The Lawyer as Director

By Robert L. Kehr, Kehr, Schiff & Crane, LLP

Robert L. Kehr is a principal in Kehr, Schiff & Crane, LLP, in Los Angeles.  He was a member of the Commission for the Revision of the Rules of Professional Conduct, a former Chair of the State Bar Standing Committee on Professional Responsibility and Conduct and of the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee.  He is an adjunct professor at Loyal Law School. The opinions expressed are his own.

Lawyers sometimes are asked to serve as directors of for-profit and nonprofit corporations. Most commentary on this situation addresses a lawyer's service as a director while the lawyer or the lawyer's firm at the same time acts as the corporation's lawyer.[1] This article discusses the distinct topic of the lawyer as director of a corporation when there is no lawyer-client relationship.[2]

There are several understandable and legitimate reasons why a lawyer might find it attractive to serve on a non-client's board. These include the possibility of direct financial benefit from board compensation, the opportunity to take advantage of directors' stock purchase rights, reputational enhancement, and the potential to develop relationships with other directors who might make client referrals. A lawyer might obtain satisfaction from seeing a board seat as a sign of professional accomplishment and standing. Board service might broaden the lawyer's experience by exposing the lawyer to a client's perspective and might educate the lawyer about a particular area of commerce. Nonprofit board membership would afford the lawyer a community service opportunity, and whether the corporation is for-profit or nonprofit, a senior lawyer might see board service as an opportunity to slow down and transition toward retirement.

Despite these possible rewards, board service involves risks that should cause a lawyer to consider carefully whether and how to serve as a director. Lawyers should be alert to three key areas of concern:

1) Unintended lawyer-client relationships. An organization might recognize that a director with the background and knowledge of an experienced lawyer could improve the board's deliberations. This makes it is easy to imagine corporate executives and other directors turning to the lawyer-director for advice on legal questions, or the lawyer volunteering suggestions that others might see as legal opinion. When this happens there is a risk that others will think the comments amount to legal assistance, and that there is a lawyer-client relationship with the organization, with other directors or executives, or both. Thus, a lawyer-director must remain aware that a lawyer-client relationship is created by a person's objectively reasonable reliance on a lawyer to provide legal advice or representation: "An attorney-client relationship, together with all the attendant duties a lawyer owes a client, including the duty of confidentiality, may be created by contract, either express or implied. In the case of an implied contract, the key inquiry is whether the speaker's belief that such a relationship was formed has been reasonably induced by the representations or conduct of the attorney."[3] This reliance does not require a formal engagement, the payment of legal fees, or any other particular step: "A professional relationship is not dependent upon the payment of fees nor…the execution of a formal contract."[4] While an oral or written lawyer-client agreement normally is interpreted by the usual principles of contract interpretation,[5] the lawyer bears the burden of any uncertainty. As stated by one court in typical language: "'The general rule is that in construing contracts between attorneys and clients concerning compensation if there is any ambiguity as to the intent of the parties that construction should be adopted which is most favorable to the client.'"[6] A lawyer-director therefore should consider protective steps such as announcing his or her role at the start of each board meeting and having this included in meeting minutes, declining to answer legal questions with an explanation of why, and referring those questions to corporate counsel.

2) Conflicts of interest. Even when there is no lawyer-client relationship with the corporation, a lawyer's board service could create conflicts of interest with regard to the lawyer's (and the firm's) other relationships. The reason for this is, as stated in California State Bar Formal Opinion 1981-63: "[A] conflict of interest may arise from an attorney's relationship with a nonclient. Such a conflict of interest may arise [1] where an attorney's relationship with a person or entity creates an expectation that the attorney owes a duty of fidelity. It may also arise [2] where the attorney has acquired confidential information in the course of such a relationship which will be, or may appear to the person or entity to be, useful in the attorney's representation in an action on behalf of a client."[7] A recent case labeled this a "confidential nonclient relationship."[8]

3) Personal liability and insurance. A lawyer engaged in any activity outside the practice of law always should be aware that he or she is not acting as a lawyer. One of the consequences of this is that the lawyer's malpractice insurance policy might not provide protection for board service: "The law firm's liability policy will generally cover only claims arising out of the performance of professional services as a lawyer and may contain a specific exclusion with respect to liability arising out of the lawyer's capacity or activities as corporate director or as corporate officer."[9] Because malpractice carriers are concerned about the personal liability insureds might incur as a result of board service, some applications and renewals for professional liability insurance require information about the lawyer's activities as a corporate director. A lawyer-director therefore should be concerned that the corporation provides sufficient directors and officers liability insurance (D&O) and a robust indemnification agreement.

There can be important personal and professional benefits to a lawyer who serves as a non-client's director, but doing so also carries significant risks for the lawyer. The easy familiarity of board members' personal relationships could distract the lawyer-director, who always should be vigilant that his or her board position is not the same as that of other directors.

[1] See, e.g., Cox, The Paradoxical Corporate and Securities Law Implications of Counsel Serving on the Client's Board, 80 Wash. U. L.Q. 541, 567 (2002); Smith, Sitting On vs. Sitting In On Your Client's Board of Directors, 15 Geo. J. Legal Ethics 597, 612 (2002); Zaloom, Legal Status of the Lawyer-Director: Avoiding Ethical Misconduct, 8 U. Miami Bus. L. Rev. 229 (2000); and Straub, ABA Task Force Misses The Mark: Attorneys Should not Be Discouraged From Serving On their Corporate Clients' Board of Directors, 25 Del. J. Corp. L. 261 (2000).

[2] There are variations. See, e.g., Smoke, Between a Rock and a Hard Place: Attorney as Corporate Director and Shareholder's Attorney, 21 J. Legal Prof. 277 (1996).

[3] Cal. State Bar Formal Op. 2003-161. See also, e.g., Sky Valley Limited Partnership v. ATX Sky Valley, Ltd. 150 F.R.D. 648, 651-52 (N.D. Cal. 1993); Zenith Insurance Co. v. Cozen O'Connor, 148 Cal.App.4th 998, 1010 (2007); and Responsible Citizens v. Superior Court, 16 Cal. App. 4th 1717, 1733 (1993).

[4] See, e.g., Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1317 (7th Cir. 1978) (footnotes omitted) and Whatley v. Meyer Wilson Co., LPA 2017 Bankr. LEXIS 3903, *12 (E.D. Cal. 2017) (based on California law).

[5] Banning Ranch Conservancy v. Superior Court, 193 Cal. App.4th 903, 912-13 (2011).

[6] Lane v. Wilkins, 229 Cal. App. 2d 315, 323 (1964).

[7] Relied on by William H. Raley Co. v. Superior Court, 149 Cal. App. 3d 1042, 1047 (1983) (disqualifying firm whose partner served on non-client's board).

[8] Lynn v. George, 15 Cal. App. 5th 630, 634, 638 (2017) (finding no confidential non-client relationship under the facts presented).

[9] Beveridge, Recent Developments in Corporate Law and Practice, 24 Okla. City U. L. Rev. 133, 143-44 (1999).