It has long been recognized that partners owe fiduciary duties of loyalty and care to one another and that officers and directors owe such fiduciary duties to the corporations they serve and to the corporation’s shareholders.  Although many recent cases involving allegations of breaches of fiduciary duties have garnered attention primarily for the sensational facts involved (the saga of The Walt Disney Company’s hiring and almost immediate – and expensive – termination of Michael Ovitz comes immediately to mind), the headlines have obscured some important developments in the law.  The Delaware courts, for example, are now recognizing and beginning to articulate an independent duty of good faith owed by directors.  Some of the most interesting recent developments in fiduciary duty law, however, have involved fiduciary relationships outside the usual partner-officer-director arena.

Fiduciary Duties of Underwriters to Issuers

One of the most interesting cases of 2005 involved a breach of fiduciary duty claim brought against Goldman, Sachs by a defunct internet retailer.  In EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 832 N.E.2d 26, 799 N.Y.S.2d 170 (2005), the New York Court of Appeals held that an issuer of an initial public offering could properly assert a claim for breach of fiduciary duty against an underwriter based on the issuer’s reliance on the underwriter’s expertise in pricing the IPO where the underwriter had an undisclosed conflict of interest.  Goldman was the lead managing underwriter of eToys’s 1999 IPO.  The negotiated underwriting agreement fixed the initial offering price at $20 per share and provided for an allotment of several million shares that eToys sold to Goldman at $18.65 per share.  On the first day of trading in May of 1999, eToys’s stock opened at $79 per share, rose to $85 per share, and closed at more than $76 per share.  (By the end of 1999, the share price had fallen to $25 per share and, in 2000, fell permanently below the offering price.)  The unsecured creditors of eToys brought an action against Goldman for breaching a fiduciary duty to eToys with respect to the pricing of the IPO;  the complaint alleged that Goldman deliberately underpriced the IPO so that it could profit from certain undisclosed agreements with several of its favored customers that involved Goldman selling portions of its allotment to those customers (a practice known as “spinning”), who agreed in turn to “kick back” to Goldman a percentage of profits made by “flipping” (quickly selling the shares in the high-priced aftermarket).

The New York Court of Appeals held that, notwithstanding a negotiated underwriting agreement that specified the IPO price, the breach of fiduciary duty claim should not have been dismissed by the trial court.  The cause of action could survive – at least for pleading purposes – the court said, because the complaint alleged an advisory relationship apart from the underwriting agreement and further alleged that Goldman induced eToys to rely on Goldman’s knowledge and expertise to advise eToys as to the IPO price most advantageous to eToys.  Had Goldman disclosed its alleged conflicts of interest, the court said, no breach of fiduciary duty would exist.

The dissent noted that the underwriting agreement, including the IPO price, had been fully negotiated between two sophisticated and fully-counseled parties.  This written agreement, according to the dissent, defined the entirety of the relationship between eToys and Goldman and precluded the finding of a separate, fiduciary relationship.  Indeed, the dissent posed the interesting question, “How may a buyer ever owe a duty of the highest trust and confidence to a seller regarding a negotiated purchase price?”  EBC I, 5 N.Y.3d at 36, 799 N.Y.S.2d at 180 (Read, J., dissenting in part).

Although some commentators have seen in the EBC I decision the opening of a Pandora’s Box with respect to underwriter liability, such concern seems both hyperbolic and unwarranted.  Not only is the Court of Appeals’s opinion narrow, but, like many breach of fiduciary duty cases, it hinges on a lack of disclosure.  This suggests that underwriters can obviate breach of fiduciary duty claims by disclosing that they have or may have “spinning” arrangements.  Underwriters, too, could expressly disclaim any intent to act in an advisory capacity.  Indeed, the dissent raises a point that will prove important at trial:  any issuer likely will have difficulty establishing both a fiduciary relationship with and reliance on an underwriter in the face of an underwriting agreement that specifies a fully-negotiated IPO price.

