Robert Lindsay and Mary Mullally examine
three recent cases that highlight the difficulties faced by in-house lawyers when they are at odds with management
Legal directors have been at the centre of three bitter disputes in recent months which place the spotlight firmly on the tricky role of the in-house lawyer.
Tim Warwick was company secretary at RoadChef when he queried new options his boss was granting himself over a trust fund of shares for employees.
He was told not to make a fuss by a senior director and an outside law firm. He and fellow staff have now instructed Cardiff law firm Palser Grossman to see if it can sue the boss for transferring employee shares to his own account.
Nick Deeming was legal director and company secretary at Anglo-French software group Sema when the new German director sold some of his shares in Sema during a closed period.
The director’s sale was followed by a profit warning, which became the subject of an investigation by the Financial Services Authority (FSA).
A third in-house lawyer, Tom Conlon, was legal director at Dutch bank ABN Amro when he was asked to mount an investigation into insider dealing. He claims he was sacked and his investigation shelved when he uncovered widespread money laundering at the bank. Last month he reached an 11th-hour settlement with ABN Amro.
All three cases highlight the problems faced by legal directors when they are at odds with management.
As a professional and an officer of an organisation, the legal director’s role is to ensure that the company complies with its obligations. But if his or her view of the obligations conflicts with the directors and they do not follow the advice, what steps should be taken by the legal director to protect what he perceives to be the company and the shareholders’ interests?
With client confidentiality issues and what can be a strong corporate culture not to break ranks, this can be a difficult call. Two of the three directors will not talk about their cases. Conlon has signed the usual confidentiality clause preventing him from talking about it. Warwick’s case, according to partner James Moss at Palser Grossman, is still live, and he is also unwilling to talk.
But Deeming, who has now left Sema, whose difficulties triggered a takeover by Franco-American oilfield services group Schlumberger, has spoken exclusively to Legal Director about the problems thrown up at the group.
Reports at the time said that Hartmut Lademacher, the Sema German director, netted £24m by selling his shares when he wasn’t supposed to. Lademacher had to resign from Sema in the negative publicity following the sale (see box).
At the time his share dealings emerged, Lademacher told the press that he had
misunderstood the closed period position and had made an error – he later claimed that he did not realise he was a director.
A war of words developed between Lademacher and the company chief executive, Perre Bonelli. Deeming tells Legal Director that he was not asked by Lademacher if he could sell shares, and that Lademacher was fully aware of his obligations as a director of a company.
Deeming says that he and Sema were only aware of the sale some considerable time after it had taken place. Once he had established that the sale was in the closed period, Deeming notified the FSA immediately. An internal investigation was then launched, which led to Lademacher’s removal from the board.
Under the UKLA Listing Rules, Deeming says, once Sema was aware of the dealing it was under an obligation to announce it and that, professionally, it had no choice but to disclose the breach to the regulators.
If there is no specific obligation to comply with regulations, where does the legal director stand if his advice is ignored and he believes that the company and the shareholders’ position is threatened?
Is it simply a question of recording the advice or should the legal director take steps to protect the company’s shareholders?
Legal directors can seek to rely on whistleblowing provisions under the Public Disclosure Act 1998 as Conlon at ABN Amro attempted to do (see box). Guy Dehn is the head of the charity Public Concern at Work, which campaigned to introduce whistleblowing legislation.
The only time Dehn can recall an in-house lawyer asking his organisation about advice on blowing the whistle was when the lawyer concerned had leaked business details to the press and was being disciplined by the Law Society for breaking client confidentiality. Dehn says that a good in-house lawyer should never be in the position to have to blow the whistle. If he has given clear advice and that advice is ignored, he is in the clear. If the advice was that an action was unlawful then the directors can be prosecuted and disqualified if they ignore it. The checks and balances in the system ought to be capable of righting things themselves. The important thing is giving clear advice and taking external advice if the in-house lawyer himself needs to bolster his position, he says.
Deeming disagrees with this analysis and says that there are certain instances where the in-house director has to consider very carefully whether to disclose information. If advice is given and ignored, Deeming says, the in-house adviser has to ask himself whether he has a professional obligation to protect the company and the shareholders.
It is important to distinguish between two situations, Deeming says. The first situation is where advice is received, and then ignored on good commercial grounds.
This is a business decision which is taken after all the facts, including the legal advice, have been weighed. The lawyer giving the advice may not like the decision, but it comes with the territory.
The real problem – the second situation – arises where a law or regulation with potentially serious consequences for the company and its stakeholders is ignored.
For example, what if, on the basis of information available internally to the company, the in-house adviser felt that there was an obligation on the company to make an immediate announcement to the market. If the advice was given and ignored, Deeming says, the in-house adviser would have an obligation to protect the company and its shareholders.
In that scenario, the in-house adviser could not remain passive and simply put a note on the file, Deeming says. He must take the matter further.
“The whole approach to corporate governance demands maximum freedom for the company secretary to be able to ‘whistleblow’ in whatever way necessary to protect his and the company’s position,” he says.
Deeming says that this distinguishes the old-style in-house legal adviser from the US-style general counsel, who has a business role. “In my view, it is not just a question of advising the director of his position and the consequences if he breaches the law.
“The matter goes far beyond that in terms of protecting the company’s position both from a legal perspective and a PR perspective,” he says. Faced with this dilemma, the in-house lawyer should act in an independent and professional way. He or she must first go to the chairman of the company, Deeming says. In addition, he should be prepared to seek independent legal advice.
“Contact in the event of an issue must start with the chair. It is for this reason alone that the chair must remain independent and not have a dual, chair/chief-executive role. Otherwise it is very difficult to be independent.”
