ACC GC Roundtable on Ethics

Charles Dadswell, SVP & General Counsel - Illumina, Inc.

Denise Jackson, SVP, General Counsel & Corporate Secretary - AMN Healthcare, Inc.

Mike Williams, Special Counsel to the CEO - Staples.

Moderator - Scott Stanton, Partner - Morrison & Foerster

  • After Scott’s introductory remarks, we will begin by asking each panelist to describe
  • individual background (career path that led to current position)
  • your company, including what it does, where it does it, its key partners/customers and anything else that will help frame your experience and your challenges as GC
  • how your legal department is organized.

Next, we will transition into a more conceptual discussion of some of the issues addressed in the article “The Tensions, Stresses and professional Responsibilities of the Lawyer for the Corporation” as well as those highlighted in “The Top Ten Cases Involving Ethical Issues for In-house Counsel”.

  • Role of the GC
  • What role do you play in the business?
  • How much of your advice is “business advice” as differentiated from “legal advice”?
  • Softball question: Does your status as an officer of the corporation relieve you from your obligations to comply with the rules of professional responsibility?
  • How do you deal with the pressure to get deals done quickly (i.e., not be a bottleneck) but also provide sound advice?
  • If part of your role is to be the corporate “ethicist”, do you think that role may dissuade business people from keeping you fully informed?
  • Does your role as GC help you to act as a mediator/facilitator between different constituencies in the organization?
  • Do you commonly speak directly with opposing outside counsel without your outside counsel? (This goes to the question of whether it is appropriate for opposing outside counsel to speak directly to you as an in-house attorney without violating the rule prohibiting direct communications with a represented party. Please refer to “Speaking of Ethics: Contact with In-House Counsel” included with the materials.)
  • Independence: [1]
  • To whom do you report directly? Who controls your compensation and advancement?
  • Does your role as part of the business team help you be a more effective legal advisor, or does it complicate that role?
  • Do you think it’s appropriate for the lawyer to act as a “gatekeeper”? Is that consistent with youobligation to be an “advocate”?
  • Who is your client:
  • What is “the best interest of the corporation” and who gets to decide? Board, CEO, shareholders? What if they are divided? What about other “stakeholders”? What about the government? Does the public matter?
  • How do you deal with the relationships between the corporate entities in your organization? Are there situations where you have tried to keep privilege separate among the entities or to allow for separate representation in situations where the interests of the subsidiaries may diverge?
  • How do you deal with situations where an officer or director seeks legal advice from you related to their position as an officer or director? For example, what do you do if an officer requests tax advice about matters of executive compensation?
  • Do you have procedures or practices intended to segregate information that is merely “confidential” from information that is “attorney-client privileged”?

Hypothetical I

You are an attorney working in the legal department, and you are working with the CEO on the sale of one of the operating divisions of your company. Buyer prepares the initial draft of the agreement, which includes a non-competition covenant binding on your company. The non-competition covenant provides that the exclusive remedy for a breach by your company of its covenant is the return of the consideration allocated to that covenant. In the initial draft, $3M of the $5M total consideration is allocated to the non-competition covenant. After negotiations, to minimize the tax costs to your client, the buyer agrees to reduce the amount allocated to the non-competition covenant to $1, and buyer prepares a revised draft reflecting this change. The buyer fails to make any change to the remedies section – the effect of which is that the buyer’s only remedy for a breach of the covenant is $1, rendering the covenant meaningless. When you call this issue to the attention of your CEO, she instructs you to say nothing. What should you do?

Note to Panelists: Please review Formal Opinion No. 2013-189 and California Proposed Rule 4.1 included with the materials.

Hypothetical II

You are the general counsel of a public company, and you have been working hard on a significant strategic reorganization which was approved by a divided Board and is set for announcement in two days. The Chair of the Board reaches you on your cell phone, and she angrily informs you that the Wall Street Journal is publishing an article in the morning paper disclosing your company’s plans on the reorganization. The Chair says that the information in the article must have – in her judgment – been leaked by one of the dissenting board members. She instructs you to immediately engage a private investigation firm to find out which Board member made the leak so that she can “hang that person out to dry.”

Issues for Discussion in Hypothetical II:

Consider the following:

CAL. RULE 3-600(A)(same as proposed Rule 1.13 (a)):

In representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement.

CAL. RULE 3-210:

A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal. (compare proposed Rule 1.13(b) which (i) imposes a “reasonably should know” standard, (ii) adds “violation of a legal obligation” to the subject conduct and (iii) mandates reporting up the ladder)

Questions:

As the lawyer for the corporation, is it appropriate for you to take instructions from the Chair to investigate the conduct of other individual board members?

Again as the lawyer for the corporation, how do you balance the interests of the corporation (which may be harmed by the discovery of a board member who has leaked information) against the desires of the Chair to “hang that person out to dry” and, potentially, the corporation’s compliance obligations?

What are the obligations of the corporate counsel to monitor the means of the investigation?

What are the obligations of the attorney to inform the board about the investigation?

Hypothetical III

You have completed the negotiation and documentation of a purchase and sale agreement where your company is the seller. The buyer is represented by competent counsel. At the closing, the buyer delivers the closing statement and funds flow memo which contains a clear error that results in a substantial overpayment to your company. You inform your CEO of this error, and he instructs you to say nothing. What should you do?

Consider Proposed Rule 4.1: In the course ofrepreenting a client a lawyer shall not knowoingly make a false statement of a material fact or law to a third person or fail to disclose a material fact to a third person when disclosure is necessary to avoide assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by B&P cod or rule 1.6.

Note to Panelists: Please review “Lawyer’s Duty to Disclose Mistakes in Commercial Closing” included with the materials.

Hypothetical IV

The general counsel of a private company with a diverse stockholder base, who is by training a real estate lawyer, has been recently appointed to his position, which required him to move his family to a new city and state in order to obtain a significant increase in compensation and responsibility. The CEO of the company is an imperious personality with a track record for doing deals quickly and successfully. Shortly after assuming his position, the general counsel is directed to prepare a series of consulting agreements in connection with divestitures which provide for substantial payments to the CEO and other senior managers. The general counsel has no direct involvement in the negotiations, and he is not invited to the board meetings. Later, it is revealed that the consulting payments were part of a scheme by the CEO and other senior managers to siphon proceeds from the deals for their personal benefit. The general counsel received no personal benefit from the scheme.

Issues for Discussion in Hypothetical IV:

Consider the following: Cal Rule 3-600: (compare proposed Rule 1.13(b) which (i) imposes a “reasonably should know” standard, (ii) adds “violation of a legal obligation” to the subject conduct and (iii) mandates reporting up the ladder)

(B) If a member acting on behalf of an organization knows that an actual or apparent agent of the organization acts or intends or refuses to act in a manner that is or may be a violation of law reasonably imputable to the organization, or in a manner which is likely to result in substantial injury to the organization, the member shall not violate his or her duty of protecting all confidential information as provided in Business and Professions Code section 6068, subdivision (e). Subject to Business and Professions Code section 6068, subdivision (e), the member may take such actions as appear to the member to be in the best lawful interest of the organization. Such actions may include among others:

(1) Urging reconsideration of the matter while explaining its likely consequences to the organization; or

(2) Referring the matter to the next higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest internal authority that can act on behalf of the organization.

(C) If, despite the member's actions in accordance with paragraph (B), the highest authority that can act on behalf of the organization insists upon action or a refusal to act that is a violation of law and is likely to result in substantial injury to the organization, the member's response is limited to the member's right, and, where appropriate, duty to resign in accordance with rule 3-700.

Cal Rule 3-110:

(A) A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence.

(B) For purposes of this rule, "competence" in any legal service shall mean to apply the 1) diligence, 2) learning and skill, and 3) mental, emotional, and physical ability reasonably necessary for the performance of such service.

(C) If a member does not have sufficient learning and skill when the legal service is undertaken, the member may nonetheless perform such services competently by 1) associating with or, where appropriate, professionally consulting another lawyer reasonably believed to be competent, or 2) by acquiring sufficient learning and skill before performance is required.

Discussion in Rule 3-110:

The duties set forth in rule 3-110 include the duty to supervise the work of subordinate attorney and non-attorney employees or agents.

In an emergency a lawyer may give advice or assistance in a matter in which the lawyer does not have the skill ordinarily required where referral to or consultation with another lawyer would be impractical. Even in an emergency, however, assistance should be limited to that reasonably necessary in the circumstances.

