When shareholders in a closely held corporation disagree, it is extremely likely that one or more shareholders will approach the outside counsel who represents the company, and ask counsel to represent them in shareholder litigation. Before an outside corporate counsel agrees to represent one shareholder against another in a dispute, the Rules of Professional Conduct (RPC) must be carefully considered. Violation of these important rules could lead to a successful motion to disqualify, disgorgement of legal fees, attorney malpractice or the filing of a successful ethics complaint.
The practitioner considering representing one shareholder against another should check if there are any conflicts of interest that would prohibit the representation, as well as whether counsel might be a necessary and material witness to facts in dispute between the parties. For the reasons set forth herein, outside corporate counsel may want to consider referring litigation among the shareholders to another law firm.
Is There a Conflict of Interest?
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