Ethical Considerations When Negotiating and Drafting Contracts 

With Subsidiaries  

Corporate Counsel’s Perspective

When discussing contract negotiations for corporate counsel, ethical considerations and potential conflicts must always be considered. This is the second of a three-part series discussing the ethical factors and conflicts for corporate counsel when negotiating contracts. Last week, the MSBA focused on general ethical considerations when negotiating and drafting any contract. This week, the MSBA will concentrate on ethical considerations in contract negotiations and drafting for subsidiary organizations of the corporation. Next week, the MSBA will discuss ethical considerations when negotiating company and key employee agreements/conflicts. 

Corporate counsel, simply, is employed by the company and represents the company. Even though corporate counsel may represent the company, unintended conflicts may arise when negotiating agreements with subsidiaries. A common scenario is when corporate counsel represents the parent company in drafting an intercompany service or license agreement with a subsidiary that is less than 100% owned.  What do the ethical rules require in this situation?  

Relevant ABA Model Rules for Professional Conduct

The relevant ABA Model Rules of Professional Conduct regarding this issue are listed below:

• Rule 1.7(a) – Except as provided in section (b) of this Rule, an attorney shall not represent a client if the representation involves a conflict of interest.  A conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the attorney’s responsibilities to another client, a former client or a third person or by a personal interest of the attorney. (b) Notwithstanding the existence of a conflict of interest under section (a) of this Rule, an attorney may represent a client if: (1) the attorney reasonably believes that the attorney will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the attorney in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. (emphasis added)
• Rule 1.9 (a) – A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing. (emphasis added)
• Rule 1.13 (a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents. (g) 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 shareholders. 
• Rule 4.3 – In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer’s role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client. 

     Who is your client in this scenario?

When corporate counsel is asked to negotiate an intercompany agreement with a subsidiary, who is corporate counsel’s client? It is clear that your client is your company and not the subsidiary.  One of the key critical issues for in-house attorneys is that the officers and directors think that you are their lawyer. Rule 1.13 provides that a lawyer representing an organization may also represent the directors, officers, and employees. It is critically important that in-house counsel clearly state to the officers and directors that your client is the organization and not any one of the officers/directors individually.

     Are you concurrently representing the subsidiary in this transaction?

If yes, then review Rule 1.7(a) and Rule 1.9 and the waivers allowed. Rule 1.7 states that you must determine if there is a conflict of interest; and, if so, will the representation be directly adverse. Rule 1.7 also requires you to assess whether there is a significant risk that the representation will be materially limited by the attorney’s responsibility to another. The next step is to analyze Rule 1.9. If the interests between your company and the subsidiary are materially adverse, then Rule 1.9 allows a lawyer to acquire a written waiver to represent both.  

     Can you claim to be a disinterested party pursuant to Rule 4.3

The likelihood of corporate counsel qualifying as a disinterested party pursuant to Rule 4.3 is close to zero. Therefore, it is essential that corporate counsel discuss and inform your officers and directors that there is a conflict with you representing both the company’s interests and the subsidiary’s interest. Ask your officers and directors how the company plans to manage the conflict. Give solutions to the conflict by proposing hiring outside counsel to represent the subsidiary. If the company decides to move forward without hiring outside counsel then the parties may try to resolve the conflict through negotiations. If both of those proposals fail, then,  as counsel,  you have a duty to disclose the conflict to both sides and request a waiver in writing.  

Ignoring the conflict is probably the least suggested course of action. In time, someone, possibly the government or a private party, may bring suit alleging there was a conflict of interest – that will put counsel and potentially the company (your client) in peril.   

Maryland Rules and Notes

Rule 19-301.7 CONFLICT OF INTEREST–GENERAL RULE (1.7)

• (2) Resolution of a conflict of interest problem under this Rule requires the attorney to: (1) clearly identify the client or clients; (2) determine whether a conflict of interest exists; (3) decide whether the representation may be undertaken despite the existence of a conflict, i.e. whether the conflict is consentable; and (4) if so, consult with the clients affected under section (a) of this Rule and obtain their informed consent, confirmed in writing. The clients affected under section (a) of this Rule include both of the clients referred to in subsection (a)(1) of this Rule and the one or more clients whose representation might be materially limited under subsection (a)(2) of this Rule.

Under the Maryland Rules, the notes for Rule 19-301.7, give counsel a blueprint to determine if there is a conflict; and, if so, to manage the conflict through written informed consent.

Key Takeaways

• Determine early whether a conflict exists when your company is negotiating with a subsidiary organization owned in part or in whole by your client. If a conflict exists, disclose, disclose, disclose!  Obtain written waivers. 
• Make it clear to your officers and directors, employees, etc. that you represent the organization and not any one individual in the organization.
• “No man can serve two masters; for either he will hate the one, and love the other; or else he will hold to the one, and despise the other.”  ABA/BNA LAWYERS’ MANUAL ON PROFESSIONAL CONDUCT § 51:301 (2008)(quoting Matthew 6:24).

____________

Materials for this article were taken from “Ethical Considerations for Corporate Counsel for Contract Negotiation & Drafting”, presented by I. DeAndrei (Dee) Drummond, Esquire, General Counsel with MarketSource, Inc. and Andrew Lapayowker, General Counsel of Rosemore, Inc., during the MSBA’s Legal Excellence Week on February 23, 2021.