The 1735 edition of Jonathan Swift’s Gulliver’s Travels includes a frontpiece portrait of Capt. Lemuel Gulliver. Beneath the portrait is a Latin phrase – Splendide Mendax. This phrase is a snippet from the Roman Poet Horace’s Odes (Book III, Poem 11). It means splendidly false. The phrase is perhaps one of the most famous literary examples of an oxymoron, meaning two words that contradict each other.
In the securities field, the term “independent legal counsel” is an oxymoron that completely misapprehends the role of lawyers. The blame for introducing this abomination into the federal securities laws can be laid at the door of Congress. In 2002, Congress amended Section 10A of the Securities Exchange Act of 1934 to include a requirement that each audit committee have the authority to engage “independent counsel”. The SEC dutifully included the term “independent counsel” in Rule 10A-3.
Notably, neither Congress nor the SEC actually used the the phrase “independent legal counsel” in the statute or rule. While one might imagine that Congress had legal counsel in mind when it used the phrase “independent counsel”, the SEC actually imagined the word “legal” into the statute: “Similar to our interpretation of Section 10A(m) of the Exchange Act, which gave the audit committee authority to engage ‘independent legal counsel’ . . . .” SEC Release No. 33-9330 (June 20, 2012).
In Section 952 of the Dodd-Frank Act, Congress mandated that the SEC adopt rules directing national securities exchanges to prohibit the listing of equity securities of any issuer that does not satisfy certain independence standards for compensation committees. Among those standards is the authority of the compensation committee to engage “independent legal counsel”. This time Congress actually used the word “legal”. In June, the SEC adopted the mandated rules but specifically declined to define the term, principally on the basis that no one urged them to do so.
My problem with the phrase is that it is entirely unclear of what or whom legal counsel is intended to be independent. Rule 3-600(A) of the California Rules of Professional Conduct provides that “In representing an organization, a member shall conform his or her representation to the concept that the client is the organization itself, acting through its highest authorized officer, employee, body, or constituent overseeing the particular engagement.” I suspect that in many cases, it is the corporation, not the committee or the individual committee members, that signs the lawyer’s engagement letter even though the committee selected and decided to engage legal counsel. When this is the case, the lawyer’s professional obligations run to corporation, not to the individual committee members, the committee, or anyone else. It is therefore nonsense to say that the lawyer is independent of the corporation that retained her. This is made clear by the California Court of Appeal in Brooklyn Navy Yard Cogeneration Partners, LP v. Superior Court, 60 Cal. App. 4th 248, 254 (1997):
If subsection (A) of rule 3-600 of the Rules of Professional Conduct leaves any doubt as to who or what is not a client of the organization’s attorney, subsection (D) clarifies the point. This subsection sets forth the limited nature of the duty owed by an organization’s attorney to the nonclient actors with whom the attorney deals in the corporate context. These nonclients are identified as the “organization’s directors, officers, employees, members, shareholders, or other constituents.” (Rules Prof. Conduct, rule 3-600(D).)
Note that the rule clearly contemplates that the interests of a corporation may differ from those of directors, management and even the shareholders.
If the lawyer’s clients were the committee members, then she should comply with the Rules of Professional Conduct dealing with multiple clients (Rule 3-310). If the corporation is paying the attorney to provide advice to another person or entity, then she must also comply with the rule concerning accepting compensation from someone who is not her client. The more fundamental problem is that the attorney will owe obligations of confidentiality and competence not to the corporation but to someone else. Doesn’t Congress and the SEC want legal advisers to owe their allegiance to the interests of the corporation?
P.S. – If you are wondering about the plural of oxymoron, it’s oxymora. The word is derived from two Greek words meaning sharp and foolish. The English plural form of many, but not all, Greek words that end in -on, is formed by substituting -a, as in phenomena and criteria.