Experts Say When General Counsel Leaves Abruptly, Board Has Duty to Ask Why

Michael Peregrine, left, of McDermott Will & Emery and Martin Bienenstock, right, of Proskauer Rose.

Often there is a known reason why a company’s general counsel departs—retirement, a better job or simply dismissal. But when a GC leaves abruptly and without a stated reason, it should set off little alarm bells for the board of directors, according to corporate governance experts.

Abrupt departures do happen, such as the hasty exit of general counsel Dane Butswinkas from Tesla Inc. on Feb. 20 after only two months on the job.

And when that happens, the experts told Corporate Counsel, there are key steps a board needs to take quickly, starting with a diligent inquiry into why.

A Tesla spokesman said the company doesn’t comment on internal procedures such as board inquiries. Butswinkas said in a statement at the time, “I am returning to my home in Washington, D.C., and to my trial practice at Williams & Connolly.” One source said the departure was also due to a “cultural” mismatch with the company. However, Butswinkas’ statement said he would continue working as outside counsel for Tesla.

Butswinkas left one day after Tesla CEO Elon Musk posted a tweet without running it by a corporate lawyer, as required by a settlement with the U.S. Securities and Exchange Commission over an earlier tweet. The SEC has called for Musk to be held in contempt of court for violating the settlement, but this week he contested any such action.

Corporate Counsel spoke recently with three corporate governance experts about a board’s duty when a general counsel leaves abruptly. Here’s what they had to say:

Michael Peregrine

The McDermott Will & Emery partner said it is absolutely the board’s duty as overseer of a company to inquire into the departure. “It goes back to the Enron Corp. scandal days, when general counsel were either marginalized, fired for giving bad news or quit because they didn’t like what was going on.”

Besides making sure nothing untoward was going on, Peregrine said the board’s duty includes seeing that the company has hired the right person, is paying the GC appropriately, is not treating him or her like a lackey, and isn’t concealing a deeper legal or ethical issue.

An inquiry can offer the board other key information as well. “If the general counsel was fired for performance reasons after a short time, then that says something about the company’s hiring process,” Peregrine said. “Or if the general counsel felt undervalued, then the directors need to be aware of that too. The board is responsible for making sure the general counsel is a pre-eminent position in the organization.”

Not only is such an inquiry not impinging on a CEO’s right to hire and fire, but Peregrine said it is the board’s “fiduciary duty” to inquire.

Martin Bienenstock

The chair of Proskauer Rose’s governance group said when it comes to a GC leaving, the key word is “abruptly.” If no normal reason is apparent, Bienenstock said the board needs to protect against any illegal or unethical conduct prompting the departure.

“If the general counsel quits abruptly, chances are the person has gone into the office of the CEO and said such and such needs to be done differently, otherwise it would be unethical or illegal conduct. You need to immediately use your inside or outside counsel to find out,” he said.

“Of course,” he added, “now you’ll have an issue with the CEO as well, because the general counsel wouldn’t quit if the CEO had backed him up.”

Jill Fisch

The University of Pennsylvania business law professor explained that not all departures require a board response. “The duty to inquire is fact-specific,” said Fisch, who is also co-director of the Institute for Law and Economics at the school.

“But I would think when any high-level officer leaves a company, the board would want to know why,” she added. “And the company may need to disclose the reason anyway under securities laws.” In Tesla’s case, that was not so because Butswinkas was not one of the top five highest-paid company officers.

Fisch said she wouldn’t call it a fiduciary duty, “but if I were on a board and a senior executive left, I would want to know why because it is the board’s responsibility to oversee the senior executives and to replace them.”