I. RESPONSIBILITIES OF COUNSEL REPRESENTING CLOSELY-HELD CORPORATIONS
A. S.J.C. Rule 3:07 and Conflicts of Interest
Since the 1972 promulgation of Rule 3:07, Massachusetts lawyers have been regulated under disciplinary rules modeled upon the American Bar Association's 1970 Code of Professional Responsibility and Canons of Judicial Ethics. Conflict of interest rules are classified under Canon 5 of the Disciplinary Rules ("A lawyer should exercise independent professional judgment on behalf of a client").
Traditionally, corporations have been viewed as "entities" separate and apart from their stockholders, officers and directors. ABA Model Code of Professional Responsibility Ethical Consideration (EC) 5-18 states that an attorney for a "corporation or similar entity owes his allegiance to the entity", not persons "connected with the entity".
EC 5-18 acknowledges, however, the possibility that a lawyer representing a corporate "entity" might also represent "a stockholder, director, officer, . . .or other person connected with the entity in an individual capacity . . . if the lawyer is convinced that differing interests are not present."
DR 5-105 attempts to define an attorney's obligations to multiple or former clients by its mandate that, absent informed consent of all concerned "clients", see DR 5-105(C):
- A lawyer shall decline professional employment if the exercise of his independent judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing different interests . . .
- A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involve him in representing different interests. . .
Counsel representing closely-held corporations frequently act on behalf of both the corporation and some or all of its shareholders. This places a serious ethical burden on counsel which is exacerbated by the possibility that counsel for the corporation may be held to owe fiduciary and other duties to all shareholders even if counsel is not technically acting as counsel for those shareholders.
B. An Attorney May Find Himself With Multiple and Conflicting Obligations Under The Law Governing Closely-Held Corporations
In 1975, the Supreme Judicial Court held in Donahue v. Rodd Electrotype Co., 367 Mass. 578, 593, 328 N.E.2d 505, 515 (1975) (footnotes and citations omitted) that "stockholders in the close corporation owe one another substantially the same fiduciary duty in the operation of the enterprise that partners owe to one another. . . . the 'utmost good faith and loyalty'. . . . They may not act out of avarice, expediency or self- interest in derogation of their duty of loyalty to the stockholders and the corporation."
Since Donahue, Massachusetts courts have recognized that the duty of "good faith and loyalty" encompasses such matters as providing employment to shareholders where no other means exists by which the shareholder may obtain a return on his investment, see Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 353 N.E.2d 657 (1976) or a minority shareholder's refusal to consent to corporate transactions where a supermajority vote is required, see Smith v. Atlantic Properties, Inc., 12 Mass.App.Ct. 201, 208-09, 422 N.E.2d 798, 802-03, further app. review denied (1981) (minority may become--and be subject to-- the duties of "an ad hoc controlling interest"). When counsel is advising the corporation on such matters, he/she may also be providing advice to the controlling stockholders as individuals as to whether their conduct satisfies their duties to fellow shareholders.
Unhappy shareholders may seek to impose liability on attorneys representing closely held corporations on a variety of theories.
The Existence Of An Attorney-Client Relationship
First, shareholders may argue the existence of an attorney-client relationship which imposes duties on the attorney to the shareholders. An attorney-client relationship may be implied from the circumstances when a person seeks advice within the attorney's professional competence, and the attorney expressly or impliedly agrees to give or actually gives the desired advice or assistance. DeVaux v. Arter, 416 Mass. 377, 381, 622 N.E.2d 604, 607 (1993). Whether an attorney-client relationship exists is a question of fact. Page v. Frazier, 388 Mass. 55, 61, 445 N.E.2d 148, 152 (1983).
