Bench & Bar

JAN 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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19 BENCH & BAR | Because an attorney has special knowledge and experience, boards may have a tendency to look to the attorneys who serve on a board for legal advice and an attorney may be held to a higher standard of care in fulfilling his or her fiduciary duties on a nonprofit board. More may be expected of an attorney. Consequently, an attorney who serves as a board member and who reviews legal documents (such as the nonprofit's corporate bylaws) or comments on a legal matter faced by the nonprofit corporation arguably could be held to a higher standard of care than a board member who is not an attorney. For this reason, an attorney serving only as a board member should make it clear to the board that any comments or input regarding a legal matter before the board are strictly being provided only in the role of board member, and not as attorney for the board or for the nonprofit corporation. An attorney serving as a board member may even want to suggest, and have documented in the board minutes, that the nonprofit corporation was advised to consult its legal counsel on the matter. In complying with the business judgment rule and other fidu- ciary duties, board members may rely on information, reports and opinions received from other directors, committees of the board, officers, and consultants retained to advise the nonprofit corpora- tion. 4 However, if an attorney has additional knowledge that makes reliance on the materials and reports unwarranted, the attorney may not be considered to have acted in good faith under the law. 5 As a board member, an attorney with specialized knowledge and experience cannot act passively if he or she has information or knowledge that differs from the reports and information presented to the board by officers or other directors or outside counsel that affects a decision or action of the board. A board member has a fiduciary duty to avoid conflicts of interest. e law requires that a director discharge his duties in a manner he honestly believes to be in the best interests of the corporation. 6 In a fiduciary relationship, a board member cannot profit from the relationship without the permission of its principal, i.e., the nonprofit corporation. 7 Conflicts of interest easily identified are those that involve financial gain to the board member or his family, such as a transaction involving the sale of corporate real property at below market rates to a board member or family member, or the grant of business by the nonprofit organization to a business owned in part or whole by a board member. Indirect conflicts of interest may be more difficult to identify, but attorneys should stay alert to consideration of these as well. On some occasions, however, what appears to be a potential conflict of interest may actually offer a benefit to the nonprofit corporation, such as when a board member can provide a service or a product through his or her business because of a certain expertise, or pro- vide services or goods at a competitive price. e law in Kentucky does allow nonprofit corporations to engage in transactions with a director of a corporation, provided certain requirements are met. 8 If the material facts of the transaction and the director's interest are disclosed, if the board approves of the transaction, and if the trans- action is fair to the corporation, the corporation can be involved in a corporate transaction with a director. 9 Corporate by-laws may impose different or additional requirements. Other prudent mea- sures to be followed by a board may include obtaining competitive bids to ensure the services provided are financially comparable; conducting due diligence on the area of expertise of the director; disclosing all risks of the representation to the board; and requiring the interested board member to refrain from all discussions and votes on the transaction. An attorney who serves as a board member may properly undertake representation of the board if the board approves the representation in accordance with the law and board policies, and if the attorney determines that there are no ethical limitations on the representa- tion (some of which are discussed below). An attorney who serves as a board member and provides limited legal representation to a nonprofit entity should document the representation in writing to the nonprofit corporation and make clear the limited representation of the engagement. ETHICAL OBLIGATIONS OF ATTORNEYS SERVING ON NONPROFIT BOARDS While the Rules of Professional Conduct in Kentucky do not contain a rule specifically directed to an attorney's service on a nonprofit board solely as a board member, some of the rules do require an attorney serving on a nonprofit board to consider the effect on clients of the attorney or the attorney's firm. e rules also apply to an attorney who serves as a board member and who, either intentionally or unintentionally, provides representation to the nonprofit corporation through his or her board service. An attorney who is considering serving a nonprofit corporation either as a board member only, or as a board member and attorney for the nonprofit corporation, should carefully review the various aspects of the nonprofit's business and how it might impact the attorney in his or her representation of the nonprofit corporation and other clients given the ethical obligations imposed on attorneys in general. For example, an attorney is prohibited from representing a client if the representation "will be directly adverse to another client" or if there is a "significant risk the representation will be materially limited by the lawyer's responsibilities to another client, a former client, a third person or by a personal interest of the attorney." 10 An attorney is permitted to represent two clients if the lawyer believes that the lawyer will be able to provide competent and diligent representation to each affected client; the representation is not prohibited by law; the clients' interests are not directly adverse; and the clients give informed consent in writing. 11 If there is no direct adverse conflict with representation of the two clients, the attorney should consider whether he or she can competently and diligently represent a client without the representation being mate- rially limited due to his or her proposed service on the board of the nonprofit corporation. In doing so, the attorney should consider whether he or she may possess confidential information that will affect the advice given to the client or the attorney's service as a board member. Additionally, the attorney should consider whether his or her own interests in general favor representing the client over serving the board, or vice versa, and consider any impact on the attorney's ability to give independent advice to the client and

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