When you represent a business entity, do you also necessarily represent the shareholders? How about the owners?  What if there are just two of them? Representing closely held entities can raise thorny ethics issues for business lawyers.  Model Rule 1.13(a) says that when you represent an organization, your client is the entity.   And when you begin the engagement, you certainly intend to represent the business itself — not the shareholders, members or partners (i.e., the entity’s constituents).  But down the road, when a dispute develops among those constituents, you may find yourself facing the contention that you have an attorney-client relationship with a constituent, as well.

Who’s my client?

The question of client identity has far-reaching implications.  The answer to the question “Who is the client?” can define the scope of your duty for purposes of malpractice liability; it can shape the contours of the attorney-client privilege; and it can raise or negate a disqualifying conflict of interest.

In a recent issue of the ABA’s Commercial & Business Litigation Newsletter (subscription required), Massachusetts lawyer Paula Baggar reviewed some of the authorities in this area — in which the question of whether an implied lawyer-client relationship has been established is highly fact-intensive.

I owe duties to who?!

Baggar notes that some court opinions in this area of the law staunchly stick to the entity theory of representation, absolving the closely-held entity’s lawyer of duties to the shareholders, for example.  See, e.g., Skarbrevik v. Cohen, England & Whitfield (Cal. Ct. App. 1991) (minority shareholder sued corporation’s counsel, alleging duty to inform shareholder that other three shareholders planned to force him out; held, in absence of lawyer-client relationship with shareholder, lawyer had no duty).

Other courts, Baggar says, have muddied this helpful bright-line concept.  See, e.g., Schaeffer v. Cohen, (Mass. 1989) (finding “logic in the proposition” that counsel for closely-held corporation owes each shareholder a fiduciary duty even though lacking an attorney-client relationship with shareholders merely by virtue of representing the entity).

Some courts have also considered a third-party-beneficiary theory as a basis for extending to constituents the corporate lawyer’s relationship with the entity, notes Baggar.  See, e.g., Chem-Age Indus. Inc. v. Glover (S.D. 2002) (“to establish a duty owed by the attorney to the nonclient, the nonclient must allege and prove that the intent of the client to benefit the nonclient was a direct purpose of the transaction or relationship.”).

Last, Baggar writes, is the theory that corporate counsel aided and abetted some wrongdoer, injuring a corporate constituent — most likely a minority shareholder.  See, e.g., Granewich v. Harding (Or. 1999) (lawyer for closely-held corporation who acted in concert with majority owners to squeeze out minority shareholder was liable for breach of fiduciary duty).

Key considerations

Identifying your client is key in representing closely-held entities, and making sure that your duties run solely to the organization can be challenging.  Baggar lists some practice pointers, among them:

  • “Every shareholder must understand that, unless a joint representation has been undertaken, corporate counsel’s primary obligation is to the corporation.”;
  • “Corporate counsel must be aware of special circumstances creating a duty to nonclient constituents.”;
  • “Particularly if there are any special circumstances (e.g., the corporation is very small or a third party is paying the fees), corporate counsel should confirm in writing who is not his or her client.”

Navigating these corporate waters can be a challenge, so take care to avoid taking on constituent clients when you intend solely to represent the organization.