Risk Update

Conflicts Analysis — Client Clash, Company and Directors, Evolving Considerations

Posted Dan Bressler

Brad Risinger, partner at Fox Rothschild, shares analysis of recent conflicts matter: “One Law Firm. Two Clients. Three Times the Complexity.” —

  • “Counsel in North Carolina Derivative Actions can Represent Company, and Targeted Directors who do not Face ‘Serious Charges of Wrongdoing'”
  • “Amidst a “bitter family dispute” over future control of a closely held oil company, can the same law firm represent the directors paving the way for their son to take the reins and the company that minority shareholders seek to protect from the heir’s perceived shortcomings?”
  • “In Mauck v. Cherry Oil Co., Inc, 2021 NCBC 59, the Business Court took a first impression look and adopted a subjective standard that would disapprove of such dual representations only when allegations of ‘serious wrongdoing’ are made against the directors sued in a “derivative action.”
  • “Womble Bond Dickinson (US) was counsel for defendants Jay and Ann Cherry, and over the repeated objections of the plaintiffs, the firm subsequently was retained to represent Cherry Oil. As Judge Davis aptly noted, the plaintiffs drew little comfort from Womble Bond purporting to protect the interests of the majority shareholders and the company (id.¶¶ 13, 25): ‘In essence, the Plaintiffs’ argument is that an attorney cannot represent one client at the same time that it is investigating that client for potential wrongdoing against another client.'”
  • “The Business Court surveyed differing approaches from other jurisdictions, but ultimately settled on a rule that would allow the same law firm to represent both company and directors in a derivative action unless there are “serious charges of wrongdoing” against the directors.”
  • “There are, Mauck concludes, instances when a law firm should not represent both company and targeted directors in a derivative action but discerning them depends on a subjective determination of when alleged director misconduct amounts to ‘fraud, theft, self-dealing, or usurpation of corporate opportunities.'”
  • “Instead, the Court held, alleged efforts by the defendant directors to consolidate their power and lessen the influence of the minority shareholders was a debate about ‘current mismanagement and future direction,’ not the sort of ‘theft, fraud, or gross financial conflicts of interest that courts have found sufficient to constitute serious charges of wrongdoing.'”