6 novembre, 2006 18:02

When Outside Counsel Say It's Time to Hire a GC

Jessie Seyfer

The Recorder

November 6, 2006

Jack Harding's company had a problem.

ESilicon's outside counsel bills were stacking up. The process of drafting sales contracts was sucking up too much of some executives' time that could be better spent elsewhere. And the Sunnyvale, Calif., semiconductor maker needed to put some serious work into preparing to one day go public.

It was time to hire the company's first in-house general counsel.

CEO Harding says the company had a great relationship with its outside law firm, Fenwick & West, but had so many different projects going with so many of the firm's different attorneys that money was being wasted.

"You have a little bit of overhead with each partner," Harding said. "The summation of all those engagements starts to be a whole lot of waste. It's just too damn expensive."

So in April, eSilicon hired Fritz Koehler, a lawyer who had worked with Harding as a general counsel when they both were at a company called Marimba. Koehler even got advice from Fenwick & West on hiring a GC. Fenwick attorneys interviewed Koehler and liked him, too.

"Fenwick was with me in thinking it was time for a GC," Harding said. "I don't think Fenwick & West thinks about making a lot of money by helping startups along the way. Their return really comes on large transactions."

Koehler is now, as he puts it, eSilicon's "internal champion" for all legal affairs.

"I was looking for a sort of jack-of-all-trades but I also had the enormous benefit of having worked with him before," Harding said. "I knew that he and I could work well together. I knew he had a breadth of knowledge that was appropriate."

ESilicon's motivations for creating its first in-house legal department are typical, said Fred Krebs, president of the Association of Corporate Counsel. Most companies that launch an in-house department have mounting outside legal costs, a flood of a particular kind of legal work, or they want someone who really knows the business well to position the company for the future, he said.

And just as a GC can help the company gear up for future triumphs, he or she can also help a company prepare -- or prevent -- future crises, Krebs said. The recent corporate scandals offer ample proof of how important this is.

"One of the reasons you'd want to have a GC is to have someone who can, on the spot, see the big picture for the company," he said. "And that's what you might have there to keep them out of trouble."

Some companies under suspicion for stock option backdating or other wrongdoing have recently added GC positions. Vitesse, a chip maker in Camarillo, Calif., noted the hiring of its first GC in the same Securities and Exchange Commission filing where it mentioned being investigated by the SEC and the Department of Justice for stock option issues.

Vitesse didn't return a call for comment. In July, the company hired Sharon Drew, a former GC for Asylum Telecom. The ad for Drew's job noted that the candidate must have "experience in dealing with SEC matters including dealing with 'alleged wrong doings.'"

Jonathan Block, a general counsel for Salem Communications, also located in Camarillo, doubted companies were creating these positions solely as a public relations move.

"In-house lawyers are very cautious about taking on new jobs, especially at troubled companies, unless they sincerely believe they can help right the ship," said Block, who is also president of the ACC's Southern California chapter. "It doesn't surprise me that companies, in response to this scandal, are hiring inside counsel. It would very much surprise me if they're hiring them as window dressing."

Santa Clara, Calif.'s Macrovision, which helps media companies prevent theft of their content, is also the focus of an SEC probe. It added an in-house GC post last year, hiring Loren Hillberg, formerly GC of the software maker Macromedia. The company didn't comment on its reasons.

In general, the size of companies' in-house legal staff has been on the rise, according to a 2003 report from the ACC. In 1991, for example, the top 10 Fortune 500 companies employed an average of 287 in-house attorneys. By 2000, that average had risen more than 40 percent, to 407, according to the report. Corporate scandals will only further the trend, the report says.

At a recent seminar on how to do good corporate governance on a shoestring budget, it seemed clear that Deanne Tully, general counsel for Virginia's Tier Technologies, has a favorite expression: An ounce of prevention is worth a pound of cure.

"Making sure that you have the appropriate governance structure to avoid so many problems we read in the headlines is critical if you're a GC," she said. "The cost of not having good corporate governance can be horrific. If you don't have it in place, you're going to get something that's going to require you to spend an obscene amount of money."

The stock option backdating scandal has touched more than 120 companies so far and has sent several general counsel packing, or worse, facing a prison sentence. This might make some attorneys wary of taking a GC post, which bothers eSilicon's Koehler.

"The role of the GC is becoming viewed more and more as something with potential taint, which is unfortunate," he said.