Articles Posted in Business Law

When consulting with startup business owners and entrepreneurs, common issues arise regarding key elements of the business and its structure. These issues can expose the business, and the owners, to unnecessary litigation and other legal expenses. Below are three common mistakes that startup businesses make and how you can avoid them.

Failing to Use and Maintain Proper Employment Documentation

We’ve all heard the stories about businesses getting started in a parent’s garage and suddenly becoming a multi-million dollar success. However, as the business grows, there has to be a protocol in place for hiring new employees and what employment status they have with the business. Unfortunately, many startups encounter problems when they fail to maintain proper employment documentation exposing the founders to lawsuits if an employee feels they get short-changed in terms of pay, benefits, title, equity, etc.

When forming a business as a corporation, you will have to select corporate directors and officers. You may even be one of these directors or officers. Officers and directors can face personal exposure when the corporation inevitably becomes involved in some sort of dispute. That is why it is extremely important that officers and directors require separate indemnification agreements between themselves and the corporation.

What Exactly is Indemnification?

Indemnification in this situation involves the corporation indemnifying the directors and officers. To indemnify is to guarantee financial reimbursement to an individual in case of a specified loss. Under California law, a corporation has the ability to indemnify its agents, directors, and officers. However, any indemnification of officers or directors for the defense of any proceeding must be done in a way that is consistent with that law in order to be valid. The law allows indemnification against expenses, judgments, fines, settlements and other amounts reasonably incurred in connection with the proceeding if the director or officer acted in good faith and reasonably thought he or she was acting in the best interests of the corporation and, in criminal matters, had no reason to believe the conduct was unlawful.

The California General Corporation Law governs how notice of stockholder meetings must be given. This information is of vital importance to all California corporations. It is important to note that while email notice is allowed, it is not allowed under all circumstances.

What Does California Law Say About Email Notice?

California law does allow email notice under certain circumstances. Section 601(b) provides that, ¨Notice of a shareholders’ meeting or any report shall be given personally, by electronic transmission by the corporation . . . .¨ This law also says that notice is deemed to have been given when it has been sent through an electronic transmission by the corporation. However, this law is also clear that in order for electronic notice to be good enough, it must also comply with Section 20 of the Corporations code.

When you are forming a business, you have many entities to choose from. One option is a limited partnership. These entities are governed in California by the California Uniform Limited Partnership Act of 2008 (CULPA). However, the law regarding limited partnerships may be about to change, so if you are considering forming one of these entities you should seek out business counseling.

What is a Limited Partnership?

When people think of partnerships they often think of business arrangements where two or more people share equal stakes in a company. A limited partnership is a different kind of partnership. While there will be one or more general partners, there are also one or more limited partners. This type of arrangement is very common amongst law firms, accounting firms, film production companies, and real estate investment projects.

When you decide to form a business, there are many decisions you have to make which require business counseling and advice. One of those decisions is the decision regarding what sort of business entity you will form. Different laws, regulations, and responsibilities apply to each type of business, whether it is a partnership, an LLC, or a corporation. Even if you have experience with one or more of these types of business, the regulations change over time so it is important to get advice regarding how your rights and responsibilities may change over time. One recently changed law is the Revised Uniform Limited Liability Company Act (RULLCA), and a California appellate court recently decided what the operative date of the new law is.

Effective Dates versus Operative Dates

Usually when legislative bodies pass laws, one of two things happens. In some cases the law specifically says when it goes into effect right there in its language. Some other laws that do not contain this language are presumed to go into effect on a certain date by default, often January 1 of the year following the law’s passage. However, the “effective” date and the “operative” date of a statute may not be the same. The “effective” date of a statute is when it becomes the law of the land. The “operative” date is the date upon which the directives of the statute can actually be implemented. Often these two dates are the same. Imagine that the legislature passes a statute that says it is a felony to steal an ice cream truck, and that the statute goes into effect on January 1, 2016. For that sort of statute, the effective date and the operative date would be the same because as soon as January 1, 2016 roles around anyone who were to steal an ice cream truck could be arrested and prosecuted for the crime. Sometimes, however, the effective date and the operative date are not the same.

