New Jersey’s Appellate Division recently reaffirmed a long-established but inconsistently-recognized legal principle: A lawyer who represents a company does not necessarily represent the company’s owners.
The court did not permit an owner to assert for himself the company’s attorney-client privilege while trying to keep confidential communications out of a legal proceeding. Royzenshteyn v. Pathak, No. A-1386-22 (App. Div. Jan. 2, 2024).
Facilitating a closely held company’s compliance with the newly effective Corporate Transparency Act will expose lawyers to owners’ confidential information—their passport, driver’s license, and date of birth, for example. A careful lawyer will make clear whether he or she represents one or all of the parties. The recent Royzenshteyn opinion demonstrates how the lawyer’s duty of confidentiality attaches to the represented party only.
Many owners of closely held companies—exactly the kinds of companies that will be filing sensitive information with the U.S. Treasury—will find it confusing that a lawyer’s representation of the company is not the representation of the owners. Thoughtful lawyers will have to deal with owners’ expectations. Lawyers will be helping companies file closely guarded “beneficial ownership information” on behalf of millions of small companies complying with the new Corporate Transparency Act. Clients and lawyers potentially face trouble if they don’t articulate in the beginning whom the lawyer is representing.
The Underlying Case
The Appellate Division’s decision came in a lawsuit originally brought in 2018 by Stanislav Royzenshteyn and Roman Gerashenko, the sole shareholders of a closely-held corporation, Onyx Enterprises International (“Onyx”). The suit, which named both individual and corporate defendants and involved various causes of action, arose out of a 2015 transaction in which Royzenshteyn and Gerashenko sold a majority of Onyx’s common stock. Onyx had retained an AmLaw 200 law firm to provide legal advice regarding this transaction.
In the 2018 lawsuit, Royzenshteyn and Gerashenko asserted privilege and refused to produce documents, “contending that some of those documents involved communications with attorneys representing Onyx. The Appellate Division reasoned that, therefore, Onyx, not the plaintiffs, [Royzenshteyn and Gerashenko], had the right to assert or waive the privilege.”
In 2019 a trial court directed the plaintiffs to produce all of the documents they had claimed were privileged. Thereafter, the Appellate Division reversed that order and instructed the trial court to address “whether [the law firm] represented just Onyx or jointly represented Onyx and plaintiffs.”
A special master reviewed the allegedly privileged communications and determined that there was no express or implied attorney-client relationship between the plaintiffs and the AmLaw 200 law firm.
Citing “the substantial, credible evidence in record supporting the special master’s conclusion,” the Appellate Division thereafter held that it “look[ed] forward to receiving the 493 documents” that the plaintiffs had refused to provide.
Significantly, the Appellate Division explicitly refused to establish a “rule” providing that “shareholders in closely held corporations are presumed to hold the privilege individually as distinct from the corporate entity.”
Royzenshteyn’s Applicability to Other Situations
Incorporated or registered companies are legal entities separate from their owners. This concept more commonly applies to insulating a corporation’s owners from personal liability for the corporation’s actions, for example—a premise known as the “corporate veil.” But Royzenshteyn v. Pathak illustrates that professional service providers, especially lawyers, would do well to keep in mind the concept of separation of entities from their owners when a lawyer undertakes a new matter or embarks on a relationship with new clients.
Professional service providers such as law firms should spell out exactly whom their client is—the entity, its owners, or both—at the outset of any business relationship. In the case of a law firm, such agreements are usually included in the letter of engagement. Identifying exactly which party the lawyer or law firm represents will clarify the answers to many questions, including which party is responsible for the service provider’s bills, and whether the law firm’s representation of any of the parties in another existing or future matter creates a conflict of interest. Under the new Corporate Transparency Act’s filings, which require information from the company and certain of its owners, many lawyers will be undertaking new representations in a new context.
A lawyer may need a waiver to ensure that the representation in the new matter doesn’t create a conflict.