Who Does Corporate Counsel Represent During Boardroom Disputes?
Introduction
When directors or majority shareholders fight over corporate control, the corporation’s in-house lawyer may face competing demands from people who previously acted as the lawyer’s clients or superiors. The central ethical question is whether corporate counsel represents the individual directors and shareholders, or the corporation as a separate juridical entity.
Under Philippine corporate and legal-ethics principles, corporate counsel generally represents the corporate entity. The lawyer does not automatically represent the corporation’s directors, officers, majority shareholders, parent company, or affiliated entities merely because those persons control, manage, or own shares in the corporation.
This distinction becomes especially important when the corporation may pursue claims against directors or shareholders who allegedly diverted corporate assets, usurped a corporate opportunity, committed fraud, or otherwise acted against the corporation’s interests.
The Corporate Client Is the Corporation
A corporation has a legal personality separate and distinct from the persons who compose it. Its directors, officers, and shareholders may act for the corporation only within the authority granted by law, the articles of incorporation, the by-laws, or valid corporate action.
Under Section 22 of R.A. No. 11232, the president and other corporate officers perform the functions assigned by law, the by-laws, or the board of directors. Corporate powers, however, are generally exercised through the board of directors, subject to matters requiring shareholder approval.
The separate personality of the corporation means that corporate counsel’s client is ordinarily the corporation itself. The lawyer’s duty is therefore directed toward the corporation’s lawful interests, rather than toward the personal interests of a director, officer, or shareholder who communicates with counsel in that person’s corporate capacity.
Why Directors and Shareholders Are Not Automatically Clients
Representation of a corporation does not, by itself, create an attorney-client relationship between corporate counsel and every person connected with the corporation. A director may consult corporate counsel about corporate matters, but that fact alone does not mean that counsel personally represents the director.
The same rule applies to shareholders. A majority shareholder may have substantial voting power and influence over corporate affairs, but ownership of shares does not convert the shareholder into the corporate lawyer’s individual client.
The Supreme Court explained in Hornilla et al. v. Salunat, Administrative Case No. 5804, 2003, that a lawyer engaged as counsel for a corporation cannot represent members of the corporation’s board in a derivative action brought against them. The corporation and the directors may have opposing interests, even if the directors previously instructed or dealt with the lawyer on corporate matters.
The decisive inquiry is whether the lawyer’s duty to one client requires the lawyer to advance a position that must be opposed when acting for another client. The prohibition applies even when no confidential information was obtained or used.
The Ethical Rule on Conflicting Interests
Section 19 of the Code of Professional Responsibility and Accountability, A.M. No. 22-9-1-SC, provides that a lawyer representing a corporation or organization does not, by that representation alone, necessarily represent its constituents or affiliated organizations, including a parent or subsidiary.
The same provision addresses a lawyer who also serves as a member of the corporation’s board. The lawyer must determine whether the responsibilities of the two positions conflict and, when a conflict exists, disclose it to all concerned parties.
The rule reflects two separate relationships:
| Relationship | Primary duty |
|---|---|
| Corporate lawyer and corporation | Protect the corporation’s lawful interests and provide independent legal advice. |
| Director and corporation | Exercise corporate powers with loyalty, care, diligence, and good faith. |
| Lawyer-director and corporation | Disclose and manage conflicts between professional and fiduciary responsibilities. |
A lawyer who serves both as corporate counsel and director must not use one role to compromise the duties owed in the other. The lawyer should obtain independent advice where necessary and should not participate in decisions in which the lawyer’s personal, professional, or fiduciary interests conflict.
What Happens During a Boardroom Control Dispute?
In a boardroom dispute, factions may demand that in-house counsel prepare pleadings, issue legal opinions, release corporate records, recognize particular directors, or treat one faction as the lawful board. Corporate counsel should not simply follow the instructions of the most powerful shareholder or the director who hired the lawyer.
The lawyer must first determine who is authorized to act for the corporation. Under Section 22 of R.A. No. 11232, corporate powers and the conduct of corporate business are generally vested in the board of directors. The authority of a particular officer must be traced to the law, the by-laws, or a valid board resolution.
SEC Opinion No. 22-16, 2022, likewise explains that a corporation acts through its board and that officers and agents generally cannot bind the corporation without authority from the board or the by-laws. The president may have general supervision over corporate operations, but that does not necessarily include authority to decide disputed questions of board composition or corporate control.
When the board itself is divided, counsel should avoid privately choosing a faction. The lawyer should identify the legally recognized board, review the articles, by-laws, minutes, notices, resolutions, and relevant filings, and advise the corporation through properly authorized corporate action.
Directors Owe Fiduciary Duties to the Corporation
Directors are not owners of corporate property. They manage corporate assets and affairs in a fiduciary capacity for the corporation and its stockholders.
In Bernas et al. v. Cinco et al., General Register Nos. 163356-57, 2015, the Supreme Court described the board of directors as the corporation’s directing and controlling body. The Court emphasized that directors must exercise care, diligence, and utmost good faith in managing corporate affairs.
