Is it safe to serve on a client’s board of directors?
It can be very rewarding, both personally and financially, to be asked to serve on a client’s board of directors. It’s also easy to understand why a client might make the request: the lawyer may have worked closely with the corporation’s founders to establish the company, and will likely have a solid understanding of the corporation’s objectives, the marketplace challenges it faces, and its relationships with industry partners, suppliers, customers and others.
However, sitting on a client’s board (including a non-profit’s board) can be problematic for a number of reasons from both the lawyer’s and the corporate client’s perspective. Here are some of the problems that can arise, and suggestions for avoiding them.
Potential for conflicts of interest
Conflicts are a common source of claims against lawyer-directors. A lawyer who advises not only the corporation but also another party – for example, an individual corporate officer or employee whose interests may diverge from those of the corporation – is in a conflict position. The following scenarios may help to highlight some of the possible conflicts that arise in these situations:
- lawyer acts for individual founders of the corporation, then later the corporation;
- lawyer advises more than one shareholder in a closely-held corporation (for example, family members);
- lawyer sits on the board of a merged corporation after having acted for a predecessor corporation;
- lawyer advises both the corporation and individuals within the corporation, when these parties’ interests diverge; or
- lawyer sits on the board of a corporation while having a financial or other interest in a party with which the corporation does business.
Since conflicts tend to surprise the unaware, a lawyer’s best defence is to continually ask the question “who is my client?” If the answer is ambiguous, the lawyer cannot afford to ignore his or her instincts and must terminate the working relationship with one (or both) clients. Unfortunately, it may then be too late to undo the damage. Conflicts can arise at any point in a working relationship and frequently develop after unanticipated events, making this issue fairly intractable (and thus dangerous) from a liability perspective.
Potential for loss of solicitor-client privilege
Sometimes a lawyer is invited to sit on a client’s board to be available to provide legal advice about company matters. While this arrangement is convenient, it does not reflect the traditional context for the provision of professional legal services. The duties and role of a corporate director and the director’s responsibility to the shareholders do not overlap neatly with the duties of a lawyer to a client. A lawyer sitting on a corporate board will be expected to consider non-legal issues and to comment on business directions and decisions.
Where an individual provides legal advice, business advice, and mixed legal-and-business advice to a board or to its members, the statements made may NOT meet the established legal tests for solicitor-client privilege. While a lawyer can attempt to set up the conditions for the client’s later assertion of privilege (for example by saying, on the record, something like “speaking, now, in my capacity as legal counsel”), that attempt may not always be determinative, and the client may lose the benefit of privilege for certain communications.
A lawyer who chooses to act as a director can attempt to distinguish legal advice from business discussions by causing the record of meetings to reflect the distinction. The lawyer might also, if asked for legal advice during board proceedings, advise that he or she “will get back to” the asker, and then do so in a context more consistent with lawyer-client communications. Neither option is foolproof, and the lawyer would do well to formally advise the client of the risk of loss of solicitor-client privilege that board participation poses.
Potential for loss of ability to represent client
Related to the foregoing is a separate risk: the risk that being a party to certain board discussions might trigger the eventual termination of the lawyer-client relationship. Consider the scenario in which board proceedings – observed by a lawyer – lead to eventual litigation. If the lawyer-director is called as a witness in those proceedings, he or she could easily become a party adverse in interest to either the company as a whole or to other individual directors. As a result, the lawyer would lose the right to represent the corporate client (and the corporation would lose its counsel).
Insurance coverage gaps
From an insurance perspective, a lawyer considering sitting on a client’s board should be aware that his or her professional indemnity insurance covers only the provision of “professional services” qua lawyer, as defined in the policy. Acting as a corporate director does not fall within the definition of professional services. Lawyers who sit on corporate boards should ensure they are covered under a directors’ and officers’ liability coverage policy, and/ or an outside directors’ liability policy.
Finally, since some firms have policies in place with respect to lawyers serving on boards, it’s important to review these, if they exist, and to ensure that you comply with the approval process.
Lawyers who choose to serve on clients’ boards may be motivated to do so by the prestige involved or for the opportunity to “give back”; however, the risks may outweigh the benefits so provided to the client. These risks are not only risks to the lawyer, but in many cases, to the client as well. Lawyers should think carefully before accepting an invitation to serve on a client’s board of directors.
This article by Nora Rock (corporate and policy writer at LAWPRO) originally appeared in the May 16, 2014 issue of The Lawyers Weekly published by LexisNexis Canada Inc.
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