Chapter 1 - § 1.4 • LAWYERS AS DIRECTORS

• Jurisdiction: Colorado

§ 1.4 • LAWYERS AS DIRECTORS

§ 1.4.1—Introduction

Lawyers are commonly asked to join boards of directors for various entities, including the boards of their clients or prospective clients. Although the Colorado Rules of Professional Conduct do not prohibit lawyers from serving as a director for an organizational client, there are several issues that may play a role in the lawyer's decision to accept or decline the client's invitation. As discussed below, these issues include increased risks of conflicts of interest, the potential impact on the attorney-client privilege, and whether the lawyer's malpractice insurance policy will cover advice rendered during the dual relationship.¹²¹

§ 1.4.2—Conflicts of Interest

A lawyer considering whether to serve on a client's (or prospective client's) board of directors should carefully consider actual or potential conflicts inherent in this dual relationship. As stated by the commentary to Colo. RPC 1.7:

A lawyer for a corporation or other organization who is also a member of its board of directors should determine whether the responsibilities of the two roles may conflict. The lawyer may be called upon to advise the corporation in matters involving actions of the directors. Consideration should be given to the frequency with which such situations may arise, the potential intensity of the conflict, the effect of the lawyer's resignation from the board and the possibility of the corporation's obtaining legal advice from another lawyer in such situations. If there is a material risk that the dual role will compromise the lawyer's independence of professional judgment, the lawyer should not serve as a director.

Of course, the specific issues that may arise will vary depending on the type of legal services the lawyer might provide and the nature of the organization and its business. For example, a lawyer who practices water law will likely face few potential conflicts by serving on the board of an organization that has little to no involvement with water issues, but may encounter recurring conflicts in serving on the board of an entity that depends a great deal on water usage and therefore relies heavily on the advice of water lawyers.

The ABA Ethics Committee has identified at least four potential conflict situations for a lawyer-director:

1) Representing the organization in pursuing a course of action that the lawyer, as a director, opposed;
2) Rendering advice regarding board decisions or actions in which the lawyer-director participated;
3) Participating in corporate actions or decisions that involve or affect the lawyer's law firm; and
4) Representing the organization in certain litigation matters.¹²²

Each of these situations implicates Colo. RPC 1.7(b), and therefore in each instance the lawyer-director must determine whether the lawyer's continued representation will be materially limited by the lawyer's own interests. "When the obligations or personal interests as a director are materially adverse to those of the lawyer as corporate counsel, the lawyer may not continue to serve as corporate counsel without the informed consent of the corporate client."¹²³

Representing the Organization in Undertaking an Action the Lawyer Opposed

In addition to considering Colo. RPC 1.7(b), when an organization plans to do something with which the lawyer-director disagreed, the lawyer must decide whether he or she can pursue the representation with the diligence required by Colo. RPC 1.3. Of course, the reason why the lawyer opposed the proposed action is relevant. If the proposed action would otherwise violate the Rules of Professional Conduct or the law, for example, the lawyer may not ethically undertake the engagement, even disregarding conflicts of interest. In addition, the lawyer should be confident that he or she is not aiding the violation of the fiduciary duties owed the corporation or its shareholders.¹²⁴

As recognized by the ABA Ethics Committee, if the lawyer-director is not actually disqualified by Rule 1.7(b) but yet is not comfortable undertaking the representation, another lawyer in the lawyer-director's firm may undertake the representation.¹²⁵ However, if Rule 1.7(b) requires the lawyer's disqualification, the conflict will be imputed to the other lawyers in the firm under Rule 1.10(a).¹²⁶

Providing Counsel with Regard to Actions in Which the Lawyer-Director Participated

A lawyer-director must carefully consider requests to give advice regarding actions of the board in which the lawyer-director participated, because the lawyer-director will necessarily have to give advice regarding his or her own actions and decisions. This inherent conflict may impair the lawyer's independent professional judgment.¹²⁷

In addition, in these circumstances it may be difficult or impossible for the lawyer-director to seek or obtain a waiver of the conflict, because the other directors who would need to consent to the continued representation also have a personal interest in the matter.¹²⁸

Corporate Actions Affecting the Lawyer or the Lawyer's Firm

The lawyer-director may also face conflicts when the board involves itself in matters affecting the relationship between the organization and the lawyer or the lawyer's firm. This conflict may involve the lawyer directly, such as when the board evaluates the bills submitted by the lawyer's firm, or more indirectly, such as when the board considers proposed actions that may require the organization to seek additional legal counsel.

Unlike the conflicts previously discussed, which involve the lawyer's ethical duties as a lawyer, these types of conflicts arise from the lawyer-director's duty as a director. Specifically, the lawyer-director has a fiduciary duty to act in the best interests of the organization, which duty may be impaired by the lawyer's desire to defend...