New England Biz Law Update
Here’s a scenario that an in-house attorney might very well face.
Your CEO calls to explain he has decided to amend the company’s existing credit facilities in connection with a transaction set to close in a few business days, and the company’s banker is “looking for some sort of opinion.”
Since the banker, having already spoken with her outside counsel, has advised your CEO and CFO that “all that’s involved is a simple amendment of our existing legal agreements,” management sees no need to retain outside counsel and run up a bill or, even worse, delay a closing.
All that stands between your company and the needed funds is a legal opinion. No problem, assumes management. In fact, didn’t outside counsel write an opinion when the company established the credit facilities with the bank just last year? You can simply use that opinion as your template, right?
Not so fast. The giving of a legal opinion carries real risk and thus should never be a rushed or perfunctory exercise.
As noted by the Committee on Legal Opinions of the American Bar Association’s Section of Business Law in a report published in 2003 (58 Business Lawyer 1127), a lawyer who delivers his or her legal opinion, whether a member of a law firm or an employee of an company, owes a duty of care to the recipient to exercise the competence and diligence normally exercised by lawyers in similar circumstances.
The duty of inside counsel to investigate facts that support a closing opinion is the same as for outside counsel. An in-house attorney who signs a closing opinion – often the head of the company’s law department, or the senior member of the team of in–house attorneys who worked on the transaction – has personal responsibility for satisfying the duty of care owed to the recipient.
You’re on your own
The in-house lawyer who signs an opinion does so in his or her own name, not in the name of the company or the law department. Neither the company nor the department is a lawyer or law firm, and thus does not have the professional standing necessary to deliver a legal opinion. Notwithstanding that others may have assisted in the transaction or in preparation of the opinion, unless the opinion by its terms is given in reliance on the opinion of specified counsel (such as outside counsel), it is the signer of the opinion, and nobody else, who is ultimately responsible to the recipient of the opinion for the care exercised by all members of the team.
And using company letterhead or signing as an officer of the company won’t change the signer’s personal liability for an opinion. In short, you are on your own.
Some in-house attorneys incorrectly assume that if they sign in their capacities as officers of the company, they’ll be indemnified and/or covered by the company’s directors and officers insurance policies.
While most states’ statutes permit a corporation to indemnify an officer who is a party to a proceeding because of her status as an officer by provisions in articles of organization or a certificate of incorporation or by-laws, by resolution of the board of directors, or by contract, such statutes generally do not require indemnification. And where statutes do provide for mandatory indemnification, intentional or knowing misconduct is excluded, and usually, the corporation has to indemnify the officer only if she is “wholly successful” in the defense of proceedings, and then only for “reasonable expenses.”
Because the statutory provisions and case law interpreting those laws vary widely from state to state, any in-house counsel who signs an opinion in reliance on an indemnity from her corporate employer ought to “get it in writing.” You should be sure the delivery of a legal opinion in good faith and with the reasonable belief that your conduct was in the best interests of the corporation is in fact expressly covered by the language of the indemnity, and that the corporation will indemnify against all costs resulting from a related claim, including any settlement payments ultimately made.
In-house counsel should also be aware that D&O coverage typically covers in-house attorneys only when they act solely in their capacities as corporate officers, and not as lawyers.
“Just about anything that a staff attorney, or even a GC, does for his or her employer could be considered legal work,” says Frank Licata, of Licata Kelleher & Co., a Boston-based risk management advisory firm. “But there’s no doubt that giving a legal opinion is providing legal services, and that’s not covered” by D&O policies.
Licata points out that several insurers, to dispel any doubts, clearly disclaim coverage of giving legal opinions in the language of their D&O policies.
Silver lining
While the corporate scandals of recent years have generally made life more difficult for in-house lawyers, there may be a silver lining.
In response to the marked increase in the numbers of shareholder actions and government prosecutions against general counsel, and, more specifically, the Sarbanes-Oxley Act and other legislation that has increased the potential liability of in-house attorneys, the insurance industry has introduced or expanded the scope of existing insurance products in order to address the concerns of many in-house counsel.
Several insurance companies now offer supplemental insurance products to in-house lawyers, including employed lawyers professional (ELP) liability policies. These policies expressly afford protection not only from these new exposures, but to risks relating to other professional services, including pro bono work, moonlighting, regulatory filings, representations made to third parties in litigation, advice given in connection with employment decisions and, of course, the giving of legal opinions. They protect the kinds of legal services in-house counsel routinely perform in practice. ELP policies generally define professional services broadly, but an endorsement – available from most insurers – may be necessary in order to include within the definition of covered professional services any personal legal services for officers or employees of the company (think of that real estate closing on the boss’s summer house that you helped with). ELP policies should provide for defense costs for claims brought by non-client third parties and individual employees you are assigned to represent, as well as claims by your employer, its board of directors, its officers and its shareholders. Coverage is usually on a worldwide basis (both as to where the wrongful act occurs and where the claim is made).
Basic policies can be expanded by endorsement to include in the definition of loss both punitive and exemplary damages, to make the policy claims made (not claims made and reported), and to cover independent contract attorneys, paralegals and legal assistants as insureds. Some insurance companies require the purchase of a particular endorsement that in effect amends the definition of a covered wrongful act to include violations of the Sarbanes-Oxley Act.
Any in-house counsel engaged in the preparation, execution and delivery of legal opinions to third parties, including banks, parties to a commercial transaction, and outside agencies or regulatory bodies such as the Securities and Exchange Commission, must be prepared to satisfy the duty of care owed to the recipient of that opinion, and to exercise the competence and diligence normally exercised by lawyers in similar circumstances.
Kevin J. O’Connell is a partner with the Boston law firm of Posternak Blankstein & Lund LLP (www.pbl.com). He is engaged in a general corporate practice, with particular focus on transactional representation including mergers and acquisitions, the structuring of joint ventures and strategic relationships, and financings. Kevin also counsels clients on a broad range of business issues, including licensing, contracts and commercial matters. He can be reached at (617) 973-6121 or [email protected].
