Corporate Counsel’s Obligations

Posted in Blog, Business Law by on November 14th, 2017

By: Attorney Gerald S. Garnick | of Counsel

 

Free ConsultationA sensitive issue in the practice of law has always been where a corporation or an LLC hires an attorney to represent the entity and then a conflict arises between the stockholders or the members and the attorneys who represented the entity starts taking sides on behalf of one shareholder or member in opposition to the other.

A recent, July 2017, Massachusetts Appeals Court case adjudicated that lawyers for a limited liability company (and this will also apply to corporations) could be sued for breaching a fiduciary duty to the LLC’s minority members despite the lack of an attorney client relationship. In the case of Baker vs. Wilmer, Cutler, Pickering, Hale and Door, LLP the attorneys argued successfully in the Suffolk Superior Court’s Business Litigation session and the court held that neither an express nor implied attorney client relationship with the lawyers existed and thus the lawyers had no fiduciary duty. However, as stated above, the Suffolk Superior Court holding was reversed by the Appeals Court.

In the Baker case, the LLC hired the attorneys to resolve the differences between the majority member who owned 75% and the minority member who owned 25%.

The fee agreement between the LLC and the law firm and in the engagement letter stated that the law firm would not represent any individual members of the company. When the negotiations between the majority and minority member of the LLC broke down, the law firm devised a plan which would allow the majority members of the LLC to approve a merger with another business entity. By merging with the new entity the majority member could convert his outstanding loans and future contributions into preferred stock in the new entity and eliminate the minority member’s ability to interfere with company operations while decreasing the minority ownership stake in the LLC. The law firm argued that their situation was different from previous cases because the minority member had not interacted with them, and did not place any trust and confidence in the law firm.

The Court noted that determining whether a fiduciary duty exists is largely fact specific. In this case, the attorneys were required to communicate with the minority members, particularly given the strong protections in the company’s organization agreement. It was further found that the attorneys were alleged to have taken purposeful steps to conceal their activities undermining the LLC’s agreement.

The Court held “given the protections contained in the …agreement, the minority members should have been able to repose trust and confidence that counsel hired by the company would have communicated and consulted with them prior to underdoing those protections.”

Attorneys who are hired to represent an LLC or a corporation are obligated to be impartial when there is conflict between the members or the stockholders. Once hired by the corporation or the LLC, the attorneys job is not to take away any protections from the minority stockholders or members even if the majority requests them to do so. The attorneys who are hired by the LLC or corporation when they find themselves in a potential conflict should recommend that the separate shareholders and members hire their own attorneys to resolve their differences.

Corporation and LLC clients should take seriously this Baker case decision. When a law firm is hired to represent the entity, it cannot then take sides when a dispute arises between the members of the LLC or the stockholders of the Corporation. Rather, when a dispute does arise, the individual members and stockholders are required to obtain and provide their own counsel and not depend upon the law firm that was hired to represent the entity.

If you have any questions or if you need guidance, please call the attorneys at Wynn & Wynn, P.C. at 1.800.852.5211 or request a free consultation.

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