THE U.S. LAWYER'S COMMON LAW AND STATUTORY OBLIGATIONS: AN INSIDE COUNSEL'S PERSPECTIVE

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 1
(Apr 2007)
CHAPTER 7C
THE U.S. LAWYER'S COMMON LAW AND STATUTORY OBLIGATIONS: AN INSIDE COUNSEL'S PERSPECTIVE
Deborah J. Friedman ^*
Brian J. Boonstra
Nicole M. Larsen
Davis Graham & Stubbs LLP
Denver, Colorado

Introduction

The role of inside counsel is critical to the success of any large organization. This is especially true for multinational organizations in highly regulated industries, such as the mining and oil and gas industries. Inside counsel, particularly the company's general counsel, is responsible for promoting a culture of compliance with law, overseeing certain aspects of regulatory compliance in the various jurisdictions in which the company operates, advising senior management and the board of directors on their legal obligations and supervising the activities of inside and outside legal counsel throughout the world. Moreover, inside counsel frequently has a seat at the management table and provides her expertise on matters which are not strictly legal in nature.

Inside lawyers, of course, are in one sense no different from other employees. They are subject to their employer's various policies and procedures as well as the many laws and regulations that govern the conduct of employees generally. In addition to these requirements, however, inside counsel, like all other attorneys, must fulfill their legal and business responsibilities within a patchwork of additional requirements, including codes of professional responsibility, common law doctrines governing the attorney-client relationship and statutory obligations pertaining solely to the conduct of attorneys.

The rules governing the conduct of U.S. lawyers, even though not directly applicable to the conduct of non-U.S. lawyers operating in foreign jurisdictions, will nonetheless impact the ways that U.S.-based clients interact with non-U.S. lawyers, and the ways that both U.S. and non-U.S. lawyers interact with locally domiciled clients that are subsidiaries of U.S. based companies. This is particularly true if the client or client's direct or indirect parent is publicly traded on a U.S. stock exchange or otherwise subject to the regulations of the U.S. Securities and Exchange Commission ("SEC"). A better understanding of the scope and breadth of rules governing the conduct of U.S. attorneys will assist U.S. lawyers and non-U.S. lawyers to work as an effective team in their common representation of U.S.-based multinational organizations.

This article provides a practical discussion of inside counsel's roles and responsibilities in light of the rules governing the conduct of U.S. lawyers. It is written primarily for non-U.S. lawyers, or others unfamiliar with the rules governing the conduct of U.S. lawyers and how those rules affect certain policies and procedures within an organization. Although this article focuses

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primarily on the role of inside counsel in a U.S.-based corporation, many of the principles described also govern the roles of outside counsel.

The first part of this article discusses the role of U.S. inside counsel generally, and provides certain guidelines or "best practices" which should be implemented to enhance the ability of inside counsel to promote a corporate culture of compliance with law and fulfill their legal and ethical responsibilities. These guidelines address such matters as the structure of the internal legal function, protection of the confidentiality of attorney-client communications and proper reporting relationships with senior management. Although the specific best practices discussed here are motivated by U.S. legal considerations, many of these practices will be implemented by U.S. based general counsel on a company-wide basis and will affect all inside and outside legal counsel for the company and its worldwide subsidiaries.

The second part of this article describes the unique and complex issues that inside counsel face in connection with the unpleasant and difficult challenge of conducting an internal investigation. These issues include the ethical and statutory obligations of U.S. lawyers when confronted with clear evidence of corporate wrongdoing, which lawyers should conduct the investigation, and ethical obligations concerning the conduct of employee interviews. In light of the reach of certain U.S. statutes, such as the Foreign Corrupt Practices Act of 1977,¹ it is likely that non-U.S. counsel will at some point participate with U.S. counsel to conduct an investigation of alleged misconduct outside the United States.

I. Best Practices for Inside Counsel

The Client is the Company

The general counsel faces the unique challenge of serving as a "watchdog" for legal compliance on the one hand, and maintaining close, open relationships with senior management on the other. The SEC has made clear its expectations that the general counsel play an essential leadership role in promoting a corporate culture of compliance with the law and ethical standards,² including accurate public disclosure. The Sarbanes-Oxley Act of 2002 emphasizes the central role of general counsel in requiring "up the ladder" reporting of material violations of securities laws.³ In many respects, the general counsel plays an essential role as guardian of the company's corporate reputation.⁴

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At the same time, in order to identify issues and provide effective and timely counsel, the general counsel must have knowledge on a current basis regarding developments in and affecting the company's business that can result only from close working relationships with the company's senior management and a strong understanding of the inner workings of the company.

The New York City Bar Association Task Force Report summarized this understanding as follows:

The SEC has made clear its expectations that the General Counsel play an essential leadership role in promoting an appropriate "tone at the top" or corporate culture to support rigorous compliance with the law.... There is an inherent tension in the role of the General Counsel and other internal lawyers that must be recognized and managed. To be effective, the General Counsel and his top lieutenants must maintain a close, open relationship with the CEO and other senior executives, and have a thorough understanding of the client's business and other objectives. To be "welcomed in," these high-ranking legal officers must be seen as trusted advisors, partners to the business and advocates for the corporation. If a culture is promoted in which they are seen only as the enforcers of the law, the General Counsel and other senior internal lawyers risk creating "an atmosphere of adversity, or at least arm's length dealing, between the lawyer and the corporate client's senior executive officers that is inimical to the lawyer's essential role as a counselor promoting the corporation's compliance with the law." The tension, in short, is "between giving independent judgment and advice and securing the trust and confidence" of management and the Board.⁵

In balancing these conflicting roles, the general counsel and other inside counsel must recognize that the client to whom their duties are always owed is the company, not the management or the board. It is important for the general counsel to have sufficient status and independence within the company to deal with situations where interests of the company may not align with individual desires of senior management or the board.⁶ The general counsel must be aware of conduct by management that is in conflict with the best interest of the company, as such conflicts may require a report to the board and other action by the general counsel. The general counsel must establish a delicate balance between close, open relationships with management and promoting strict compliance with the law.⁷

To achieve this balance, it is important for the general counsel to act with personal integrity and to be forthright in addressing difficult issues. The general counsel should be approachable. A general counsel that is viewed strictly as an enforcement officer may create an atmosphere that prevents employees and officers facing legal or ethical issues from approaching her.⁸ A general counsel that wields significant power must use that power judiciously.

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The general counsel should conduct training for other inside lawyers to help reinforce that the client is the company and to educate them as to how to recognize and deal with conflicts and difficult situations in which the interests of the company may differ from those of management.

Structure and Reporting Relationship of Inside Counsel

A strong internal legal function can increase the efficiency and likelihood of corporate compliance with the law and ethical standards. To be effective, the general counsel and other inside attorneys should have well established reporting relationships and roles with respect to compliance matters that are supported by the board of directors.

The general counsel should be a member of senior management with regular access to other members of senior management and the board. The general counsel's role should be defined to include identifying legal risks and issues in business, contractual and regulatory areas and ensuring that those risks are dealt with appropriately by persons at the proper level within the company. She should report to the chief executive officer or another of the highest ranking company executives.⁹ The general counsel should not report to the chief financial officer, due to their respective roles in financial reporting and obligations regarding public disclosure. The general counsel should participate in meetings of committees of senior managers and other groups at which issues of legal or ethical practices or compliance are likely to arise, or where significant operational, financial, accounting or strategic matters are to be...