Recent Articles
Directors and Controlling Shareholders May Be Liable for Paying Themselves Excessive Compensation
Most passive, minority shareholders invest in closely held corporations expecting to receive a share of the corporation’s profits in the form of dividends. Such minority shareholders may find themselves starved for dividends, however, when directors and/or controlling shareholders take generous salaries, bonuses or other compensation for themselves, leaving little or no profits to be distributed to shareholders.
One might think there is little minority shareholders can do in response to such behavior. After all, under California law, the payment of executive compensation and dividends rests in the sound discretion of the corporation’s board of directors, and only directors have the power to decide whether, when and how much of a dividend will be paid. In re Talbot’s Estate, 269 Cal.App.2d 526, 537 (1969). Even where the corporation has accumulated a large profit surplus, shareholders have no right per se to compel a distribution unless the articles of incorporation make dividends mandatory (which is rare). See, Richards v. Pacific Southwest Discount Corp., 44 Cal.App.2d 551, 558 (1941).
Notwithstanding the foregoing, it is firmly established in California that directors who refuse to declare dividends while voting excessive compensation to themselves and/or controlling shareholders can be held personally liable to minority shareholders if a court finds that all or a portion of that compensation was actually a distribution of corporate profits (or a “disguised dividend”)… Read More
Although double derivative standing has been adopted in many jurisdictions outside California to address the modern corporate form, California courts have yet to rule on whether it will be allowed in this state. Application of the double derivative principle permits a shareholder of a parent company to sue for harm to its subsidiary and prevents corporate fiduciaries from using the parent-subsidiary form to circumvent shareholder derivative litigation. California’s policy of affording a right for every wrong, however, portends California’s adoption of double derivative standing…. Read More (PDF)
It is firmly established under California law that controlling shareholders of closely held corporations owe minority shareholders a fiduciary duty not to compete against their own corporations. Less clear, however, is whether equal and minority shareholders of closely held California corporations owe their fellow shareholders the same fiduciary duty.
Although federal and unpublished cases indicate a judicial trend against imposing any fiduciary duties on equal and minority shareholders in closely held corporations, the California Supreme Court has yet to squarely address the issue, and the relevant case law which does exist is inconsistent and inconclusive. … Read More
Under Certain Circumstances, a Derivative Plaintiff can be Barred from All Discovery
In a recent California decision, Jones v. Martinez, the Second Appellate District ruled that a plaintiff who derivatively sues a Delaware corporation, cannot conduct any discovery unless first establishing the right to bring a derivative action on behalf of the corporation. In other words, the plaintiff must first establish in the complaint that appropriate demand was made on the corporation or that doing so would have been futile, explaining with sufficient facts why that was so. The bare pleading of futility was not sufficient. The court also held that a derivative plaintiff was not entitled to discovery to demonstrate demand futility. … Read More
Delaware Supreme Court Holds that Corporate Bylaws May Shift Attorney Fees
In May 2014, the Delaware Supreme Court held that fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.
In ATP Tour Inc. v. Deutscher Tennis Bund, No. 534 2013 ( Del. May 8, 2014), a member of the corporation sued the corporation and six of its directors in federal court, alleging antitrust and breach of fiduciary duty claims. The member lost.
The corporation sought an award of attorney fees pursuant to its own bylaws, which had been amended in 2006 to state that if any member sued the corporation or any of its members, and the suing member did not substantially achieve the full remedy sought, the suing member must reimburse the defending corporation and members all reasonable attorney fees.
Because this issue presented a novel question of Delaware law, the federal court certified the issue to the Delaware Supreme Court.
The Delaware Supreme Court held that fee shifting bylaws are permissible under Delaware law, because: (a) nothing in Delaware law forbids them; (b) allocating risk among parties in inter-corporate litigation satisfies Delaware’s requirement that bylaws must relate to the corporation’s business, conduct of its affairs, and rights or powers of its stockholders, directors officers or employees; (c) Delaware follows the American Rule where contracting parties may obligate a losing party to pay the prevailing party’s fees; and (d) under Delaware law, corporate bylaws are “contracts among a corporation’s shareholders.”
