New Support For Joint Representation Of Company And Directors In Derivative Litigation

When a shareholder seeks, by derivative litigation, to hold a corporation's officers or directors liable to the company, one of the first questions that arises for company counsel is whether the company and the individual defendants need separate counsel. A recent opinion from the Northern District of California confirms that, at least at the outset, the company and the individual defendants may be jointly represented. The decision in Voss v. Sutardja1 shines a welcome ray of light into an otherwise murky area and provides useful guidance to company counsel.

At first blush, the answer to the question might seem straightforward. Since the complaint seeks to have the company serve as a plaintiff and recover damages from the individuals, the interests of the company and the individuals seem unalterably opposed. Many reported decisions reflexively suggest that separate representation is required. In one notable case, a federal district court, citing "a substantial body of authority proscribing dual representation of corporate and individual defendants in a derivative action," refused to approve the settlement of a derivative case—even though plaintiffs' and defendants' counsel both supported it—because the company was not represented by counsel independent of the attorneys for the individual defendants.2 In a leading case in California, the court upheld the disqualification of an attorney from representing a closely held corporation in derivative litigation in which the attorney was also representing the directors, who had been accused of embezzlement.3 The court expressed the view that this result was required in cases where directors were accused of fraud, and it also held that the conflict of interest could not be waived by the corporation, because the corporation could give consent only through the defendant directors.4

The problem with requiring separate representation at all stages of all cases, however, is that it ignores some important practical considerations of derivative litigation. These considerations suggest that, at least at the outset of some cases, the interests of the company and the defendant directors or officers may very well be aligned. If this is so, it ought to be permissible for one attorney to represent both sets of clients jointly.

From the point of view of the company's internal or external counsel, the first step in analyzing the representation issue is to look at the interests of the respective parties. The...