Duties Absent An Attorney-Client Relationship
However, even in the absence of an actual attorney-client relationship, in Page, the SJC stated that "in a proper case, a non-client alleging negligence against an attorney" may be able to recover if the non-client placed "foreseeable reliance" on the attorney's actions. Id. at 65-66, 445 N.E.2d at 154 . However, in subsequent cases, the SJC has noted that "'where an attorney is also under an independent and potentially conflicting duty to a client,' we are less likely to impose a duty to nonclients". Robertson v. Gaston Snow & Ely Bartlett, 404 Mass. 515, 524, 536 N.E. 2d 344, 350, cert. denied 493 U.S. 894 (1989), quoting Page v. Frazier, supra, 388 Mass. at 63, 445 N.E.2d at 153-54. In Robertson, the SJC affirmed a decision that a corporate officer in a close corporation could not reasonably rely on the corporate attorney protecting him in a corporate reorganization. The Court held that the trier of fact had properly concluded that counsel for the reorganizing corporation owed no duties to this shareholder.
Does Counsel For Close Corporations Owe Fiduciary Duties To All Shareholders?
Four months after the Robertson case, the SJC dealt with the question of whether an attorney for the close corporation owes fiduciary duties to all shareholders, without setting forth any definitive answer. In Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg, P.C., 405 Mass. 506, 541 N.E. 2d 998 (1989), a former minority shareholder of a closely held corporation argued the corporation was entitled to derivative relief from the corporation's payment of attorney's fees in a prior derivative action that shareholder had instituted against the corporation and the controlling shareholder. The Supreme Judicial Court (O'Connor, J.) held plaintiff had surrendered her standing to bring claims arising out of the payment of counsel fees when she sold her interest in the company. 405 Mass. at 513, 541 N.E.2d at 1002. Nonetheless, the Court acknowledged that "Indeed there is logic in the proposition that, even though counsel for a closely held corporation does not by virtue of that relationship alone have an attorney-client relationship with the individual shareholders, counsel nevertheless owes each shareholder a fiduciary duty . . . Just as an attorney for a partnership owes a fiduciary duty to each partner, it is fairly arguable that an attorney for a close corporation owes a fiduciary duty to the individual shareholders. However, it is not necessary for us to resolve the question whether such a duty is owed in order to decide this case." Id.
While the Court in Schaeffer asserted that the lack of standing made the question of the identity of the client of counsel engaged in the name of the corporation moot, it suggested that Massachusetts may follow the lead of other jurisdictions in finding that attorneys engaged on behalf of closely-held corporations owe fiduciary duties to all shareholders, even in the absence of a formal attorney-client relationship.
Schaeffer's dicta endorsed the approach to the question followed in many other states and expressly cited the leading Michigan case of Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, P.C., 107 Mich. App. 509, 309 N.W.2d 645 (1981), cited with approval 405 Mass. at 513, 541 N.E.2d at 1002. The plaintiff in Fassihi had been one of two shareholders in a medical professional corporation. Plaintiff asserted claims against the corporation's attorneys arising out of his ouster from the corporation and the attorney's alleged failure to disclose to him that his co-shareholder, the chief of radiology at the hospital at which both shareholders had practiced, had authority under corporate by-laws and agreements with the hospital to do so. The Court acknowledged that the professional corporation was the attorney's sole client. See 107 Mich.App. at 514, 309 N.W.2d at 648. Nonetheless, the panel held the attorney for the corporation might owe independent fiduciary duties to its shareholders:
Instances in which the corporation's attorneys stand in a fiduciary relationship to individual shareholders are obviously more likely to arise where the numbers of shareholders are small. . . . [T]he corporate attorneys, because of their close interaction with a shareholder or shareholders, simply stand in confidential relationships to both the corporation and individual shareholders. 107 Mich. App. at 516, 309 N.W.2d at 649 (footnote omitted).