Normally corporate bylaws are drafted during the business formation process. However, sometimes corporations amend their bylaws. The question then becomes one of whether amendments to the corporate bylaws can or should be applied retroactively. When these amendments would impair previously accrued claims, both California and Delaware courts agree that the answer to this question is “no.”

California Court Refuses to Apply Bylaws that would Impair an Accrued Claim Retroactively

A California court has refused to apply bylaws that would impair an accrued claim retroactively. The case is Cobb v. Ironwood Country Club. In this case Ironwood’s board of directors adopted a bylaw that required binding arbitration of disputes. Ironwood did not pass this bylaw until four months after past and current members of the country club had already filed a lawsuit dealing with an alleged breach of an agreement by Ironwood. Ironwood then argued that, because the members had agreed to follow the bylaws, including a provision in the bylaws that allowed their amendment, that the members and former members were bound by the new bylaw that mandated the arbitration. The trial court and the Court of Appeal disagreed with Ironwood’s assessment.

An important part of business and commercial law is drafting security agreements and UCC filings. These sorts of documents require a certain degree of specificity to be valid. However, just as with anything, too much specificity can be too much of a good thing. Being too specific in these documents can lead to ambiguities that can lead to protracted litigation.

Court Discusses Whether UCC Financing Statements Adequately Perfected a Security Interest

A federal court in New York recently addressed the issue of specificity in Ring v. First Niagra Bank, N.A. It all started because of a Chapter 7 bankruptcy filing. The trustee started an adversary proceeding alleging avoidable preferential transfers to First Niagra. The issue before the Court was whether what it termed a “needlessly convoluted description of collateral” in a succession of U.C.C. Financing statements caused a claim of security to fail as “seriously misleading” under the U.C.C. as adopted by New York.

Businesses frequently enter into contracts, whether it is with employees, other businesses, or customers. It is easy to think that the power to contract gives a business the ability to set whatever terms it prefers for an interaction, so long as the other party agrees. However, state law puts some limits on the power of contracting. It is important to consult with an experienced business law attorney before adding new language to the contracts you use to be sure the terms will be enforceable down the road. One example of the laws you need to be aware of when drafting contracts has to do with non-disparagement clauses.

You Cannot Use Non-Disparagement Clauses in Consumer Contracts.

A non-disparagement clause can be extremely appealing to a small business owner. In this day and age, where potential customers rely heavily on online reviewing services, like Yelp, when making decisions about who to do business with, an unfair and unflattering review can sink a small business. To counter this problem, some businesses began including clauses in their contracts with consumers prohibiting the consumer from making negative statements about the company. However, California has now banned these clauses.

When foreign corporations do business in California they need to comply with California laws governing such corporations. However, California’s law is not the only law that applies to a foreign corporation. Such corporations also have to consider laws in their native states, as a recent case from Delaware demonstrates. This is why it is important for any such business to consult with an experienced business law attorney.

Delaware Rules its Courts Have Authority to Impose Specific Condition on Books and Records Inspection

In United Technologies Corp. v. Treppel, the Delaware Supreme Court held that a Delaware court has the authority to impose a specific condition on a books and records inspection under the Delaware General Corporation Law (DGCL). The condition in question in that case was one that would have said that “any claim, dispute, controversy or causes of action . . . arising out of, relating to, involving or in connection with” the inspection be brought in a Delaware court.

California’s tax code includes a provision that makes it so a domestic corporation that fails to pay certain taxes can have its corporate rights suspended. If your corporation’s rights are suspended under this provision, it can affect both the corporation’s ability to bring legal actions and to appeal the outcomes of legal actions.

Causes of Action Filed by Suspended Corporations

When a corporation is suspended there is a straightforward way for it to revive its corporate rights. According to the tax code, the corporation can revive its rights by: