The role of corporate counsel is changing in the US from that of corporate confidante to cooperate gatekeeper.
In-house counsel play a significant role in corporate governance and in managing corporate crises. From legislation in response to corporate accounting scandals, to the threat of government investigations and class action litigation, today’s in-house counsel faces challenges unheard of by their predecessors. While there is protection available through employed lawyers professional liability insurance, potential exposure to liability is increased, including: backdating stock options, rules regarding electronically stored information (“ESI”), liability to outside third parties, and the investigation of boardroom leaks.
For example, US law now requires attorneys who represent the issuer of securities before the Securities and Exchange Commission to report evidence of material violations of securities laws, breach of fiduciary duties, or similar violations to the chief legal officer or the chief executive officer, or higher if the chief legal officer or chief executive officer do not respond appropriately.(1)
One issue which has risen in prominence in the past year is that of backdating stock options. Options backdating is the practice of granting employee stock options at an exercise price equal to the value on the date granted. As the name implies, however, backdating means the date chosen as the grant date is an earlier date when the price of the underlying stock was lower. Legal issues may arise from this practice if the grantor attempts to conceal the backdating and lawsuits have been filed alleging stock option backdating, numerous companies have disclosed problems with misdated stock options, and many companies are under investigation by US authorities. Indeed, more than a dozen general counsel in the US have been forced out of their positions as a result of option backdating. In this environment, in-house counsel, board members, and officers face civil and criminal liability claims including: misrepresentation, fraud, conspiracy, breach of fiduciary duties, violations of the securities laws, and related allegations. Under these circumstances, in-house counsel may expose themselves to liability for, inter alia, inadequate filings; advice provided; and ratification of work performed by outside counsel.
As seen in a recent Digest article, the US Federal Rules of Civil Procedure were amended to handle electronically stored information (“ESI”). In-house counsel must be able to locate, gather, preserve, review, and duplicate ESI in order to produce it. Of particular concern to corporate counsel is that liability may ensue, for example, for employees who erase computer tapes.
In addition, because they are acting on behalf of the company’s investors, corporate counsel arguably play a public role in internal corporate investigations. Indeed, the US government expects in-house counsel to protect the investing public by insisting on compliance with the law and to advise management of the legality of their actions.
What is more, more courts are finding an attorney-client relationship between in-house counsel and outside third parties who rely upon work performed by in-house counsel.
In-house counsel may also be subject to both criminal and civil liability in boardroom investigations. The now infamous Hewlett-Packard board investigation has taught us that exposures for in-house counsel may arise from legal and business situations where in-house counsel have multiple roles and loyalties which may give rise to a conflict of interest. In such a situation, if an in-house counsel knows or should reasonably know that the investigation is utilizing illegal methods, she has a duty to report such conduct, and if there is any doubt as to the legality of investigative methods, seek the advice of outside counsel and act on the basis of that advice.
So, what’s an in-house counsel to do in this environment? Bar association task forces have attempted to provide some guidance, including:
• Alert decision makers to potential legal violations.
• Gain access to senior management and the board of directors as well as all persons responsible for compliance and ethics issues.
• Attend meetings of the board as well as critical committees.
• Require final approval of the selection of outside counsel retained by the company and clearly define the role of outside counsel.
• Require active consultation in matters regarding financial disclosure especially.
• Carefully analyze involvement in internal investigations and cooperate in external investigations as appropriate.
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