Fassihi and cases decided in other jurisdictions leave little doubt that attorneys who participate as the sole attorney in the organization of a closely-held corporation may be subject to either discipline or disqualification should they represent only one shareholder in disputes arising out of the management or dissolution of the entity. See, e.g., In re Brownstein, 288 Or. 83, 87, 602 P.2d 655, 657(1979) (attorney reprimanded for representing one shareholder against the other on guaranty of corporation's note to shareholder where attorney had represented corporation at time note and guaranty were executed) ("in actuality, the attorney in such a situation represents the corporate owners in their individual capacities as well as the corporation"); Horowitz v. Horowitz, 151 App.Div.2d 646, 647, 542 N.Y.S.2d 708, 709 (2d Dep't 1989) (affirming disqualification of attorney who "had represented the interests of the closely-held corporation of which the parties are the only shareholders for a period in excess of ten years" from acting as counsel in action between shareholders); Matter of Fleet v. Pulsar Const. Corp., 143 App.Div.2d 187, 189, 531 N.Y.S.2d 635, 636 (2d Dep't 1988)(attorney for corporation disqualified from representing one shareholder in subsequent action against the other): [A]lthough the corporation is a distinct jural entity, it is equally clear that in prosecuting and defending litigation on its behalf, Elovich [the attorney] was in fact representing its only two shareholders, the presently disputing parties. . . . [I]t is reasonable to infer that Elovich obtained confidential or strategically valuable information concerning Weinberg [one shareholder] which will be of use to petitioner Fleet [Elovich's client and the other shareholder].
The Massachusetts courts have to date been hesitant to impose duties to nonclients upon attorneys when they are under an independent and potentially conflicting duty to a client. Spinner v. Nutt, 417 Mass. 549, 613 N.E.2d 542 (1994) (counsel for trustees of a Trust have no duty to beneficiaries of the Trust). Thus, it is uncertain whether the SJC will impose a fiduciary duty upon counsel for a closely held corporation as to the shareholders of the corporation. However, given the language in Schaeffer, it seems probable that the SJC will hold that counsel for a close corporations have a fiduciary duty to its shareholders.
C. The Effect of the Proposed Revision of the Massachusetts Disciplinary Rules
In February, 1995, the Supreme Judicial Court announced it was considering a complete revision of Rule 3:07 based upon the American Bar Association's 1983 Rules of Professional Conduct. The Report of the Supreme Judicial Court's Committee on the Model Rules of Professional Conduct (released February 24, 1995) asserted that "[t]he scope of the Model Rules more accurately reflects the diversity of modern legal practice" (id. p. 2). Proposed Rule 1.13 (substantively identical to the ABA Model Rule) goes beyond the existing provisions of Rule 3:07 by acknowledging that the representation of an "organization as client" poses ethical issues. Nonetheless, while paragraphs (d) and (e) of proposed Rule 1.13 recognizes the possible conflicts which may exist, it fails to offer any "bright line" test to guide the attorney's conduct:
- (d) In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when it is apparent that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.
- (e) A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization's consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholder.
Similarly, Rule 1.7, the restatement of the general bar on conflicting engagements now found in DR 5-105, does nothing to suggest how an attorney for a closely-held corporation should act in the event of a dispute between its shareholders, even as it allows conflicts to be resolved by the attorney's own "belief":
- A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
- the lawyer reasonably believes that representation will not adversely affect the relationship with the other client; and
- each client consents after consultation.
- A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest, unless:
- the lawyer reasonably believes the representation will not be adversely affected; and
- the client consents after consultation. When the representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
The ABA's commentary on Model Rule 1.13 proposed no real resolution of the question of how the attorney is to identify the "clients" to whom he owes duties. See Ann. Model. R. Prof. Conduct 1.13 ("Another situation in which the issue of client identity often arises involves close corporations")(citing authority). Even after revision, Massachusetts' ethical rules will continue to force an attorney to look to his own judgment and case-by-case determinations in proceeding with the representation of a closely-held corporation and/or its shareholders.
