Friday, July 29, 2005

Potential Conflicts of Interest in Advising Corporations

One of the toughest areas to determine whether there is a conflict of interest in legal representation involves corporate clients.  While the entity is usually the client, the lawyer interacts with the board of directors and senior management, who will view the lawyer as providing them with legal advice as much as the corporation.  Things can get even murkier when it is a closely-held corporation, so the line between shareholder, manager, and corporation can be hopelessly blurred.  A New York Times article (here) discusses the possible conflicts involving Marty Lipton, perhaps the leading attorney in the country in the field of mergers-and-acquisitions and corporate governance. 

Lipton recently advised Morgan Stanley when former officers of the company challenged the leadership of its then-CEO, Philip Purcell.  Lipton counseled the board and company management, including Purcell, in dealing with the dissidents and institutional investors.  Things changed when Purcell decided to retire, and Lipton then advised the board on his severance package, which totals $113 million.  Lipton's firm, Wachtell Lipton, also represented the board on a pay package for co-president Stephen Crawford, who entered into an agreement that guaranteed him $32 million, even if he quit before August.  Once John Mack returned to Morgan Stanley as CEO, Crawford pulled the ripcord and took the money after serving as co-president for less than two months. Did Lipton (and his firm) have a conflict in these different roles?  In one sense, the answer is yes, in that his work with Purcell could call into question his loyalty to Morgan Stanley, which arguably included seeking the lowest possible payment, once he had to negotiate with Purcell (who was advised by his own attorney).  On the other hand, Lipton's client remained the entity -- Morgan Stanley -- and of course no one has objected to the representation (although some outside the company blanched at the severance payments, and the lawsuits started flowing like a New York fire hydrant on a hot summer day).

The pay figures for Purcell and Crawford are reminiscent of the compensation of former New York Stock Exchange chairman Dick Grasso.  Interestingly, the NYSE was advised by Lipton on Grasso's pay, and Lipton also counseled Grasso on the issue.  A conflict of interest? Maybe yes, maybe no -- and who says the rules of professional responsibility are vague?  The determination of a conflict is not based solely on whether a client objects, but at the same time in corporate representation the lawyer has to deal with multiple constituencies, and turning the ethics rules into a "Lawyers Full Employment Act" by requiring separate counsel whenever there is a change in circumstances can be more harmful to clients by driving up the costs of representation.  One hopes that conflicts of interest are not like Leona Helmsley's view of taxes, only for the little people (or lawyers, as it were). (ph)

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