ethical issues for the corporate lawyer

ETHICAL ISSUES FOR THE CORPORATE LAWYER

THE PRACTICING LAW INSTITUTE:HOT TOPICS IN MERGERS & ACQUISITIONS 2015

October 2, 2015

Savaria B. Harris, Partner, DLA Piper LLP (US)

Agenda

Recognizing conflicts of interest in time

Obligations of confidentiality

Issues of candor in negotiations

Useful Resources

ABA Model Rules of Professional Conduct

State Bar Rules of Professional Conduct

Court opinions

Ethics opinions of bar associations/committees

Recognizing Conflicts of Interest in Time

Starting with the rules – Rule 1.7 “ (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the

representation involves a concurrent conflict of interest. A concurrent conflict ofinterest exists if: (1) the representation of one client will be directly adverse toanother client; or (2) there is a significant risk that the representation of one ormore clients will be materially limited by the lawyer's responsibilities to anotherclient, a former client or a third person or by a personal interest of the lawyer; (b)Notwithstanding the existence of a concurrent conflict of interest under paragraph(a), a lawyer may represent a client if: (1) the lawyer reasonably believes that thelawyer will be able to provide competent and diligent representation to eachaffected client; (2) the representation is not prohibited by law; (3) the representationdoes not involve the assertion of a claim by one client against another clientrepresented by the lawyer in the same litigation or other proceeding before atribunal; and (4) each affected client gives informed consent, confirmed in writing.”

Recognizing Conflicts of Interest in Time (cont’d)

What constitutes a conflict of interest and what do I do about it? A conflict of interest exists where the interests of an attorney’s clients actually or

potentially conflict with each other, and the attorney’s duty on behalf of one clientrequires the attorney to take (or omit to take) action which is or may be harmful tothe interests of one or more other clients of the attorney.

An unaddressed conflict may result in a situation where an attorney’s zealousnessmay be diminished, or his or her judgment may be impaired or duty of loyaltydivided. Generally, failure to resolve or otherwise address a conflict of interest inaccordance with the rules regulating attorney conduct could result in disqualificationof the attorney in one or both conflicted matters, and may also result in malpracticeliability, fee disallowance or disgorgement, sanctions, or (for willful breaches)discipline by the bar.


What constitutes a conflict of interest and what do I do about it? (cont’d) Most conflicts of interest arise in a M&A context when the lawyer represents

the seller of a business. Scenario: in a stock sale, the lawyer represents the selling shareholders, each of whom may

have different (i.e. conflicting) interests in a transaction. Therefore, the question is whetherthe lawyer may represent all of the shareholders in light of their different interests. Issues:

Majority Shareholders May Be Receiving More Consideration Guidance

A lawyer may have a conflict and need to advise for the use of other counsel if “(2)there is a significant risk that the representation of one or more clients will bematerially limited by the lawyer's responsibilities to another client, a former clientor a third person or by a personal interest of the lawyer”


Who exactly is my client? Scenario 2: Another common scenario is when a lawyer has representing

a corporation as its general counsel for a number of years. Shareholdersnow seek to sell the company and the sell is structured as a stock sale.The buyer requires, as a condition of closing, the target corporation(owned by the selling shareholders) to enter into employment agreementswith the target corporation’s senior management, some of whom are alsoselling shareholders. The lawyer is preparing agreements between thetarget corporation and the selling shareholders. Issue: The lawyer is arguably representing the buyer and the selling

shareholders in this situation.


Who exactly is my client? (cont’d) Scenario 3 – Buyer side: The lawyer represents the corporation. The

corporation’s managers, who are also shareholders, seek to buy theshares of other shareholders. May the lawyer represent the shareholders(buyers), but not the shareholders of the corporate client that he or shehas represented for several years? Issue: The lawyer’s representation of one client is arguably directly adverse to

the representation of another client.


Who exactly is my client? (cont’d) Guidance: “(b) Notwithstanding the existence of a concurrent conflict of interest

under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonablybelieves that the lawyer will be able to provide competent and diligentrepresentation to each affected client; (2) the representation is not prohibited bylaw; (3) the representation does not involve the assertion of a claim by one clientagainst another client represented by the lawyer in the same litigation or otherproceeding before a tribunal; and (4) each affected client gives informed consent,confirmed in writing.” Informed Consent: Each client is made aware of the relevant circumstances and of the

material and reasonably foreseeable ways that the conflict could have adverse effects onthe interests of the client. When representation of multiple clients is undertaken in a singlematter, the information must include the implications of common representation including,loyalty, confidentiality and privilege.