D. Disclosure From the Outset May Be the Best Policy
Proposed Rule 1.7 (if adopted), as well as existing DR 5-105(C), strongly suggest that attorneys must make clear to all participants in a closely-held corporation the scope--and risks--of their engagement from the outset of the representation, particularly if disputes arise among shareholders in the future. While courts recognize that the use of only one attorney to organize a multi-shareholder closely-held concern is often appropriate, see In re Brownstein, supra, 288 Or. at 87, 607 P.2d. at 657 ("This court does not say that a lawyer cannot put together small transactions in which the amounts involved are not large enough to justify. . . individual representation"), it is all too true that the attorney called upon to prepare initial organizational papers for multiple shareholder close corporations typically has represented one--but not all--of the new co-shareholders in the past. In such circumstances, attorneys would be well advised to follow the practice employed by many and request written consent to the joint representation, disclosing the inherent risks and prior and continuing associations of counsel. By doing so, they may both effectively delineate their obligations in the initial engagement--and forestall mandatory disqualification should a dispute erupt among shareholders in the future.
II. ETHICAL ISSUES FACING COUNSEL FOR MINORITY INTERESTS
A. The Advantages of Having No Prior Relationship With the Corporation and Its Management
Typically, when a minority or otherwise non-controlling shareholder seeks to take action against a closely-held corporation and its management, counsel for the minority will have had no prior relationship with the corporation. Under those circumstances, there can be no question of counsel's obligations to a former client interfering with representation. Indeed, had counsel for the objecting shareholder been counsel for the corporation as a whole during the period in which the acts in issue took place, it is likely that the bar on representation would be absolute under current DR 4-104 (and Proposed Rule 1.9), which bars the disclosure of confidences of other and former clients. Courts have not hesitated to enter orders of disqualification in those rare instances where corporate counsel appeared for a minority shareholder in a management dispute. See, e.g., Wood v. Beacon Factors Corp., 137 App.Div.2d 752, 753, 524 N.Y.S.2d 831,832 (2d Dep't 1988) (Corporate counsel disqualified from representing minority shareholder in action by majority shareholders to enforce corporate loan guaranteed by minority shareholder).
The minority's engagement of counsel with no prior relationship with either the corporation or its other stockholders is advisable not only from the point of avoiding disqualifying conflicts of interest, but to ensure the continuation of the attorney-client privilege. Representation of a closely-held corporation may be deemed for privilege purposes to constitute joint representation of the corporation and its principals in a "common interest", giving any party to the representation the right to waive the attorney-client privilege as to all communications in the event of a dispute between such parties over the subject matter of the representation. While the question has never been decided in Massachusetts in cases involving closely-held concerns, the courts have held no privilege exists in disputes between insured and insurers who formerly shared counsel. See, e.g., Klefbeck v. Dous, 302 Mass. 383, 19 N.E.2d 308 (1939); Catino v. Travelers Ins. Co., Inc., 136 F.R.D. 534, 537 (D. Mass. 1991). This risk is eliminated, of course, if counsel never participated in representation other than of the client seeking relief from management.
B. Potential Pitfalls In the Information-Gathering Process
While the absence of prior connections between counsel for a minority shareholder and his closely-held corporation resolves many if not most ethical issues, some issues may remain. The most important of these may limit counsel's ability to conduct an informal investigation of the corporation's activities through contact with corporate employees. DR7-104(A) (1) generally bars an attorney from making direct contact with adversaries represented by counsel. Neither the existing rule nor the S.J.C. committee's proposed revisions, however, address contacts with a corporate adversary's employees. This poses the question of whether counsel may interview non-party employees as potential witnesses for the minority stockholder.
The Massachusetts Bar Association attempted to resolve this question in its Ethics Opinion 82-7, in which it concluded that ex parte contact by opposing counsel with any corporate employee, regardless of status or title within the corporation was improper, to the extent that the interview concerned matters within the scope of employment and the interviewee's statements could affect the corporation's legal rights or obligations. Several Massachusetts Federal cases have refused to follow Opinion 82-7 literally and permitted ex parte interviews of employees of a corporate defendant in employment discrimination cases on a case-by-case basis. In these cases, the Court concluded ex parte interviews were required to investigate the basis supporting the employer's versions of the reasons for challenged actions. See, e.g., Morrison v. Brandies Univ., 125 F.R.D. 14, 18 (D. Mass. 1989) (permitting plaintiff's counsel to conduct ex parte interviews of faculty who supported plaintiff's claim to tenure where defendant could be expected to present contemporaneously-generated record supporting denial of tenure); Mompoint v. Lotus Dev. Corp., 110 F.R.D. 414, 418-19 (D. Mass. 1986) (permitting plaintiff's counsel to make ex parte contact with defendant's employees asserted to have made harassment complaints which led to dismissal of plaintiff).
