December 7, 1993

FACTS:


You are a member of a law firm (Firm). You have been asked
to consider an appointment as a Commissioner of the State Ethics
Commission (Commission).

The Firm, which previously functioned as a partnership, has
been organized and operated as a professional corporation under
G.L. c. 156A. The Firm is identified as a professional
corporation on its letterhead. All lawyers are instructed to
include the phrase "a Professional Corporation" whenever the
firm name is used, for example, on all pleadings in court and on
opinion letters. All lawyers have been provided with business
cards which identify the Firm as a professional corporation.

There are currently forty-six stockholders of the Firm.
Under the by-laws, each stockholder is referred to as a "member
of the firm" or "member." Each member holds one share of voting
stock and each member has one vote on any matter which is put to
a vote. As a member of the Firm, you own one share of voting
stock.

The Board of Directors, known as the Management Committee,
consists of four people, each of whom must be a member of the
Firm. The Management Committee manages the business of the firm,
except for those matters reserved to the members by the by-laws,
or by the Articles of Incorporation, or to the Compensation or
Nomination Committees, as provided in the by-laws. The Management
Committee generally meets weekly to consider matters relating to
the management of the Firm. You are a director of the Firm and
sit on the Management Committee. Your term expires in January,
1994.

Each member is an officer of the Firm. There are three named
officers of the Firm: a president, a treasurer and a clerk. You
are an officer only by virtue of your status as a member of the
Firm. The Chair of the Management Committee is ex officio the
president and treasurer, but, according to the by-laws, those
titles are not to be used, except as required by law, by the
articles of incorporation or as requested by third parties.

The Firm is a going concern which keeps careful account of
its income and assets. The Firm is also careful to observe all of
the corporate formalities required by law, by the articles of
incorporation or the by-laws, and keeps its records in accordance
with those formalities. Its financial statements are reviewed
annually by Price Waterhouse. It is adequately capitalized, and
each member has paid capital into the Firm.

Members, together with associate lawyers and staff, are
employees of the Firm. Annual salaries for

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members are set by the Compensation Committee. The distribution
to the members of net receipts (profits) of the Firm is
determined by the Compensation Committee, not the Management
Committee. The Compensation Committee is elected by the members.
Neither you nor any member of the Management Committee sits on
the Compensation Committee.

On occasion, members of the Firm or associate lawyers (who
are not members) represent people or entities on matters within
the jurisdiction of the Commission. In particular, there is at
least one member and one associate whose clients have matters
currently pending before the Commission. These lawyers' practices
are such that they frequently represent clients who have matters
within the jurisdiction of the Commission.

If appointed to the Commission, you personally will not
represent any client on matters within the Commission's
jurisdiction. If appointed, as soon as you are informed that a
matter pending in the Commission involves a client of the Firm,
you will recuse yourself from future participation in that
matter. In addition, for all such matters, you will make
arrangements within the Firm to assure that you receive no
compensation related to the representation.


QUESTION:


What limitations will G.L. c. 268A place on your activities
and those of the Firm and its members and employees should you
accept membership on the Commission?


ANSWER:


You and the Firm will be subject to the following
limitations.


DISCUSSION:


1. Jurisdiction


If you accept appointment as a Commissioner you will be a
special state employee [1] for purposes of G.L. c. 268A. See EC-
COI-87-39
. As a result, certain of the provisions of the conflict
of interest law will apply less restrictively to your private
activities than if you were a full-time state employee.


2. Limitations on Your Private Law Practice

a. Section 4


Section 4(a) of G.L. c. 268A, the conflict of interest law,
prohibits a state employee from directly or indirectly receiving
or requesting compensation from anyone other than the
Commonwealth or a state agency, in relation to any particular
matter in which the Commonwealth or a state agency is a party or
has a direct and substantial interest. Section 4(c) prohibits a
state employee from acting as agent or attorney for anyone other
than the Commonwealth or a state agency for prosecuting any claim
against the Commonwealth or a state agency, or as agent or
attorney for anyone in connection with any particular matter in
which the Commonwealth or a state agency is a party or has a
direct and substantial interest. "The concern addressed by s. 4
is the potential of influencing pending agency matters." EC-COI-
91-5
.