Section 30 of R.A. No. 11232 imposes personal liability on directors or trustees who willfully and knowingly vote for or assent to patently unlawful corporate acts, act with gross negligence or bad faith, or acquire a personal or pecuniary interest in conflict with their corporate duties.
The provision also prohibits a director, trustee, or officer from acquiring an interest adverse to the corporation in matters entrusted to that person in confidence. A violator may be treated as a trustee for the corporation and may be required to account for profits that should have accrued to the corporation.
Corporate Opportunity and Control Disputes
A boardroom dispute may involve allegations that a director, officer, or controlling shareholder took a business opportunity belonging to the corporation. In that situation, corporate counsel must assess the corporation’s interests independently of the faction supporting the alleged transaction.
In TOPROS, Inc. v. Chang, Jr., et al., General Register Nos. 200070-71, 2021, the Supreme Court held that a corporate fiduciary who takes a corporate opportunity for personal benefit, without first disclosing it to the board and allowing the corporation to decide whether to pursue it, may breach the duty of loyalty.
The Court identified factors relevant to the corporate-opportunity inquiry: whether the corporation could financially exploit the opportunity, whether the opportunity was within the corporation’s line of business, whether the corporation had an interest or expectancy in it, and whether taking the opportunity placed the fiduciary in a position adverse to corporate duties.
Corporate counsel should therefore preserve relevant records, advise the corporation regarding possible claims, and ensure that any investigation is not controlled solely by the directors or shareholders accused of misconduct.
Can Corporate Counsel Represent an Individual Director?
Corporate counsel may separately represent an individual director only after examining whether the representation is compatible with the lawyer’s duties to the corporation. A separate engagement is particularly problematic when the director’s interests may become adverse to the corporation.
For example, a director may ask corporate counsel to defend against a demand letter alleging that the director misappropriated corporate funds. The lawyer should ordinarily decline the individual engagement because the corporation may need to investigate, sue, or otherwise take action against the director.
Written consent does not automatically cure every conflict. Consent must be informed and made after full disclosure, and the lawyer must still comply with the professional rules governing loyalty, confidentiality, independent judgment, and the prohibition against representing materially conflicting interests.
Common Boardroom Scenarios
| Scenario | Proper approach for corporate counsel |
|---|---|
| A majority shareholder demands that counsel recognize a new board immediately. | Verify the election, authority, by-laws, notices, quorum, and applicable corporate records before treating the demand as binding on the corporation. |
| A director asks counsel to defend the director against the corporation. | Explain that the corporation is the client and assess whether the director’s interests are adverse to it. |
| Two board factions issue conflicting instructions. | Identify the legally authorized corporate decision-maker and avoid taking partisan instructions without a valid basis. |
| A parent company instructs counsel of its subsidiary. | Confirm whether counsel represents the subsidiary, the parent, or both, and determine whether the separate entities’ interests conflict. |
| A director allegedly diverted a corporate opportunity. | Advise the corporation independently, preserve evidence, and avoid representing the accused director in the same matter. |
Communications and Confidentiality
Communications made to corporate counsel for the purpose of obtaining legal advice generally belong to the corporate representation. An individual director should not assume that a discussion with in-house counsel is confidential from the corporation or from a properly authorized successor board.
When a conflict becomes apparent, counsel should clearly state the identity of the client, explain that the lawyer does not represent individual directors unless separately engaged, and advise affected persons to obtain independent counsel.
Counsel should also preserve corporate documents and avoid disclosing privileged or confidential information to a shareholder faction merely because that faction claims ownership or control. Access to corporate information must be assessed under applicable law, corporate authority, and the circumstances of the request.
Recommended Steps for In-House Counsel
- Identify the client. Confirm in the engagement letter and internal records that the client is the corporation, unless a separate representation has been expressly and ethically established.
- Verify authority. Review the articles of incorporation, by-laws, board resolutions, minutes, notices, election records, and relevant regulatory filings.
- Map the conflicts. Determine whether the interests of the corporation, directors, officers, shareholders, parent entities, and subsidiaries are aligned or adverse.
- Give a written warning. Inform directors and shareholders that corporate counsel does not automatically serve as their individual lawyer.
- Recommend independent counsel. Refer directors or officers to separate counsel when their personal interests may conflict with the corporation.
- Document the process. Keep a clear record of legal advice, authority checks, conflict disclosures, and the corporate action authorizing significant decisions.
Conclusion
During a boardroom dispute, corporate counsel represents the corporation—not the individual directors or majority shareholders competing for control. The lawyer’s duty is to preserve the corporation’s separate legal interests, maintain independent judgment, and avoid serving two clients whose positions are materially opposed.
Directors and officers should not assume that their position, share ownership, or prior relationship with in-house counsel gives them a personal right to legal representation. Corporate counsel should verify corporate authority, disclose conflicts, protect confidential information, and recommend independent legal advice whenever a director, officer, or shareholder becomes personally adverse to the corporation.
About Nicolas and De Vega Law Offices
Nicolas and de Vega Law Offices is a full-service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 84706126, +632 84706130, +632 84016392 or e-mail us at [email protected]. Visit our website https://ndvlaw.com.