Notwithstanding the more liberal view set forth in these Federal decisions, in most cases in which financial or operational mismanagement form the basis of the claims of a minority shareholder, the defendant's operating officers are likely to be the only "witnesses" with knowledge of facts either supporting or refuting the minority's claims. As virtually all these persons, if not parties, would be capable of making statements which bound the corporation, Opinion 82-7 would appears to bar ex parte interviews of the corporation's current employees. The only exception may be cases in which a minority shareholder terminated from employment is asserting claims under Wilkes, supra, and seeks to interview employees who may shed light on the alleged "business justification" for the termination. In this regard, the conventional wisdom that a minority shareholder can only prove his case employing evidence elicited through discovery of its adversary is not only based on experience but is likely ethically required.
III. ETHICAL ISSUES FACING COUNSEL FOR THE CORPORATION AND ITS CONTROLLING SHAREHOLDERS
A. Can Counsel For the Corporation And/Or its Control Group Continue to Serve As Counsel Once a Shareholder Dispute Begins?
Where counsel has had a long-standing relationship with both a closely-held corporation and its controlling shareholder(s), the interplay between substantive law and ethical restrictions may impose serious (if not unsurmountable) barriers to the continuation of the representation if a dispute between shareholders erupts. Counsel may be viewed not only as having duties to the minority, but may be named a party defendant in a shareholder suit or become a witness. The existence of any of these factors may bar continuing representation of the control group.
In the first instance, an attorney may become subject to disqualification because he is named a defendant by dissenting shareholders. The minority may name counsel a defendant for breach of the duties that corporate counsel may owe to the minority referred to in Schaeffer, supra. Attorneys also act at times as directors or officers of closely-held corporations. Where, as in many cases, a dispute with a minority shareholder arises out of an alleged "squeeze-out" or "freeze out" and/or the termination of his or her employment, counsel may be named a defendant in his capacity as director or officer. In some cases, an attorney may be free to represent himself in a case in which he has been named a party, notwithstanding the ordinary bar against appearances in cases of actual conflict or potential testimony, see Gorovitz v. Planning Bd. of Nantucket, 394 Mass. 246, 248-50, 475 N.E.2d 377, 379-80 (1985) (attorney expected to testify cannot be disqualified as trial counsel in zoning appeal when he is bona fide general partner of plaintiff and his interest does not differ from that of other general partners). In many other instances, however, potential conflicts between the attorney and other defendants may mandate disqualification. Cf. Guliano v. Carlisle, App.Div.2d, 621 N.Y.S.2d 685 (2d Dep't 1995) (attorney for real estate holding corporation named defendant in action brought by minority shareholders naming attorney defendant for his conduct as escrow agent disqualified from acting as trial counsel "because he is a co-defendant whose defense may be inimical to that of his clients [the controlling shareholders]...")
Another burden to the continuation of the attorney-client relationship may be the personal participation of the attorney in the dispute between shareholders or the actions underlying the claims of minority shareholders. "Corporate" counsel may have attended meetings with non-shareholders concerning transactions under attack (for example, the transfer of corporate real property to a shareholder for less than fair consideration), or conferences between conflicting shareholders at which matters in dispute were discussed. Counsel's knowledge of non-privileged discussions at these conferences create the possibility he may be called as a witness concerning these events. DR 5-101(B) and 5-102 forbid an advocate from acting as a witness for his client or giving "prejudicial" testimony as a witness called by his client's adversary. These rules create a high barrier to continuing representation when an attorney possesses knowledge of details of the transactions alleged to be at the center of a claim of breach of fiduciary duty, or may have been the only "neutral" witness to discussions between shareholders prior to the dispute.