Fiduciary Obligations of Corporate Counsel to Individual Shareholders in Close Corporations

Whether a lawyer nominally representing a close corporation can be liable for breach of fiduciary duty to one of the corporation’s shareholders is another issue gaining attention around the country.  In the typical situation, a close corporation of two or three equal shareholders and directors retains a lawyer (or law firm) as corporate counsel.  One or two of the shareholder-directors then ask the corporation’s lawyers to assist in squeezing out the remaining shareholder-director, ostensibly for “the best interests of the corporation.”  Is the corporate counsel liable to the ousted shareholder-director?

Some courts have held that, in such circumstances, the lawyer (or law firm) owes fiduciary duties to each of the corporation’s shareholders.  See, e.g., Fassihi v. Sommers, Schwartz, Silver, Schwartz & Tyler, 309 N.W.2d 645, 649 (Mich. Ct. App. 1981); Schaeffer v. Cohen, Rosenthal, Price, Mirkin, Jennings & Berg P.C., 541 N.E.2d 997, 1002 (Mass. 1989).  This view treats the close corporation as analogous to a partnership, where the law has long held that an attorney for the partnership owes fiduciary duties to each of the partners.  It also recognizes that, with respect to close corporations, “the corporate attorneys, because of their close interaction with a shareholder or shareholders, simply stand in confidential relationships in respect to both the corporation and individual shareholders.”  Fassihi, 309 N.W.2d at 648.

Other courts have found that attorneys for a close corporation owe fiduciary duties directly to ousted shareholders based on the existence of an attorney-client relationship.  See, e.g., Rosman v. Shapiro, 653 F. Supp. 1441, 1445 (S.D.N.Y. 1987); Bobbitt v. Victorian House, Inc., 545 F. Supp. 1124, 1126 (N.D. Ill. 1982).  This approach is based on the twin propositions, both largely unassailable, that an attorney owes fiduciary duties to his client and that the existence of an attorney-client relationship is a question of fact.  Although the “entity rule” generally provides that corporate counsel represents only the corporation and not its individual constituents, the nature of the contacts between the corporate attorney and the individual shareholders in a close corporation may compel a different result.  See, e.g., Rosman, 653 F. Supp. at 1445 (“Although, in the ordinary situation, corporate counsel does not necessarily become counsel for the corporation’s shareholders and directors, where, as here, the corporation is a close corporation consisting of only two shareholders with equal interests in the corporation, it is indeed reasonable for each shareholder to believe that the corporate counsel is in effect his own individual attorney.”); ABA/BNA Lawyers’ Manual on Professional Conduct § 91:2001 (2000) (“If a lawyer’s dealings with constituent individuals in the organization become so extensive and personal that the individuals reasonably believe the lawyer represents them personally, a court or disciplinary authority may conclude that, despite the rule that the organization is the client, a lawyer-client relationship has nonetheless been formed between the lawyer and the constituent.  This is more likely to occur when the entity is a close corporation or other small organization.”).

A third group of courts do not focus on the existence of any attorney-client relationship or a direct fiduciary relationship between the corporation’s attorney and the individual shareholders.  Rather, these courts ask whether the corporation’s attorney has aided and abetted breaches by one or more of the close corporation’s shareholders of the fiduciary duties owed by them to the ousted shareholder.  In Granewich v. Harding, 985 P.2d 788 (Or. 1999), for example, the Oregon Supreme Court confronted the issue of an attorney’s liability to a squeezed-out shareholder in a close corporation where the lawyer had not even been retained when two of the corporation’s three shareholders hatched their plot to force out the third shareholder.  The facts could not justify the finding of an attorney-client relationship between the attorney and the ousted shareholder, nor could they lead to the conclusion, as in Fassihi, that the relationship between corporate counsel and the ousted shareholder was of a nature that could reasonably lead to the finding of a direct fiduciary relationship between the attorney and the ousted shareholder.  The Granwich court, however, concluded, based on the pleaded allegations that the defendant law firm assisted the two shareholders in forcing the plaintiff shareholder out of the corporation knowing that the squeeze-out was in violation of the two shareholders’ fiduciary obligations to the ousted shareholder, that the law firm could be found liable to the plaintiff shareholder for aiding and abetting breaches of fiduciary duty by its clients.

