Solicitors on the Board of Directors – The Pros and the Cons
There has been a rise of practising solicitors beginning to serve on their client’s boards as a company director. Solicitors generally bring a whole ‘suitcase’ of skills to the role of a company director as they’ve such a wide range of commercial skill and intellectual qualities developed throughout their legal careers.
Solicitors have also built a critical mindset trained to see flaws in any argument. For these reasons and more, appointing solicitors onto a board can be seen as extremely beneficial to a company, especially if they are under distress, to help deal with any legal dilemmas and improve the operations of that company.
The Benefits of Having Solicitors on The Board of Directors
Solicitors have been dealing with complex legal matters throughout their careers, so naturally are more comfortable with dealing with complex situations. They bring an insightful perspective to complicated areas of law, making sure their advice is based upon both morality and the law – something a strictly business-minded director may not be able to do.
Usually, the Directors of a board are extremely skilled in one particular area, whether that be marketing or production etc., but when it comes to complying with Government regulations consisting of complex laws and legislation, many Directors fail to understand what is then required of them.
If and whenever legal complications arise, many Directors may be then faced with the issue of not fully understanding how to approach their issue(s) under the law, and therefore under distress seek the legal advice of a solicitor.
Under these stressful circumstances, many companies become motivated to bring onboard a solicitor Director who would then be able to provide to them adequate and proper legal advice; skilfully build and manoeuvre any legal case to achieve the best desired outcome for the company; negotiate with any third parties; and settle any legal disputes with confidence so that their Directors can focus on their respective roles within the company.
Playing ‘devils advocate’, which many solicitors are trained to do – that is be able to identify all the flaws in a company’s decision and potentially predict the likelihood of any successes or complications that may arise if a company was to approach an issue a certain way – allows for greater generation of discussion, problem solving and reaching solutions with greater clarity.
For these further reasons, companies are motivated to appoint a solicitor director for the purposes of making well-informed decisions and judgments across a variety of issues a company may face.
Being able to also absorb large amounts of new material and dissect information into their factual scenarios, solicitors act upon accuracy and fact-based decision making. Thus, solicitors can be regarded as well placed to help boards navigate risky areas with integrity and honesty, as their actions are monitored and regulated by the Court.
This however, is a double-edged sword. Being monitored and regulated by the Court, solicitors owe a paramount duty to the Court, whereas Directors of a board owe a primary duty to the company. A solicitor acting as Director will and therefore run the risk of finding themselves in a conflict of interest should their role as a solicitor giving advice and role as a Director of the company become unclear or in conflict.
Conflicts That May Arise
No doubt, having a solicitor provide legal advice for a company is useful, however, when that same solicitor is also a Director for a company, the company may lose legal professional privilege. In Australia, it is essential for legal professional privilege to be maintained as it protects solicitors and their clients (the company) from disclosure.
Conflict may also arise if the board decides to pay remuneration to the solicitor’s firm or the engagement of another firm of solicitors, where in such cases, solicitors will be required to follow the conflict of interest rules, which as provided by the Corporations Act 2001 identifies:
- When a Director of a company is required to notify other Directors of material personal interest when conflict arises;
- When a Director has a power to give standing notice to other Directors about an interest;
- What happens when the above two rules interact with other laws;
- What is required in relation to voting and completing transactions (applying to Directors of propriety companies);
- The restrictions on voting (applying to Directors of public companies only); and
- ASIC’s power to make any declarations and class orders.
Directors of a company are usually protected by a company’s Directors and Officers insurance policy, and solicitors will usually be protected by their professional indemnity coverage if they are insured appropriately.
However, it must be noted that solicitors, regardless of their professional indemnity coverage, are specifically excluded from claims arising from acting as a Director of a board. If the distinctions between the actions as a Director and actions as a solicitor becomes unclear, then this will create problems for both insurance coverage (for Director or solicitor) from being effective.
Caution To Solicitors Who Are Appointed As A Director
Solicitors are usually appointed to act as a Director for a duration of time. However, as soon as a solicitor is appointed as a Director, he or she under the law is recognised as carrying all the duties that a Director owes to a company.
Given the high risk of potential conflict that may arise, solicitors who agree to accept this responsibility should therefore carefully consider their role as a solicitor providing only legal advice to a company. They should also be extremely clear about the capacity in which they are acting, whether as a Director or as a solicitor, especially after the appointment as a Director.
To avoid the blurring of lines between the actions as a Director of a company and that of a solicitor, it is essential to:
- Ensure the careful documenting of all the roles in which certain tasks will be done and how legal advice is given;
- Ensure that when providing legal advice, such advice is minuted appropriately and if written, done so under a standard law letterhead;
- Ensure potential conflicts are at the forefront of decision-making in the board room;
- Identify any conflicts early and avoid participating in the company’s decision-making which might create potential conflicts;
- Make it clear that only legal advice is being provided if a solicitor is not appointed as a Director of a company; and
- Avoid participating in any decisions of a company if a solicitor is not a Director of that company.
Despite the potential conflicts that may arise when the actions of a Director and that of a solicitor within a company’s board becomes unclear, a company may still greatly benefit by having a solicitor Director onboard for the many reasons discussed in this article.
It is important however, that solicitor Directors are educated on the potential conflicts that may arise and in doing so, are well educated on how to protect themselves to prevent and/or lessen the damages that may be caused if such conflict were to arise, noting how high risk they are.
JB & Associates
Solicitors & Barristers
T: 02 9723 8080