Call Your Lawyer—Immediately!
from
July/August 2003
by Randy Myers
When you hire an attorney to check out a company that wants you on its board, you have the luxury of time and the opportunity to walk away without complications. But if you’re already on a board, you may need legal help in a hurry. What are some warning signs? “Anytime people wearing FBI jackets show up in the boardroom, that’s a red flag,” says Ira Raphaelson, co-chair of O’Melveny & Myers’s white-collar and regulatory defense group in Washington, D.C.
But seriously . . .
You should probably consult your personal attorney, Raphaelson says, if your board moves to restate the company’s financial results or have the company’s financial statements reaudited. Those are two of the most common reasons directors are sued. You should also run for legal advice if the board approves the purchase of material services from consultants closely aligned with the company’s outside auditors. “Another red flag, I think, would be anything involving a waiver of a conflict of interest,” says Raphaelson. He is referring to situations in which a board votes to suspend its conflict-of-interest policies so that the company can, for example, buy office furniture from the CEO’s brother-in-law or patronize a travel agency run by a vice president’s wife. “I would want a waiver reevaluated for me, and not necessarily by management,” Raphaelson says. “In fact, a board would be well served by looking for its own counsel to review any insider transactions or waivers of conflict-of-interest rules.”
According to Jeffrey E. Stone, head of the white-collar-criminal defense practice group at McDermott Will & Emery in Chicago, you should consult a personal attorney anytime there is an accusation
that the board members, by either commission or omission, have injured the company in some way. “The general counsel or the company’s outside counsel should be able to advise on matters of ongoing general business issues,” says Stone. “But when there are accusations that are leveled or might be leveled against the directors, they begin to have interests that possibly diverge from the interests of the company.”
Directors might also want to bring in a personal attorney, says Stone, if they believe a board action requires disclosure but the company’s general counsel advises that it’s not necessary. “Your fear,” he says, “is that you may take an action that could create personal exposure for you.”
If you dissent from a majority vote that you feel will put the company in a mess, you should be sure your objection is recorded by the board secretary, says attorney Rick Miller of Atlanta’s Powell Goldstein Frazer & Murphy. And in consultation with your lawyer, you may also want to prepare a memo for your personal file.“Your goal is not to hang the other directors,” Miller says, “but simply to ensure that if the transaction is subsequently scrutinized, your position was clear from the records.”
R. Mark Keenan, co-chair of the financial services insurance coverage group at Anderson Kill & Olick in New York City, says that directors who want to hire an outside attorney must not be afraid of offending the company’s general counsel. “If someone gives you a real hard time about it,” he says, “that would communicate something worrisome to me.”
