July 5, 2011
Misinformation About Lawyers As Directors
A Reuters special report (Shell Game) is making the rounds, and it has some interesting information. The report is part of a series "exploring the extent and impact of corporate secrecy in the United States." In it, the authors report that Wyoming Corporate Services is a company that creates "paper entities" for people to "hide assets." The company has registered more than 2,000 companies, all at a single address in Cheyenne, Wyoming.
One thing that caught my eye was the claim in the report that
Wyoming Corporate Services will help clients create a company, and more: set up a bank account for it; add a lawyer as a corporate director to invoke attorney-client privilege; even appoint stand-in directors and officers as high as CEO.
That attorney-client privilege thing is not quite right. Just being a lawyer does not create privilege for actions of a director who happens to be a lawyer. If a lawyer-director is somehow engaged to render a legal opinion, then privilege may attach, but having a lawyer-director at a board meeting does not mean everything discussed is privileged. Here's one court's view in this context:
The attorney-client privilege is a tenuous one, at best, with multifarious exceptions and conditions upon its applicability. Inasmuch as its enforcement impedes the search for truth, we think it may be stated with assurance, as a general principle, that the ethical and evidential strictures are brought into play only when a professional confidential relationship in its purest sense has been established. The attorneys selected by a client must, from one point of view, be dealing at arm's length with the client, as independent legal advisors, bearing in mind, of course, the fiduciary nature of the relationship.
The relationship must be one which supports the reason for the ethical and evidentiary sanctions, that is, the public policy promoting full disclosure in the interests of obtaining sound and well-considered legal advice. When the attorney and the client get in bed together as business partners, their relationship is a business relationship, not a professional one, and their confidences are business confidences unprotected by a professional privilege.
Federal Sav. & Loan Ins. Corp. v. Fielding, 343 F. Supp. 537, 546 (D. Nev. 1972).
Not all courts will go that far, but just having a lawyer on a board of directors does not do what is implied by the Reuters report.
Lawyer-directors, to the detriment of their corporate clients, may affect the protection provided by the privilege. The privilege may be lost if the party seeking discovery can show that the communications in question were communicated in the role as director, and not strictly as a lawyer.
James H. Cheek, III & Howard H. Lamar, III, Lawyers as Directors of Clients: Conflicts of Interest, Potential Liability and Other Pitfalls, 22nd Annual Institute on Securities Regulation, Vol. 1 at 461, 483 (PLI Corp. Law & Practice Course Handbook Series No. 712, October 1990).
The other thing worth mentioning is that corporations and LLCs are not inherently evil. Sure they can be used to help facilitate some bad things, but it doesn't take a corporation or an LLC to do evil. Individuals, sole proprietorships, and partnerships can all be pretty scummy, too. It has to do with the people running them, not an entity form.
I'm all for a little monitoring of bad behavior, but a some self policing can help, too. Among the reasons people claim to want to form a company is to make it look like their operation is bigger or more established. Before doing business with anyone, we all need to do our due diligence. Check financials and get personal guarantees if that's necessary. And if we don't care to check, then caveat emptor is still usually an appropriate rule. And if we do check, and it's a well-played scam, well, it's not the entity that is the problem. It's criminal behavior, that happened because of the criminal, not the corporate code.