The Supreme Judicial Court has never addressed the issue of whether or not counsel engaged in the name of a close corporation must testify (and forego acting as counsel) in a dispute between shareholders, although it has regularly observed that "tactical" motions to disqualify should not be allowed in an "indiscriminate" manner, see Gorovitz, supra, 394 Mass. at 250, 475 N.E.2d at 380. Nonetheless, Massachusetts courts continue to recognize that DR 5-102 mandates disqualification or withdrawal "when the decision 'to forego the testimony of counsel appears obviously contrary to the client's interest'", Mendel Kern, Inc. v. Workshop, Inc., 400 Mass. 277, 281, 508 N.E.2d 853, 856 (1987), quoting Borman v. Borman, 377 Mass. 775, 791, 393 N.E.2d 847, 857 (1978), or where a client's advocate will be called by an adverse party concerning non-privileged matters "where the lawyer [was] intimately involved in the events in issue." Serody v. Serody, 19 Mass.App.Ct. 411, 415, 474 N.E.2d 1171, 1174 (1985). Other states' courts have not hesitated to enter orders of disqualification under DR 5-102 against counsel for closely-held concerns in shareholder disputes. See, e.g., Hitzig v. Borough-Tel Serv., Inc., 108 App.Div.2d 677, 678, 485 N.Y.S.2d 541, 542 (2d Dep't 1985)(attorney disqualified from representing closely-held corporation in action brought by one of two shareholders arising out of termination of employment when attorney attended board meeting where termination approved and voted for termination as director). There should be little doubt Massachusetts courts would do so in an appropriate case. See Mendel Kern, Inc., supra, 400 Mass. at 282, 508 N.E.2d at 857 (observing in affirming denial of motion to disqualify that counsel "should have shown the good sense to step aside because his familiarity with the case led him to lead, suggest and almost testify while interrogating the witnesses.")
Finally, attorneys retained by closely-held corporations may become privy to information concerning the conduct of the majority that they may be required to disclose to the minority, particularly if proposed amendments to the Massachusetts rules of Professional Conduct are adopted in the form being circulated by the Supreme Judicial Court. Lawyer's "whistle-blowing" obligations have been open to much dispute since the promulgation of DR4-101(C) (permitting disclosure of confidences to prevent client from committing crime) and DR 7-102(B)(1) (permitting lawyer to disclose client's fraudulent conduct if client refuses to "rectify the same" and no "privileged communication" is disclosed). Proposed Rule 1.13(b) may impose broader and more explicit requirements upon the attorney for a closely held corporation. The rule as currently proposed may require a lawyer representing an "organization" who learns that "an officer, employee or other person" has engaged in or is about to engage in conduct in violation of either duties owed to the organization or which may be imputed to the organization and "is likely to result in substantial injury to the organization" to act "as is reasonably necessary in the best interests of the organization." While the rule counsels against disclosure outside the organization, Proposed Rule 1.13(b)(3) contemplates referral of these disputes "to the highest authority that can act on behalf of the organization"--presumably the shareholders or board of directors, which likely includes minority shareholders and their representatives. If these efforts fail, Proposed Rule 1.13(c) commands resignation and permits disclosure consistent with Proposed Rule 1.6--which itself permits disclosure both "to prevent the commission of a crime" (Proposed Rule 1.6(b)(3)), "to rectify client fraud in which the lawyer's services had been used" outside the context of criminal representation (Proposed Rule 1.6(b)(5) and "when [otherwise] permitted under these rules or required by law or a court order" (Proposed Rule 1.6(b)(2)). Presumably, "other rules" include Proposed Rule 1.13.