What about former clients? Returning to our original M&A example, the attorney may be disqualified

from representing Buyer if he or she has previously represented Seller inmatters relating to the business being sold (especially if, through that priorengagement, the attorney obtained confidential information that Buyerwould find material), unless Seller consents. On the other hand, unlikesituations involving current and potential clients, the attorney may proceedwith a new engagement adverse to a former client (with no consentrequired from the former client) where that engagement does not bear a“substantial relationship” to the prior engagement and the former clienthas no reasonable expectation of confidentiality.


What about former clients? (cont’d) Guidance: The need for consent cannot be obviated by terminating the representation of a

current client (to turn that client into a former client) in order to avoid theapplication of certain requirements of the state bar and trigger the less onerous“substantial relationship” rules applicable to conflicts involving former clients.26Further, dumping a client to avoid a conflict with a new more attractiverepresentation may itself be a breach of the attorney’s duty of loyalty to thatclient. Thus, if the lawyer decides to represent the clients, then a letter must be sent to

the clients to advise them of the conflicts of interest and to obtain their informedconsent to the representation per RPC 1.7.

Obligations of Confidentiality

Over the past several years, a fairly significant body of case law hasdeveloped governing the treatment of the attorney-client privilege inthe mergers and acquisitions context.

Issues: First is the issue of when, if ever, communications between parties to a

potential merger and their counsel are privileged, and when, if ever,parties to a potential merger can share privileged documents withoutwaiving the privilege.

Obligations of Confidentiality (cont’d)

Issues (cont’d) Scenario 4: A buyer insists on discussing the target company’s legal

exposure arising from pending and potential litigation and/or regulatoryenforcement actions. Due diligence materials requested by buyers caninclude, but are not limited to, potentially sensitive legal analysisprepared by the target company’s attorneys. Issue: The disclosure of otherwise privileged communications or documents

to a third party may waive any claim of attorney-client privilege. Opposingparties in later litigation might seek production of disclosed information on thegrounds that the attorney-client privilege has been waived.


Issues (cont’d) Guidance: Courts have found, however, that in certain circumstances, parties

to a transaction share a “common interest,” and have created an exceptionto the general waiver rule that protects otherwise privileged communicationsshared between prospective parties to a merger and their attorneys. Most courts agree that parties to a merger or sale of assets must share a legal,

rather than a purely commercial, “common interest” at the time the information isshared in order for no waiver of the privilege to take place. However, there is broaddisagreement on what constitutes a “shared legal interest,” and the extent to which itmust be shared by the parties.


Determinations of whether a “common interest” is adequately “legal” or adequately“shared” by the parties are often highly contextual. When, for example, the partiesare still in early stages of negotiations, their interests are less aligned than theywould be after a merger agreement has been signed, and closing of the transactionis more certain. Courts have made clear that the timing of the disclosure of theprivileged information and the certainty of the transaction will impact a determinationof whether the common interest doctrine preserves privilege or not. The lack of a signed merger agreement, or the existence of multiple suitors will likely

weigh heavily against a finding that disclosure of privileged information did not resultin a waiver. See Nidec, 249 F.R.D. at 579. In some cases, courts have required asigned merger agreement before finding the parties’ interests sufficiently commonfor the doctrine to apply. See In re JP Morgan Chase & Co. Securities Litigation,2007 U.S. Dist. LEXIS 60095, at *15; see generally Katz v. AT&T Corp., 191 F.R.D.433 (E.D. Pa. 2000).

Finally, courts have held that a party could not claim privilege over documents sentto the other party’s investment banker, since any shared interest impacting thebanker would be a purely financial interest, not a legal one. See, e.g., Blanchard v.Edgemark Financial Corp., 192 F.R.D. 233, 237 (N.D. Ill. 2000).


Issues (cont’d) Scenario 5: Separate from the issue of whether communications and documents

exchanged during the course of negotiations will be considered privileged,parties to a potential merger must also consider how the acquired company’sprivileged information will be handled post-acquisition. In Commodity FuturesTrading Commission v. Weintraub, 471 U.S. 343, 349 (1985), the U.S. SupremeCourt recognized the general rule that “when control of a corporation passes tonew management, the authority to assert and waive the corporation’s attorney-client privilege passes as well.” In the years following the Commodity Futuresdecision, however, courts have gradually stepped back from such a categoricalposition. Sellers are increasingly insisting on including contractual provisions inwhich the seller “reserves” control over the privilege post-closing, at least forcommunications involving the transaction itself.