All three bases for liability are currently before Maryland’s intermediate appellate court in the closely-watched case of Ahan v. Grammas (Md. App., No. 2363).  (As a matter of full disclosure, the author represents the appellant in the case.)  In Ahan, a jury found a Chicago-based law firm liable for breach of fiduciary duty and awarded $17.2 million to a disenfranchised 50% shareholder in a satellite communications business.  The law firm had been retained as outside general counsel to a corporation (FAI) in which plaintiff Ahan was a 50% shareholder and to a subsidiary corporation in which FAI owned 67% of the outstanding stock and 100% of the voting stock.  At trial, Ahan argued that the law firm, working in concert with the other 50% shareholder in FAI, had devised and implemented a scheme to give the other shareholder total control over both corporations and to push Ahan out of the businesses.  Following the jury’s verdict, the trial court granted judgment n.o.v. in favor of the law firm, concluding that, as counsel to the corporation, the law firm could not owe a fiduciary duty to an individual shareholder. 

The trial court’s reliance on the “entity rule” is a primary focus of the case.  Although acknowledging that the existence of an attorney-client relationship is ordinarily a question of fact, and despite a record establishing not only a longstanding, close working relationship between the ousted shareholder and the defendant law firm but also extensive work undertaken by the law firm for the specific benefit of the ousted shareholder (including tax advice and formation of a new corporation solely owned by the ousted shareholder), the trial court nonetheless concluded that the “entity rule” embodied in Rule 1.13 of the Rules of Professional Conduct precluded a finding of liability.

Whether the trial court read too much into the “entity rule” is squarely before the Court of Special Appeals.  Although the rule makes it plain that, by representing a corporation, a lawyer does not necessarily represent that corporation’s constituents, there is ample authority for the view that the “entity rule” does not provide a safe harbor for attorneys who fail to remain neutral and instead take sides in fights among shareholders for control of the corporation.  See, e.g., ABA/BNA Lawyer’s Manual on Professional Conduct § 91:2001 (2000) (“Rule 1.13 means only that the lawyer for a corporation does not thereby automatically or necessarily represent the organization’s constituents.  The entity theory does not preclude the possibility, however, that the corporate lawyer may inadvertently wind up representing both the corporation and a constituent.”) (“The lawyer faced with internecine conflict must remain neutral and refrain from taking sides in factional differences.”); D.C. Ethics Opinion 216 (1991) (Rule 1.13 is not applicable “where the shareholders of a closely held corporation reasonably might have believed they had a personal lawyer-client relationship with the corporation’s lawyer.”).

The Court of Special Appeals also has before it the issue raised in Fassihi and Schaeffer as to whether the jury could reasonably have found (as it did) that the relationship between the defendant law firm and the ousted shareholder was such as to give rise to a fiduciary relationship regardless of the existence of an attorney-client relationship.  The law firm has argued that the Fassihi and Schaeffer view of fiduciary obligation is at odds with what it characterizes as Maryland’s strict view of privity.  This argument, however, seems to overlook the crux of the Fassihi and Schaeffer opinions: an attorney for a close corporation may well be in privity with the corporation’s shareholders, despite the “corporate counsel” label.  See ABA/BNA Lawyer’s Manual on Professional Conduct § 91:2001 (2000) (In close corporations, “ownership and management are usually identical or substantially overlapping, making it more difficult in practice to draw a line between individual and corporate representation.”).[1]

The Court of Special Appeals decision, which is expected within the next several months, will likely shed important light on the fiduciary duties owed by attorneys to close corporations.  In the meantime, existing case authority suggests that lawyers for such corporations should think twice before involving themselves in fights for corporate control.


Although most breach of fiduciary duty cases will continue to involve claims against partners or corporate officers or directors, cases involving liability of underwriters, investment bankers, attorneys and others outside the typical partner-officer-director realm will likely account for a significant share of interesting developments in fiduciary duty law over the next several years.

[1]               The issue of aiding-and-abetting liability is also before the court, although in a slightly different procedural posture, since the trial court granted summary judgment in favor of defendants on the aiding-and-abetting claim prior to trial.