Here is the second in our series of interviews with general counsel from a variety of organizations, who share their lessons from the trenches.  You can read the first installment here.

Deal documentation quandary

What should general counsel do when a manager by-passes the legal department in negotiating transaction terms with another party — especially when that other party is a lawyer?

That’s the situation in which a seasoned GC for a large company found himself not so long ago.  The matter involved a purchase and sale transaction where the other party was a venture in which the venture’s attorney had an ownership interest and served as the venture’s business representative.

Over the course of the deal, the manager and the other party — in this case, the attorney — passed deal documents back and forth.  If the GC commented on the documents and sent a mark-up to the other party, the other party (namely, the attorney) would then simply resume communicating directly with the company’s manager, instead of the GC.

The GC felt out of the loop and unable to fulfill his role of protecting the company’s legal interests.  In addition, there was a significant ethics issue:  Model Rule 4.2 provides that in representing a client, a lawyer shall not communicate on the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter — unless the lawyer has the consent of the other lawyer.  The rule requires consent of the lawyer, not the client.

Here, the picture was complicated by the fact that (1) the other lawyer was partly dealing for his own account and partly representing a party; and (2) the organization’s manager was seemingly happy to facilitate bypassing the company’s GC in the interest of getting the deal done more quickly.

Things come to a head, and outside counsel weighs in

The GC eventually expressed his frustration to the manager, saying “I’m commenting on documents that you’ve discussed with the other side, but I’m not even aware of what you’ve agreed to.  Logistically, this is just not working.” The company was being subjected to risk, because the GC was not seeing intervening document drafts and inefficiency was mounting.

At this point, the GC consulted with the company’s long-time outside counsel.  A fresh pair of eyes was helpful in validating the GC’s assessment of the ethics issue, and in adding perspective on how to try to unwind these difficult circumstances.

Eventually, the situation came to a head with an uncomfortable exchange between the GC and the manager.  This manager, like many managers, was apparently viewing the legal department as a potential road-block, instead of the organization’s trusted advisor.  The GC pushed back, letting the manager know that requiring the other party to deal with the company’s lawyer wasn’t “just protocol — it’s an ethics rule and there’s a reason for that rule” — namely, to protect the organization from over-reaching by the other side and to give the organization the expert input on legal issues that it needed.

The aftermath and lessons learned

In the aftermath of the unpleasant words between the GC and the manager, the GC decided that he should step away from the transaction and hand off responsibility for the deal to the associate GC.  The associate GC would be more acceptable to the manager, as he had not been the one to challenge the manager.  The manager did not object to this resolution.

Eventually, the deal closed, with appropriate documentation.  Apologies were exchanged, as the manager realized he had been out of line, and that the law department brought value to the deal.

When the dust settled, the GC reflected that, when presented with a tough situation, a chief legal officer must decide whether “it’s something I can live with, or is it something that jeopardizes the interest of the client such that I have to go to the mat.”  Going to the mat here was the right thing to do.

And, as this GC agreed, the perspective of outside counsel can certainly help in these quandaries.