Thursday, October 5, 2006
Silicon Valley superlawyer Larry Sonsini has been in the news a lot lately, most likely to his chagrin. His name surfaced in cases ranging from the Hewlett-Packard pretexting investigation -- he serves as one of the company's outside counsel and advised the board related to the internal investigation of its practices -- to options-timing issues at various technology companies, include Brocade Communications, where he was on the board and its former CEO has been indicted on securities fraud charges. Now comes an article in The Recorder (here) questioning an options grant in 1999 at Novell that included an award of options on 50,000 shares to each board member, which included Sonsini. The issue is not back-dating, which raises serious concerns about the propriety of the company's books-and-records, but whether the grant was "spring-loaded." A company can time the grant of options to occur prior to the release of positive news, so that the exercise price is at a lower amount than if the award took place after the disclosure, making them more valuable. While some have questioned whether the practice is illegal or not, in light of the fact that the company is not deceived in connection with the grant, it can appear to be a bit unseemly. The options granted by Novell to Sonsini and other directors had an exercise price of approximately $16 per share, and two months later the price hit almost $40 after the company released rosy financial projections. Not that this did Sonsini and others much good, because this was 1999, and when the technology bubble burst the options became worthless.
Should an attorney take stock or options in a client corporation? The ABA has blessed the practice, at least somewhat, in Formal Opinion 00-418, issued in 2000 (note the timing). The Opinion ends with the following admonition:
Although a lawyer's representation of a corporation in which the lawyer owns stock creates no inherent conflict of interest, circumstances may arise that create a conflict between the corporation's interests and the lawyer's economic interest as a stockholder. In such event, the lawyer must consult with the client and obtain client consent if, as a result of her ownership interest, the representation of the corporation in a particular matter may be materially limited. The lawyer may in some circumstances be required under Rule 1.7(b) to withdraw from representing the client in a matter if her financial interest in the client is such that she cannot reasonably conclude that the representation would not be adversely affected.
Lawyers have to be particularly careful when a member of their firm is a director of the company and they remain as counsel to the corporation. The Novell grant to Sonsini is not a breach of the ethics rules, and most likely did not violate the federal securities laws, but it is not particularly good publicity, either, given all the other controversies where his name has emerged as a central player. (ph)