The broad stroke: Because corporate bylaws are contracts, a board of directors may enact bylaws requiring a losing party to pay attorney fees. … Read More
Have Directors Improperly Refused to Declare a Dividend?
Payment of dividends rests within the sound discretion and business judgment of the board of directors. Shareholders have no “right” to dividends even if adequate funds are available. For example, the board of Apple Inc. did not declare its first dividend until March of 2012 even though the computer giant had previously held cash and other financial assets valued at up to $100 billion. In this, as in all such instances, the directors alone have the power to determine if, when and how much of a dividend will be paid. … Read More
The sham guaranty defense is a tool by which commercial real estate loan guarantors can avoid liability when the loan is in default. Application of that defense requires proving that the guarantor is actually the principal obligor, and thus entitled to the same unwaivable protection of the anti-deficiency statutes. … Read More
Since the collapse of the last real estate bubble, commercial lenders have increasingly sought to recover from individual guarantors of loans that have fallen into default. Indeed, when an individual or entity guaranties a loan that is secured by real property, the guarantor enjoys few, if any, legal defenses should the original borrower fail to pay. … Read More
Control shareholders have a fiduciary duty to the minority shareholders to act with “good faith and inherent fairness.” As such, majority owners have a fiduciary responsibility not to use their influence to engage in self-dealing, including actions that are unfairly prejudicial to the minority shareholders. Majority owners thus should not divert business opportunities, funds or compensation to their benefit, excluding minority owners from that same benefit. This is particularly the case when majority shareholders exercise their power to transfer control of the corporation or its shares. … Read More
Have Directors and Officers Engaged in Wrongful Self-Dealing with the Corporation?
Each member of a corporation’s board of directors owes a fiduciary duty to the corporation and its shareholders. That duty fundamentally has two obligations: the duty of care (directors must perform their jobs diligently and competently) and the duty of loyalty (directors cannot use their positions of trust to further the private interests of any third party – including themselves). Under both these duties, but especially the duty of loyalty, the interests of the corporation and its shareholders must always come first. … Read More
The controlling shareholders of a corporation may not manipulate the corporation for their own self-interest, without regard to the interests of the other shareholders or corporate creditors. If they cause corporate action which disadvantages the minority shareholders, or the corporation’s creditors, and if objections to that action cannot be amicably resolved, the controlling shareholders may be held personally liable for any losses created by their action. Minority shareholders can enforce their rights and recoup their losses by filing a lawsuit over controlling shareholder misconduct. … Read More
Have Your Shareholder Rights Been Abridged?
The answer, of course, depends on the facts and circumstances of each case. But if the corporation engages in wrongful acts, and a shareholder is unable to amicably resolve the problem, that shareholder may wish to consider enforcing his or her rights including filing a lawsuit. Here are 10 examples … Read More
How To Pursue Social Causes Without Risking Shareholder Litigation
A new California statute can potentially eliminate a major driver of shareholder litigation: the allegation that a company’s philanthropic or community involvement dilutes profitability, and thus the value of a shareholder’s investment. … Read More
The Sham Guaranty Defense and Litigation Strategy
Our last email reviewed court decisions which held that various individual guarantors – partners, trustors/trustees, corporate executives and shareholders – were not guaranteeing the debt “of another” but were, in fact, equivalent to the debtor. As such, they were entitled to the protection afforded by the sham guaranty defense and the anti-deficiency statutes. However, there are other implications of sham guaranty use in contexts where a corporate entity itself is involved. … Read More
The Sham Guaranty Defense for Partners, Trustees, Corporate Officers and Shareholders
In our previous email we introduced and defined the sham guaranty defense as a tool by which commercial real estate loan guarantors can avoid liability when the loan is in default. Application of that defense requires proving that the guarantor is actually the principal obligor and thus entitled to the same unwaivable protection of the anti-deficiency statutes. However, just as there are different types of guarantors, the courts have made distinctions in the application of the sham guaranty defense. In this email we will look at the defense’s application to partners, trustees/trustors and to officers and shareholders of corporations. … Read More
The Real Estate Market, California’s Anti-Deficiency Laws and Sham Guaranty
The California real estate market has dropped sharply since 2007. With that sharp drop, commercial real estate lenders have turned their focus, with good reason, to those individuals who guaranteed these commercial loans. Not only may the projects be under water, and therefore unable to re-pay these debts, but the lender cannot ordinarily recover any deficiency from the borrower due to California’s anti-deficiency legislation. That is not so as to guarantors and, as a result, lenders purposely made guarantees an important tool in many real estate transactions, specifically, so that the guarantor may be held liable to cover any deficiency. Guaranty agreements are lengthy, they are detailed and they waive practically every defense imaginable. … Read More
Will Wall Street Executives Seek the Protection of the Fifth Amendment?