A special state employee is subject to the prohibitions of
s. 4(a) and (c) only in relation to a particular matter (1) in
which she has at any time participated [2] as a state employee,
or (2) which is or within one year has been a subject of her
official responsibility [3], or (3) which is pending in the state
agency in which she is serving. Clause (c) only applies to a
special state employee who serves as such for more than sixty
days during any period of three hundred and sixty-five
consecutive days. The Commission has previously noted that a
regular member of a Board or Commission has official
responsibility for matters which are pending in the Board or
Commission, "whether or not they have actually worked on the
matter and whether or not they actually sat on the Board [or
Commission] on a given day." EC-COI-92-36 (Board member); 89-7
(matters pending in an agency or Commission). As a result,
Commission matters that are handled by members or associate
lawyers of the Firm are matters which will be the subject of your
official responsibility as a Commission member. You have stated
that you will not represent private persons in matters before the
Commission if appointed.

Pursuant to s. 4(a), you will be precluded from receiving
the compensation that derives from representation of a private
party by members or associates of your Firm. Your proposal to
have the Firm take accounting steps to ensure that you will not
indirectly receive compensation in connection with such matters
will prevent issues from being raised under s. 4(a). Section 4(a)
will not prevent you from

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representing or receiving compensation from your or the Firm's
representation of client before state agencies other than the
Commission, however.


b. Section 7


This section prohibits a state employee from having a
financial interest, directly or indirectly, in a contract made by
a state agency, in which the Commonwealth or any state agency is
an interested party, unless an exemption applies. Section 7 is
implicated where you will receive compensation that derives from
your or the Firm's representation of a state agency client. As a
special state employee, however, you may have a financial
interest in contracts made by a state agency in whose activities
you neither participate nor have official responsibility for as a
Commission member, following your submission to the Commission of
a disclosure of the financial interest pursuant to s. 7(d). If
appointed, you will need to follow the s. 7(d) exemption
procedure with regard to each such representation of a state
agency by you or the Firm.


3. Limitations on Your Official Activities as a Commission Member

a. Section 6


This section prohibits a state employee from participating
as a state employee in a particular matter in which she or a
business organization in which she is an employee has a direct or
reasonably foreseeable financial interest [4]. EC-COI-89-5; 84-
96
. Thus, s. 6 will require your abstention from all matters in
which the Firm is representing a client before the Commission
[5]. You will also be required to abstain from any decision
which may result in additional legal work for the Firm. Such a
situation would arise if, for example, a longtime client of the
Firm was the subject of a request that the Commission institute a
preliminary inquiry under G.L. c. 268B, s. 4. In such a case, s.
6 will be triggered because it is reasonably foreseeable that
your vote in favor of initiating such an inquiry may result in
work for the Firm. As long as you continue to abstain issues
under s. 6 will not arise [6].


b. Section 23


As a state employee, you will also be subject to s. 23 which
establishes standards of conduct for all public employees.
Specifically, s. 23(b)(2) prohibits a public official from using
her position to secure an unwarranted privilege of substantial
value [7] which is not properly available to similarly situated
individuals. Under s. 23(b)(3) you must avoid creating the
appearance of undue favoritism. Issues under these subsections
could arise if you were to participate officially in a matter
involving the Firm or its clients. Your intention to abstain from
such matters, however, will avoid these concerns. You must also
bear in mind that s. 23(c) will prevent you from disclosing to
the Firm or its clients any confidential information which you
have acquired as a Commission member.


4. Limitations on Other Members of the Firm


A partner of yours would share the restrictions which G.L.
c. 268A places on the you in your private law practice.
Specifically, s. 5(d) prohibits a partner of a state employee
from acting as agent or attorney for anyone other than the state
in connection with any particular matter in which the state or a
state agency is a party or has a direct and substantial interest
and in which the state employee participates or has participated
as a state employee or which is the subject of his official
responsibility.

We have concluded that all matters pending in the
Commission, including those handled by members of the Firm, would
be the subject of your official responsibility as a Commission
member. Thus, we must address whether other "members" of the firm
are your "partners" for purposes of G.L. c. 268A, s. 5(d).

Previously, where business ties have been indeterminate, we
have construed the word "partner" broadly to include "a person
who joins with another, formally or informally, in a business
venture." EC-COI-84-78; 93-9. Thus, we have found a partnership
arrangement where a group of individuals has given the public
appearance of a partnership, for example, by linking their names
on a letterhead and answering their telephone using this firm
name, whether or not they in fact shared profits. See, e.g., EC-
COI-80-43; 82-68; 84-78
. In our decision in EC-COI-93-9, however,
we stated that in construing the term "partner" broadly, we did
not purport to "revise the terms of statutorily defined business
arrangements." Thus, while we reserved the right, in appropriate
circumstances, to review the substance of a corporate entity, we
nevertheless recognized the distinction drawn in the language and
history of G.L. c. 268A between partnerships and other forms of
business arrangements. We expressly left open, however, the
question whether our analysis in that case would apply to a
professional corporation. EC-COI-93-9, n. 14.

The question left open in 93-9 is squarely presented here
where the firm is organized as a professional corporation under
G.L. c. 156A. Subject

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to the terms and conditions of Supreme Judicial Court Rule 3:06,
G.L. c. 156A permits attorneys-at-law admitted to practice in the
courts of the Commonwealth under G.L. c. 221 to perform
professional services utilizing the corporate form. G.L. c. 156A,
ss. 2, 3 [8]. The most important feature of Rule 3:06 is that is
establishes limited liability for lawyers practicing in the
corporate form. Additionally, the Rule provides that
incorporation shall not diminish the application of the Code of
Professional Responsibility to attorneys in the corporation; nor
shall incorporation "modify, abrogate or reduce the attorney-
client privilege or any comparable privilege or relationship."
Although Rule 3:06 establishes requirements for provisions that
the articles of organization of each professional corporation
must contain, nothing in the Rule prevents such corporations from
enjoying the tax benefits and non-tax benefits enjoyed by other
professional or business corporations [9].

In the present case, each member of the firm is a
stockholder in the professional corporation and holds one share
of voting stock entitling the holder to one vote on matters put
to a vote in the corporation. It is well settled that "[t]he
ordinary relationship of stockholders [in a corporation] is not
that of partners." Leventhal v. Atlantic Finance Corp., 314 Mass.
194, 198 (1944). Accordingly, unless we find a basis for
disregarding the corporate form, members of the firm are not
"partners" for purposes of G.L. c. 268A, s. 5(d).

In EC-COI-93-9, we expressly reserved the right to review
the substance of a corporate entity according to the principles
enunciated in Evans v. Multicon Const. Corp., 30 Mass. App. Ct.
728, further appellate review denied, 410 Mass. 1104 (1991). In
Evans, the court outlined the following twelve factors which
should be considered in deciding whether to penetrate the
corporate form: (1) common ownership; (2) pervasive control; (3)
confused intermingling of business activity assets, or
management; (4) thin capitalization; (5) nonobservance of
corporate formalities; (6) absence of corporate records; (7) no
payment of dividends; (8) insolvency at time of litigated
transaction; (9) siphoning away of corporate assets by dominant
shareholders; (10) nonfunctioning of officers and directors; (11)
use of corporation for transactions of the dominant shareholders;
(12) use of corporation in promoting fraud. We are mindful,
however, that the general rule in this Commonwealth is that
corporate form will be disregarded only in "rare particular
situations to prevent gross inequity." My Bread Baking Co. v.
Cumberland Farms, Inc
., 353 Mass. 614, 620 (1968).

We find that none of the applicable factors point in favor
of piercing the corporate veil in the present case [10].The facts
indicate that the firm is an adequately capitalized, going
concern which is managed by a Board of Directors, known as the
Management Committee. The Management Committee generally meets on
a weekly basis. The firm is careful to observe all of the
corporate formalities required by law, or by the articles of
incorporation or by-laws of the corporation. Corporate records
are kept in accordance with these formalities, and the financial
statements of the corporation are reviewed annually by Price
Waterhouse. Matched against the Evans factors, these facts do not
warrant piercing the corporate veil that has been established by
the firm's compliance with G.L. c. 156A and Supreme Judicial
Court Rule 3:06.

Nor is this a case which warrants the application of the
common law doctrine of partnership by estoppel which is codified
in G.L. c. 108A, s. 16. In order to apply that doctrine it must
be shown: "(1) that the would-be partner has held himself out as
a partner; (2) that such holding out was done by the [would-be
partner] directly or with his consent; (3) that the [party
seeking to invoke the doctrine] had knowledge of such holding
out; and (4) that [that party] relied on the ostensible
partnership to his prejudice." Brown v. Gerstein, 17 Mass. App.
Ct. 558, 571 (1984); Standard Oil Co. v. Henderson, 265 Mass.
322, 326 (1928).

Here the firm displays to the public none of the attributes
of a partnership. All lawyers in the firm are encouraged to use
the designation "member" or "member of the firm" when referring
to stockholders, and the words "a professional corporation," when
referring to the firm. The latter term appears on the firm's
letterhead, business cards, pleadings and opinion letters [11].

Nor is the firm operated as a de facto partnership. Shares in the
corporation are issued on the basis of "membership" and
not in relation to the percentage of the profits earned or to be
earned by any member. Instead, members are employees whose annual
salary is set by a Compensation Committee elected by the members.
Members each make a capital contribution to the corporation and
all records including, presumably, the firm's tax returns reflect
the corporate status. Compare Boyd, Payne, Gates & Farthing, P.C.
v. Payne, Gates, Farthing & Radd, P.C.,
472 S.E.2d 784 (Va. 1992)
(law partners who formed a professional corporation for tax
purposes but who continued to conduct themselves as partners
could have their rights and liabilities determined according to
the law of partnership [12].)

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Finally, we recognize that law professional corporations are
distinguishable from other business or professional corporations
because lawyers are subject to the professional and ethical
obligations imposed by Supreme Judicial Court Rule 3:06 and the
Code of Professional Responsibility. Standing alone, however,
these ethical standards do not provide a basis for disregarding
the corporate form.

In essence, Supreme Judicial Court Rule 3:06 operates to
remove any distinction between partnerships and professional
corporations for purposes of the Code of Professional
Responsibility. The Rule, however, is based not upon an
interpretation of G.L. c. 156A or the principles applied to
pierce the corporate veil, but upon the Supreme Judicial Court's
inherent authority to regulate the practice of law. See Opinion
of the Justices
, 289 Mass. 607, 612 (1935); Post, The
Massachusetts Professional Corporation Act, 10 Boston Bar J. 7
(1963). We conclude that this judicial authority cannot
realistically be used by the Commission as a device to ignore the
parties' lawful act to organize themselves as a professional
corporation. Cf. Melby v. O'Melia, 286 N.W.2d 373 (1979) and
We're Associates Company v. Cohen, Stracher & Bloom, P.C., 480
N.E.2d 357 (N.Y. 1985) (both holding that the Code of
Professional Responsibility applicable to lawyers practicing in
the corporate form does not prevent the application for corporate
law or principles of limited liability). Thus, we conclude that
members of the firm are not "partners" for purposes of G.L. c.
268A, s. 5 [12].



-----------------------------------


[1] "Special state employee," a state employee:

(1) who is performing services or holding an office,
position, employment or membership for which no compensation
is provided, or

(2) who is not an elected official, and

(a) occupies a position which, by its classification in the
state agency involved or by the terms of the contract or
conditions of employment, permits personal or private
employment during normal working hours, provided that
disclosure of such classification or permission is filed in
writing with the state ethics commission prior to the
commencement of any personal or private employment, or

(b) in fact does not earn compensation as a state employee
for an aggregate of more than eight hundred hours during the
preceding three hundred and sixty-five days. For this
purpose compensation by the day shall be considered as
equivalent to compensation for seven hours per day. A
special state employee shall be in such a status on days for
which he is not compensated as well as on days on which he
earns compensation. G.L. c. 268A, s. 1(o).

[2] "Participate," participate in agency action or in a
particular matter personally and substantially as a state, county
or municipal employee, through approval, disapproval, decision,
recommendation, the rendering of advice, investigation or
otherwise. G.L. c. 268A, s. 1(j).

[3] "Official responsibility," the direct administrative or
operating authority, whether intermediate or final, and either
exercisable alone or with others, and whether personal or through
subordinates, to approve, disapprove or otherwise direct agency
action. G.L. c. 268A, s. 1(i).

[4] Participation includes discussion and informal lobbying
of colleagues, as well as voting (binding and non-binding). EC-
COI-92-30
.

[5] The Firm has a financial interest in all matters in
which it represents a client for a fee. EC-COI-89-5.

[6] In general, s. 6 requires a state employee in addition
to notify her appointing authority in writing of the financial
interest. EC-COI-85-33; 85-47. The appointing authority shall
then either: (a) assign the matter to another employee, (b)
assume responsibility for the matter, or (c) make a written
determination to be filed with the Commission that the interest
is not so substantial as to be deemed likely to affect the
integrity of the services which the Commonwealth may expect from
the state employee. Here, however, the quasi-judicial nature of
the Commission and the confidentiality of its proceedings, G.L.
c. 268B, s. 4(b), make meaningful notice to your appointing
authority impossible. Thus, you are advised to abstain.

[7] Anything valued at $50 or more is "of substantial
value." Commonwealth v. Famigletti, Mass. App. Ct. 584, 587
(1976); Commission Advisory No. 8 (Free Passes); EC-COI-93-14.

[8] Corporations not organized under G.L. c.156A may not
practice law. See G.L. c. 221, s. 46.

[9] The provisions of the Massachusetts Business Corporation
Law, G.L. c. 156B, applicable to ordinary business corporations,
are applicable to professional corporations, except as limited by
G.L. c. 156A and by professional and ethical obligations. G.L. c.
156A, s. 4.

[10] Because occasions to pierce the corporate veil arise
where there is (1) a "confused intermingling of the activities of
two or more corporations," (e.g., where a parent and subsidiary
ignore the independence of their separate corporate identities),
(2) fraudulent intent or consequences arising from the acts of
the principals, or (3)

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substantial injustice absent evasion of the corporate form, My
Bread, 353 Mass. at 619, many of the factors discussed in Evans
are inapplicable here.

[11] We find no significance in the fact that aside from the
designation, "a professional corporation," there has been no
change in the firm name since its conversion from a partnership
in 1991. See MBA Ethics Opinion 77-14, 62 Mass. L. Q. 193
(finding that a professional corporation may continue to use its
former partnership name after incorporation; "this representation
would not be misleading, for while the group members are not
partners, they are in fact associated together as shareholders
and employees of a professional corporation.")

[12] In Boyd, attorneys referred to themselves as partners
in internal firm manuals and in announcements sent to clients and
the legal community; distributed stock in the same percentage as
their entitlement to profits; failed to issue stock to a new
"member" of the corporation, but allowed him to share in the
profits; allowed the non-stockholding "member" to participate in
firm meetings; referred to the firm as a partnership on tax
returns; and executed an agreement dealing with the possibility
of a tax audit in which each agreed that any tax liability shall
become the responsibility of "each partner" according to his
percentage of the profits.

[13] This conclusion is consistent with Commission opinions
which have found that "associates" and those having "Of Counsel"
arrangements are not constrained by the requirements of s. 5. See
EC-COI-85-13 (associate); 89-5 (Of Counsel
).

End Of Decision