corporation's confidential information. (Rule 3-600(B).) Such actions may include urging A to reconsider the matter while explaining to A the likely consequences to Corporation. (Rule 3-600(B)(1).) If, despite the foregoing steps, A insists on pursuing such a course of action, Attorney may, and in some cases must, resign from the representation in accordance with rule 3-700. (Rule 3-600(C).)
4 This opinion is limited to a lawyer's ethical duty under the applicable ethical rules. It does not address to what extent a lawyer who complies with the ethical duties addressed in this opinion may nevertheless be disqualified as counsel by a court. The Committee observes that a court's power to order disqualification is derived from the power inherent in every court to control the administration of proceedings before it. (Code Civ. Proc., § 128 (a)(5); Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp., supra, 36 Cal.App.4th at p. 1839.) Rules of ethics are but one of the factors on which courts decide whether disqualification is necessary to preserve the integrity of the judicial process. (In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572, 586 [283 Cal.Rptr. 732].)
5 See Los Angeles County Bar Association Formal Opinion Number 471.
6 See Hammett v. McIntyre (1952) 114 Cal.App.2d 148 [249 P.2d 885] (a lawyer may not represent a civil defendant and insurer at trial when the insurer is seeking to prove facts that establish no coverage for defendant); Pennix v. Winton (1943) 61 Cal.App.2d 761 [143 P.2d 940] (lawyer acted improperly by advancing interests of insurer over defendant client at trial and should have withdrawn). (See also L.A. Cty. Bar Assn. Formal Opn. No. 471.)
7 Klemm v. Superior Court (1977) 75 Cal.App.3d 97 [142 Cal.Rptr. 509] (concurrent representation of husband and wife in divorce); Tsakos Shipping & Trading, S.A. v. Juniper Garden Town Homes, Ltd., supra, 12 Cal.App.4th at pp. 95-96 (lawyer representing opposing sides of a business transaction).
8 This issue involves a conflict between a lawyer's duty to preserve the confidentiality of one client's confidential information under Business and Professions Code section 6068 (e) and the lawyer's duty to inform the other client of significant developments related to the representation under rule 3-500 and Business and Professions Code section 6068 (m). (See L.A. Cty. Bar Assn. Formal Opn. No. 471.)
When a lawyer is engaged to represent two or more clients in a matter, the clients' communications with the lawyer in the course of that engagement are not privileged as between the clients. Evidence Code section 962 provides that when two or more clients have retained or consulted a lawyer upon a matter of common interest, none of them may claim a privilege as to a communication made in that relationship when such communication is offered in a civil proceeding between one such client and another such client. However, the duty to preserve a client's confidential information is broader than the lawyer-client privilege. (Goldstein v. Lees, supra, 46 Cal.App.3d at p. 621, fn. 5; Cal. State Bar Formal Opn. No. 1993-133.)
The Discussion to rule 3-310 refers to Evidence Code section 962 as an example of the potential adverse aspects of a multiple client representation when the clients' consent under rule 3-310(C)(1) is required.
9 Los Angeles County Bar Association Formal Opinion Number 471.
10 Under rule 3-700(D), subject to any protective order or non-disclosure agreement, a lawyer whose representation has terminated must promptly release to the client all of the client's "papers and property" if requested by the client to do so. In California State Bar Formal Opinion Number 1994-134, the Committee recognized that the duty in rule 3-700 encompasses the contents of the client's file, which belong to the client. When a lawyer represents more than one client in a matter, the file may belong to each of the clients, which, in turn, may result in conflicting claims for the file at the conclusion of the lawyer's engagement.
11 Indeed, it has been said that in closely held organizations the interests of the organization and its controlling constituent are virtually identical. (See In re Brownstein (Ore. 1979) 602 P.2d 655, 659, cited in Hicks v. Edwards (Wash.App. 1994) 876 P.2d 953, 956. Compare Skarbrevik v. Cohen, England & Whitfield, supra, 231 Cal.App.3d 692 at fn. 8.)
12 Rule 3-310(A)(2) defines "informed written consent" as a client's "written agreement to the representation following written disclosure." Rule 3-310(A)(1) defines "disclosure" as informing a client "of the relevant circumstances and the actual and reasonably foreseeable adverse consequences" to the client.
13 The authority of a shareholder or group of shareholders to take an action for the corporation, such as providing the consent in question here, will depend on the circumstances and the applicable law. The Committee observes that obtaining consent from a shareholder or group of shareholders authorized to do so may require adherence to certain corporate formalities which are beyond the Committee's purview to address in this opinion.
14 This opinion does not involve a derivative action, in which a shareholder is bringing an action against the corporation and its controlling constituents for the benefit of the corporation. (See, e.g., Jacuzzi v. Jacuzzi Bros. (1963) 218 Cal.App.2d 24 [32 Cal.Rptr. 188]; In re Oracle Securities Litigation (N.D. Ca. 1993) 829 F.Supp. 1176; Bell Atlantic v. Bolger (3d Cir. 1993) 2 F.3d 1304; Murphy v. Washington American League Baseball Club (D.C. Cir. 1963) 324 F.2d 394; Messing v. FDI, Inc. (D.N.J. 1977) 439 F. Supp. 776; Hicks v. Edwards (Wash.App. 1994) 876 P.2d 953; In re Kinsey (Ore. 1983) 600 P.2d 660; and Robinson v. Snell's Limbs and Braces (La.App. 1989) 538 So.2d 1045.) (See also Forrest v. Baeza (1997) 58 Cal.App.4th 65 [67 Cal.Rptr.2d 857], a derivative action case in which the first district court criticized and declined to follow its earlier opinion in Jacuzzi.) In particular, the Forrest court made the following observation:
Clearly, under rule 3-600, the Forrests could not consent to representation on behalf of the corporations in their capacity as directors of the corporations. In the circumstances here, where the only shareholders of the corporations are also directors involved in the controversy, to allow the shareholders to consent on behalf of the corporation would render rule 3-600 meaningless.
Although the court's application of rule 3-600 appears at odds with the Committee's analysis in this opinion, joint representation of a corporation and one or more constituents in derivative actions involves different policy considerations which are beyond the scope of this opinion.
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