Issue: While such provisions are commonplace, they may still presentproblems if the communications in question are relevant to any post-closinglitigation they face. Guidance: NY Approach - Some courts have found that while a seller does transfer its privilege

to the buyer on most subjects, it retains control of premerger privilegedcommunications that relate to the merger and its negotiations.

DE Approach – Some courts have also been hesitant to acknowledge a full transferof control over privileged communications when a sale is not a complete merger, buta sale for all or substantially all of the company’s assets. Great Hill Equity Partners IV LP v. SIG Growth Equity Fund I LLLP, 80 A.3d

155 (Del. Ch. Nov. 15, 2013) - the privilege passed to the survivingcorporation because the parties did not carve it out of the deal, and the courtfound it particularly instructive that the seller did nothing to preserve theprivilege, leaving the documents in question in the possession of the acquiringcompany for a year before taking any action to recover them.


Recommendations Pay close attention to the law that might govern any dispute over privilege. As noted above, different

jurisdictions have treated these issues in different ways, and whether certain communications areconsidered privileged or whether the privilege would be deemed waived by certain disclosures mightdepend on what law applies.

Assume that any communications made prior to the signing of a merger agreement, any communicationsmade directly to the other party (without attorneys copied), or communications shared with the other party’sinvestment banker will not be covered by the attorney-client privilege as extended by the common-interestdoctrine.

Delay as long as practicable the exchange of any sensitive legal materials, preferably until after the mergeragreement has been signed and there is a reasonable certainty of the transaction closing. Even then,parties should limit the number of persons receiving access to such information, and take appropriate actionto ensure that it is labeled and treated as confidential. Proceeding with these considerations in mind willreduce the risk of any inadvertent waiver.

Carve out a clear understanding of who will hold the privilege for certain documents post-closing, andclearly define the scope of any retention of control by the seller and its controlling shareholders. In the eventthe seller demands a contractual retention of control as envisioned in Great Hill, buyers would be well-advised to limit the scope of such provision to documents relating to the negotiation of the transaction itself,and to negotiate access to any such documents if they become relevant to post-closing litigation with thirdparties (such as a shareholder dispute or a dispute between parties other than the buyer and the seller).The buyer should also considering negotiating restrictions on the seller’s ability to disclose privilegedcommunications to any third party.

Issues of Candor in Negotiations

Model Rule of Professional Conduct: Rule 3.3--Candor to Tribunal (a) A lawyer shall not knowingly: 1) Make a false statement of fact or law to a tribunal or fail to

correct a false statement of material fact or law previously made to the tribunal by the lawyer,unless correction would require disclosure of information that is prohibited by Rule 1.6; (2)Counsel or assist a client to engage in conduct that the lawyer knows is criminal or fraudulent,but a lawyer may discuss the legal consequences of any proposed course of conduct with aclient and may counsel or assist a client to make a good-faith effort to determine the validity,scope, meaning, or application of the law; (3) Fail to disclose to the tribunal legal authority in thecontrolling jurisdiction not disclosed by opposing counsel and known to the lawyer to bedispositive of a question at issue and directly adverse to the position of the client; or (4) Offerevidence that the lawyer knows to be false, except as provided in paragraph (b). A lawyer mayrefuse to offer evidence, other than the testimony of a defendant in a criminal matter, that thelawyer reasonably believes is false.

Issues of Candor in Negotiations (cont’d)

Model Rule of Professional Conduct: Rule 3.3--Candor to Tribunal (cont’d) Tribunal is defined under RPC 1.01 as “a court, an arbitrator in a binding

arbitration proceeding or a legislative body, administrative agency or otherbody acting in an adjudicative capacity. A legislative body, administrativeagency or other body acts in an adjudicative capacity when a neutralofficial, after the presentation of evidence or legal argument by a party orparties, will render a binding legal judgment directly affecting a party'sinterests in a particular matter.”


The primary non-tribunal forms of ADR are negotiation andmediation. Model Rule of Professional Conduct Rule 4.1, “Truthfulness in Statements

to Others” In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is

necessary to avoid assisting a criminal or fraudulent act by a client, unlessdisclosure is prohibited by Rule 1.6.


Model Rule 1.6: Disclosing A Client’s Confidential Information In Cases Of Client Misconduct Intended Fraud: The lawyer “reasonably believes” it necessary to prevent a fraud, which is

“reasonably certain” to result in “substantial injury” to another’s property or financial interestsand for which the client has used or is using the lawyer’s services.