Proposed Rule 1.13 may impose new and difficult duties upon counsel for close corporations. Counsel is generally viewed as being engaged by and reporting to corporate management--in this case, controlling shareholders. In that capacity, counsel may be advised by ownership-management of conduct which may have an impact on minority shareholders in violation of the rights recognized in, inter alia, Donahue and Wilkes, supra, in connection with "freeze out" transactions or the termination of employment. Neither Massachusetts law nor any "official" commentary on Proposed Rule 1.13(c) addresses what may be viewed as an obligation of counsel for a closely-held corporation to (from the point of view of controlling shareholders) prematurely disclose plans to engage in conduct which may have an adverse effect on shareholders outside the control group. The most recent proposed revision of the ethical rules fails to provide any guide to how an attorney can or should draw the line between acting as counsel to the corporation (who may as such owe duties to minority shareholders) and counsel for controlling shareholders (who, presumably, may not be subject to duties to the minority under either substantive law or Proposed Rule 1.13).
B. Can Counsel Structure An Engagement So As to Preserve His Ability To Continue to Represent the Corporation and the Majority In the Event of Shareholder Litigation?
It is not surprising that on many occasions, counsel for the entity has chosen to end his engagement as counsel for the corporation (or its controlling shareholders) even before hostilities commence between shareholders. See, e.g., JRY Corp. v. LeRoux, 18 Mass.App.Ct. 153, 157-58 , 464 N.E.2d 82, 86 (noting resignation of former general counsel to Boston Red Sox after (as limited partner) he became aligned with general partner demanding modifications to limited partnership agreement opposed by other limited and general partners). Nonetheless, even under the proposed changes in the ethical rules, there may be means by which a lawyer associated with the management and controlling shareholders of a closely-held corporation may continue to function as counsel to the corporation and its control group after a shareholder dispute becomes the subject of arbitration or litigation.
Notwithstanding the decision in Schaeffer, Massachusetts courts have acknowledged it is possible for a single attorney to advocate the interests of the corporation and individual shareholders should counsel "not have been involved in any challenged transaction" and the corporation's and shareholders' "interests coincide." See Dynan v. Fritz, 400 Mass. 230, 246 & n.24, 508 N.E.2d 1371, 1380 & n. 24 (1987). In fact, majority shareholders have the right to take action with an adverse impact upon the minority when they "can demonstrate a legitimate business purpose for [the] action." Wilkes, supra, 370 Mass. at 851, 353 N.E.2d at 663. In this context, counsel for or introduced to the corporation by the majority may be allowed to continue joint representation to the extent it can be shown that the minority was under no illusion that counsel was acting on behalf of the dissenters. The real question, therefore, is how counsel may structure an engagement so as to bar any claim in the future it owed duties to dissenters.
As in so many other areas, early disclosure as to whom counsel represents may be the best way to protect its ability to continue its engagement should litigation between shareholders commence. In situations where the minority is (and has been) unrepresented, it may be unwise (once the formalities of incorporation and organization have been completed) for the majority's counsel to hold itself out as corporate counsel at all. Instead, majority counsel should hold itself out as acting for the corporation only on discrete transactions on which all shareholders have agreed to the engagement. Similarly, as participation in board meetings attended by unrepresented shareholders may turn an attorney into a witness, it may be unwise for counsel to have any contact with the board of directors (other than to report on discrete and presumably uncontroversial matters). If it appears likely that the majority is contemplating transactions which may have an adverse impact on the minority, counsel should make every effort possible to make clear that it is counsel to the majority on such transactions. To the extent such actions lead to negotiations in which counsel must participate with unrepresented shareholders, every effort should be made to document the conference as one for settlement purposes in which counsel appeared as representing the majority.
In short, neither the law nor the ethical rules have drawn a bright line between counsel for a closely-held corporation, counsel for all its shareholders, and counsel for the control group alone. The ability of a client--even a majority shareholder accused of breach of fiduciary duty to the minority-- "to be represented in ongoing litigation by counsel of its own choosing is a valued right which should not be abridged absent a clear showing that disqualification is warranted." Feeley v. Midas Properties, Inc., 199 App.Div. 2d 238, 238, 604 N.Y.S.2d 240, 241 (2d Dep't 1993). In the absence of clear ethical rules that permit it to maintain a relationship with the stockholders that engaged it once a stockholder dispute commences, counsel has the responsibility to structure its engagement so as to make it as clear as possible that it represents the majority alone, representing the corporation only on such limited matters as all shareholders agree.