After the worst financial collapse since the Great Depression, the finger-pointing has escalated in earnest. Major financial institutions that participated in the subprime market or failed to accurately price or rate the risks involved with mortgage-backed securities are now scrambling to protect themselves from the outrage observed in the recent congressional hearings and evidenced by many civil lawsuits. So far, Wall Street executives have not asserted the Fifth Amendment, but as multiple civil and possible criminal proceedings loom, will they? … Read More
YOU’RE EXONERATED: Exploring the “Sham Guaranty” Defense to Eliminate Liability Under a Guaranty
Lenders commonly require principals of a company to personally guarantee a real estate loan. While the business may be protected by California’s antidefiency statute, guarantors are not. Lenders also carefully draft guaranties to expressly waive or otherwise exclude defenses. In many cases, the only defense a guarantor may have to secure the protections of the California antideficiency statute is the “sham guaranty” defense. … Read More
Business Pays for Court Delays
It’s no secret that the California budget crisis has had, and will have, far-reaching implications for communities and businesses around the state. As legislators continue to struggle to close budget gaps, their actions are resulting in significant consequences for the legal community, with the impact on the state and local economies expected to be in the tens of billions of dollars. … Read More
3-D Movies Fighting for Screen Time
With the recent flurry of 3-D films, there is great pressure on theaters because, currently, there are only approximately 3,500 3-D screens in place around the country. That’s less than 10% of the total and not enough to accommodate two 3-D movies at the same time, let alone three or four.. … Read More
Arbitration Enforced at Any Cost? Perhaps Not.
The pendulum may finally be swinging back. Recent court opinions, as discussed below, reveal a more guarded approach toward the once heralded arbitration process, as evidenced by judges’ greater willingness to vacate arbitration awards and carve out exceptions to contractual arbitration. … Read More
When Seeking Pre-Trial Receivership for Solvent Companies Less May be More
Receivers may be appointed where a company is insolvent, in danger of becoming insolvent, winding up its affairs or a judgment debtor. However, did you know that prior to trial a plaintiff may seek a court-appointed receiver for a solvent, on-going business? … Read More
Is Your Partner Using the Recession to Hide Fraud?
Tough economic times can sometimes be used to mask fraudulent activities. In times like these, minority shareholders who suspect improper activity by the majority should be more vigilant than ever. Often minority shareholders, especially those not involved in the business…Read More
An Arbitrator’s Powers are Limited
There are differences between arbitration and litigation: An arbitrator has no authority to order an in camera review of information protected by the attorney-client privilege, the absolute work-product doctrine or the conditional work-product doctrine. Only a judge has the power to conduct any sort of review, and then only on materials subject to…Read More
How Final Are Arbitration Awards
For years, contractual arbitration awards have been subject to limited judicial review. Indeed, under State and Federal law, such awards could be challenged only on the grounds that they were procured by corruption or fraud or because the arbitrators exceeded their powers. Additionally, under Federal law, awards could be challenged on the ground that they were made in manifest disregard of the law …Read More
Are You Personally Liable for the Acts of Your Corporation?
Do you own a business as a corporation or an LLC, and think you’re insulted from personal liability? Think again. There are numerous ways that a shareholder of a corporation or a member in an LLC can be held personally liable for the acts of the entity…Read More
Avoiding Shareholder Litigation
Here are a few strategies that we have employed to deal with shareholder disputes…Read More
Now that arbitration has matured, is it still the economical, efficient service its proponents claim it to be? The answer is decidedly mixed. Think back only 10 years ago when arbitration was the exception rather than the rule to resolving disputes. Then, arbitration’s quick results were a welcome relief from…Read More