Lawyers as directors: dual role has its risks: enter into this relationship with your eyes wide open.

• Author: Hugener, Janice Rourke
• Position: RISK MATTERS

ATTORNEY SERVICE on a law firm client's board of directors is becoming increasingly common, benefiting both attorneys and the companies they serve. The company brings new perspective and talent into the boardroom, makes counsel more familiar with the business, and gains legal insight on a real-time basis. Attorneys are honored to be asked, better understand their client, and typically enjoy deeper client relationships from the work. However, both parties should have their eyes wide open when entering into this relationship.

A lawyer serving as an outside director has the same duty of care as any other outside director, and the same exposure to liability. The lawyer's skill and knowledge must be brought into the boardroom in the interest of the corporation. Failure to do so exposes the lawyer-director to liability for breach of the duty of care. As such, lawyer-directors must inform themselves about the company's business and any transaction at issue and, where the occasion arises, must advise fellow board members about the legality and legal implications, as well as the wisdom, of a transaction. Some of this advice may be legal, and some may be business advice. It is important that the parties know the distinction between the two.

In commenting on the Model Rules of Professional Conduct, American Bar Association (ABA) Formal Opinion 98410 makes an important distinction between giving business advice (voicing an opinion on the wisdom of a proposed transaction such as acquiring a company) and giving legal advice, either to other directors at board meetings or to internal management. No attorney-client privilege attaches to business advice, but the attorney-client privilege can be preserved if carefully limited to legal advice. The line between business advice and legal advice is often not clear; hence, to protect the privilege in important transactions, the more prudent course is to obtain the advice of outside counsel.

The lawyer-director also owes a duty of loyalty to the company, just like any other director. Consequently, a lawyer-director cannot place the law firm's interests before those of the company, and must avoid conflicts of interest.

For example, while the lawyer-director's firm is not disqualified from acting as general counsel for the company or doing legal work for the corporation, the lawyer-director should abstain from participating in the consideration of law firms to be engaged for legal advice to the company. Confidential...