THE PAST THIRTY YEARS OR SO has seen a trend towards an increase in the size and sophistication of legal departments within large companies. This trend is due in part to the need to manage legal costs, which can be very costly if all legal services are obtained from external law firms. It is also due to the expansion in the role of corporate counsel and the increasingly diverse and important roles that they leperform within a company.
This trend has occurred both in China and in other countries. According to reports, by May 2018, over 1,000 state-owned companies in China had employed corporate counsel and the total number of corporate counsel exceeded 4,600 persons.
This article considers the role of corporate counsel, the way in which corporate counsel are regulated and some of the ethical challenges that corporate counsel face. These issues are considered by reference to the position in common law jurisdictions and the position in mainland China.
THE ROLE OF CORPORATE COUNSEL
Corporate counsel perform a wide range of roles, which can vary depending on both the company at which they are employed and also the type of work they are required to do for the company. In some cases, corporate counsel perform the traditional role of providing legal and compliance advice in response to specific instructions from their business colleagues. In other cases, they are involved in business strategy and structuring and are part of the decision-making process. In the latter situation, the role of corporate counsel extends beyond their traditional one as a legal adviser to the role of a trusted adviser who is intimately and influentially involved in the decisions a company makes.
Corporate counsel – often known as “risk counsel” – also perform a very important role in the large, international law firms and handle a broad range of issues, including legal compliance, professional indemnity claims and conflicts clearance and management (for a discussion about conflicts clearance and management, see China Business Law Journal volume 1 issue 4: Cases, matters and conflicts of interest).
Many terms have been used to describe the role of corporate counsel. These include “gatekeeper” or “watchdog”; namely, somebody who is responsible to ensure that the company makes decisions that are in accordance with the legal and regulatory requirements and who monitors compliance with those requirements. Other terms that have been used to describe corporate counsel include business partners, problem-solvers and deal-fixers.
Determining the scope of the role of corporate counsel is complicated by the fact that in many cases they have concurrent roles and wear different hats. For example, a corporate counsel might concurrently act as the company secretary or as a director of a subsidiary of the company.
The role of corporate counsel and its scope may also be affected by seniority. For example, a junior lawyer is likely to be further removed from the decision-making process than a general counsel.
In mainland China, rules governing both public lawyers and corporate lawyers were issued by the Ministry of Justice and came into effect on 1 January 2019: the Administrative Measures for Public Lawyers and the Administrative Measures for Corporate Counsel. Public lawyers are defined as public officials who undertake legal affairs work for party or government bodies, or people’s organizations. Corporate counsel are defined as personnel who undertake legal affairs work for state-owned enterprises with which they have signed an employment contract.
These measures sit alongside earlier measures governing corporate counsel in state-owned enterprises that were issued in 2004 by the State-owned Assets Supervision and Administration Commission: the Administrative Measures for Legal Counsel in State-owned Enterprises.
Article 13 of the new Administrative Measures contemplates a broad role for corporate counsel and provides that the main responsibilities of corporate counsel are as follows:
- Providing legal advice in respect of major operational strategies of the enterprise such as restructuring, mergers and acquisitions, listing, asset transfer and bankruptcy reorganization;
- Participating in the drafting and amendment of the major governance system of the enterprise such as the articles of association of the enterprise and the operational rules of the board of directors;
- Participating in external negotiations, consultations, drafting and reviewing contracts, agreements, and legal documents signed by the enterprise;
- Organizing and carrying out matters such as compliance management, risk management, intellectual property management, legal promotion, education and training and legal advice;
- Handling different types of legal matters such as litigation, mediation and arbitration;
- Other legal matters entrusted or assigned by their employing unit.
- Under the new Administrative Measures, the role of corporate counsel in state-owned enterprises is potentially very broad.
The regulation of corporate counsel
In some common law jurisdictions, corporate counsel are regulated in the same way as external counsel and are required to hold a practising certificate. Jurisdictions, such as the states in Australia, recognize a separate type of practising certificate for government lawyers and corporate lawyers. On the other hand, corporate counsel in Singapore are not regulated and usually do not hold a practising certificate.
In those common law jurisdictions that require corporate counsel to hold a practising certificate, corporate counsel are subject to the same professional duties as external counsel. In Hong Kong, for example, a Practice Direction issued by the Hong Kong Law Society provides that inhouse counsel are subject to the same general principles of professional conduct, rules and regulations as a solicitor in private practice. It then qualifies this (somewhat unclearly) by adding “insofar as they are applicable.”
There are, however, some fundamental differences between corporate counsel and external counsel. Corporate counsel are employees of their company, which creates challenges in terms of maintaining their professional independence. In addition, corporate counsel are usually not able to “shelter” behind the client’s instructions and the information that the client has given to them. In other words, they are not able to limit their professional responsibility and liability by reference to the specific questions that the client has asked or the information that the client has provided.
By contrast, corporate counsel are often expected to take an open-ended, proactive role in managing risks within an organization and seek all relevant information for that purpose.
Another difference is that in common law jurisdictions, legal professional privilege extends to communications with corporate counsel only when they are acting in a legal capacity (for a discussion about privilege, see China Business Law Journal volume 4 issue 9: Privilege).
In mainland China, corporate counsel in state-owned enterprises are required to obtain a corporate counsel certificate. However, the regulation of corporate counsel is separate from the regulation of external counsel. If corporate counsel would like to move into private practice with a law firm, they must obtain a lawyer practising certificate.
As major corporate scandals have come to light over the years, the expectations that corporate counsel will challenge, disrupt and prevent corporate wrongdoing have increased. This has been accompanied by a debate around the role of corporate counsel and, in particular, whether they should act as moral guardians – or as the moral conscience – of the company.
In performing their role and resisting wrongdoing by their company, corporate counsel face several ethical challenges. One of these challenges is the risk that an “own-interest” conflict will arise; namely, the risk that their own interests, particularly concerns about their own career security and progression within a company, will cloud their judgment and conflict with their duty to act in the best interests of the client.
The challenges are compounded by the fact that corporate counsel need to comply with many different duties and obligations. Some are based on professional rules, some are based on the employment contract and some are based in statute.
All of these challenges raise the question: how should corporate counsel act in the face of corporate wrongdoing or misconduct?
In some jurisdictions, such as Canada, the professional rules impose a reporting-up duty on corporate counsel in circumstances where the company “has acted, is acting or intends to act dishonestly, fraudulently, criminally or illegally”. The rules provide that if a company ignores the advice of corporate counsel, the corporate counsel must withdraw from acting in the matter. In some circumstances, the corporate counsel may need to resign.
A similar rule appears in the 2004 Administrative Measures, Article 11 of which provides as follows:
If the opinions and suggestions put forward by corporate counsel are not adopted by the enterprise, causing major economic loss and seriously damaging the legitimate rights and interests of the investor, the corporate counsel of the subsidiary of the investor enterprise may provide feedback to the investor enterprise and the corporate counsel of the investor enterprise may provide feedback to the State-Owned Asset Supervision and Administration Body.
Article 15 of the new Administrative Measures is more direct and provides that an enterprise must not put forward for discussion, or make any decision in respect of, any major matter before listening to the opinion of corporate counsel or if the matter is unlawful in the view of corporate counsel.
(Part of this article is based on a presentation delivered by the author at the Comparative Corporate Governance Conference 2019, held in Singapore on 24-25 January 2019 and hosted by the Singapore Academy of Law, the Centre for Cross-Border Commercial Law in Asia, Singapore Management University and the University of Adelaide.)
A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com.