Questions:

Did the general counsel do anything unethical as a lawyer in his situation? Was he competent to do what he was asked to do? Was he assisting with a fraud? What should he have done?

How should an in-house lawyer deal with a situation in which he/she feels she may not be competent to address the specific issue at hand but the lawyer’s managers insist the lawyer handle the matter nonetheless?

What should an in-house lawyer do if s/he suspects that s/he is being asked to participate in a fraud similar to a situation that faced the general counsel where he seems not to have had all the facts?

Hypothetical V

A large, growing, private company issued over $80 million worth of stock options to employees and consultants in the two years preceding its IPO without registering the offering or providing the required disclosures. The General Counsel was aware that the registration and disclosure obligations had been triggered, but he consulted outside counsel and believed that the companymight be entitled to rely on an exemption from the law. The GC considered the fact that the violation could be easily remedied by making a rescission offer to the employees at a later date. The GC did not inform the board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption. The Board continued to issue options after the GC had identified and analyzed the issue. During the IPO process, the SEC determined that the exemption was not applicable and that the company had violated the law by continuing to issue options.

Issues for Discussion in Hypothetical V:

Consider the following:

Cal Rule 3-210: A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal.

Proposed Rule 1.2.1: A lawyer shall not counsel a client to engage, or assist a client in conduct that the lawyer knows is criminal, fraudulent, or a violation of any law, rule or ruling of a tribunal. Notwithstanding the foregoing, a lawyer may discuss the legal consequences of any proposed course of conduct with a client and counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of a law, rule or rulingof a tribunal.

Questions:

Step back from the hypothetical, and let’s discuss what the obligation of the corporation’s lawyer when the corporation faces a legal risk that apparently has limited consequences. That is, can the general counsel advise the corporation that it is acceptable to take an action that is the moral equivalent of speeding on an empty highway? Take it a step further, can the general counsel simply decide that it is within her purview to accept certain non-compliance risks on behalf of the corporation without advising other corporate constituencies?

Did the GC behave unethically? How? If yes, would the GC have been exonerated if he had fully informed the board?

When is it ok to advise your client that they can pursue a course of action which is likely, but not definitely, a violation of law?

Does it matter if the remedy is simple as it was in this case through rescission?

What if the penalties are immaterial?

Hypothetical VI

You are in-house general counsel of a private company which is wholly-owned by the CEO who is also the sole director. You learn from an inadvertent slip-up by the CFO that the corporation has presented intentionally false financial statements to its auditor and its lender in order to buy time until the negotiations on a big customer contract are complete. The CFO assures you that the customer contract will provide for payments that will put the company in a position to refinance its credit facility with a new lender. The CEO is fully aware of the situation and has directed the CFO to submit the false financial statements. He tells you that it is his decision and that you are to keep quiet about it.

Questions:

What should the lawyer do? Can the lawyer tell the third parties about the false financials? If the lawyer is silent, is the lawyer violating proposed rule 4.1(b)?

Does the answer change if the CEO is not the sole shareholder? Assume there is an independent board.

Change the hypothetical to consider what your position is if the false information is being submitted to a regulator.

Hypothetical VII

You are in-house counsel to a private company, and you are interviewing a senior company executive as part of an internal investigation that is also the subject of lawsuit. You have some suspicions, but no real evidence, that the officer may have engaged in unlawful conduct which could subject the company to liability and the officer to termination and potential criminal or civil penalties. The company’s employee policies require employees to cooperate with the legal department. The officer has agreed to provide a deposition and the company has agreed to provide an in-house attorney to defend the deposition. On the way to the deposition, the officer tells the in-house attorney that he lied to you earlier but that he feels like he has to tell the truth in the deposition.

Issues for Discussion in Hypothetical VII:

Consider the following: Cal. Rule 3-600(D):

In dealing with an organization's directors, officers, employees, members, shareholders, or other constituents, a member shall explain the identity of the client for whom the member acts, whenever it is or becomes apparent that the organization's interests are or may become adverse to those of the constituent(s) with whom the member is dealing. The member shall not mislead such a constituent into believing that the constituent may communicate confidential information to the member in a way that will not be used in the organization's interest if that is or becomes adverse to the constituent.