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Compensation Committees – Whom Do You Represent?

Amongst the many, many, changes wrought by the Dodd-Frank Wall Street Reform & Consumer Protection Act, is this requirement in Section 952(d)(1):  

"The compensation committee of an issuer, in its capacity as a committee of the board of directors, may, in its sole discretion, retain and obtain the advice of independent legal counsel and other advisers". 

In addition, Section 952(d)(2) makes the compensation committee "directly responsible" for the appointment, compensation, and oversight of the work of independent legal counsel; Section 952(e) requires that an issuer provide "appropriate funding"; and Section 952(b) provides that a compensation committee of an issuer may only select independent legal counsel after consideration of factors to be identified by the Securities and Exchange Commission as affecting the legal counsel's independence.

Recognizing that many compensation committee charters already include somewhat similar provisions, these new requirements may seem less than radical.  However, they do raise some interesting and important questions. 

First, and foremost, has Congress redefined state professional responsibility rules regarding the identity of a lawyer's client?   Rule 3-600(A) of the California Rules of Professional Responsibility 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". 

Thus, it seems to me that when a lawyer is asked to advise a compensation committee, that lawyer's client is the corporation and not the committee or the committee members.  I often hear lawyers say that they represent the committee.  But do they?  After all, a compensation committee is generally not considered a separate legal entity.  Indeed, Congress' mandate that the issuer provide "appropriate funding" implicitly recognizes that the compensation committee isn't a separate entity with its own purse.  Of course, it is possible that the lawyer means that he or she represents the committee members.  However, if a lawyer were to represent the individual committee members, the lawyer would generally be required to obtain the members' informed written consent pursuant to Rule 3-310(C) and Rule 3-600(E).  Also, Rule 3-600(D) requires that when a lawyer deals with an organization's directors, officers, employees, members, shareholders, or other constituents, he or she must explain the identity of the client for whom he or she acts, whenever it is or becomes apparent that the organization's interests are or may become adverse to those of the constituent(s) with whom the lawyer is dealing.

So, if the lawyer advising the compensation committee and the lawyer representing the corporation have the same client (the corporation), what does it mean to say that the lawyer advising the committee is independent?   Of what exactly is a lawyer representing a corporation required to be independent?  If the idea is that the lawyer should be independent of management, that should already be the case - the lawyer's client is the corporation.  Moreover, professional rules, such as California's Rules 3-310 and 3-600(D), already govern conflicts of interest vis-a-vis a lawyer's client.   The lawyer's role as advocate and adviser should not be conflated with that of auditors whose job it is to provide an independent assurance function.

Finally, Congress' insistence that an issuer provide "adequate funding" strikes me as unusual.  I haven't looked, but I would be surprised to learn that their are other examples of a Congress mandating that someone pay for a lawyer when legal representation isn't required by the constitution.

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
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