Intended Crime: The lawyer “reasonably believes” it necessary to prevent a crime, which is“reasonably certain” to result in “substantial injury” to another’s property or financial interestsand for which the client has used or is using the lawyer's services.

Past Crime or Fraud: The lawyer “reasonably believes” it necessary “to prevent, mitigate orrectify substantial injury” to another’s financial interests or property, which is “reasonablycertain” to occur and for which the client has used or is using the lawyer's services.


Breaking it Down Knowingly - According to Model Rule 1.0(f), “knowingly” requires “actual knowledge of

the fact in question,” which “may be inferred from circumstances.” This is not a “shouldhave known” standard, and the case law tends to agree. For example, in Brown v.County of Genesee,21 defense counsel did not know but only “believed it probable” thatplaintiff and her lawyer were mistaken concerning the computation of damages in theemployment discrimination case.

Material - The “Materiality” Annotations to the Model Rules, provide the following critical guidance: A statement is material for purposes of Rule 4.1(a) if it could have influenced the hearer. See In re Merkel, 138 P.3d 847 (Or. 2006) (information is material if it “would or could have influenced the decision-making process significantly”). Whether it actually did influence the hearer is beside the point. See In re Winthrop, 848 N.E.2d 961 (Ill. 2006) (lawyer falsely told social service agency’s lawyer that court order not required to freeze client’s assets to protect them from client’s malfeasing agent; not relevant that false statement had no effect on agency lawyer’s conduct).


Breaking it Down (cont’d) Fact - Whether a particular statement should be regarded as one of fact can depend on

the circumstances. Under generally accepted conventions in negotiation, certain typesof statements ordinarily are not taken as statements of material fact. Estimates of priceor value placed on the subject of a transaction and a party’s intentions as to anacceptable settlement of a claim are ordinarily in this category.


Commentary The first comment to the Model Rule states: “[1] A lawyer is required to be truthful when

dealing with others on a client’s behalf, but generally has no affirmative duty toinform an opposing party of relevant facts. .”

The commentary following Model Rule 4.1 makes clear the level of candor it demands ismuch less stringent than Model Rule 3.3. Unlike an attorney participating in arbitration, anegotiating attorney is not required to inform the opposing party of relevant facts andmay misrepresent estimations of price or value and may exaggerate settlement amountshis client finds acceptable.


Commentary (cont’d) Comment [2] to Model Rule 3.3: “[2] This Rule sets forth the special duties of lawyers

as officers of the court to avoid conduct that undermines the integrity of theadjudicative process. A lawyer acting as an advocate in an adjudicative proceedinghas an obligation to present the client’s case with persuasive force. Performance ofthat duty while maintaining confidences of the client, however, is qualified by theadvocate’s duty of candor to the tribunal. Consequently, although a lawyer in anadversary proceeding is not required to present an impartial exposition of the law orto vouch for the evidence submitted in a cause, the lawyer must not allow thetribunal to be misled by false statements of law or fact or evidence that the lawyerknows to be false.”

The distinction between “truthfulness” and “candor” appears to turn on whetherthe integrity of the judicial system itself is imperiled by the conduct.

A battle of wits with opposing counsel, with no one else around, over how much a casewill settle for or how much settlement authority one has, does not appear to imperil thesystem’s integrity.


Commentary (cont’d) These allowances align with the significant amount to which unassisted

negotiations retain adversarial characteristics. Unassisted negotiation is a process in which “parties’ mutual distrust of one another” is acute and inherent, and attorneys often lack “concern with both the opponent’s situation and the overall social effect of a given result. Thus, a reformulation of the level of candor should remain informed by generally accepted negotiation conventions, but should seek to draw bright lines as to the scope of permissible deception

Contact Information

28

Savaria B. [email protected] Avenue of the Americas, New York, New York, 10020-1104, United StatesT: +1 212 335 4553 F: +1 212 335 4501

Savaria Harris an experienced litigator with trials in state and federal courts as well aswith government and internal investigations in the white collar context.

Her practice centers on providing clients with an integrated approach to addressingfraud, whistleblower and government actions under the False Claims Act and its localequivalents. She is experienced in risk assessments, internal investigations, ethics andcompliance training, as well as litigation and trial representation. In addition to herpractice, Savaria is an adjunct professor of Workplace Ethics at Georgetown University,a member of the Advisory Council for the Association of Certified Fraud Examiners anda member of the NYU Program on Corporate Compliance and Enforcement.

ethical issues for the corporate lawyer

Documents