What is the Business Judgment Rule?

A director will not be found personally liable for a breach of duty of care if he or she meets the requirements of the business judgment rule (“BJR”). Under the BJR, a court will not second guess a business decision that in hindsight turned out to be poor or erroneous if the director acted in good faith and exercised due caution.

Under California law, in discharging his or her duties “a director is entitled to rely on information, opinions, reports, or statements,” prepared or presented by any of the following:

  • Corporate officers or employees who the director “reasonably believes to be reliable and competent”;
  • Legal counsel;
  • Accountants;
  • Other persons as to matters the director reasonably believes are within such person’s professional competence; or
  • A committee of the board of which the director is not a member.

Directors may use the BJR as a defense to the liability imposed in the event of a breach of duty of care by arguing that they acted in good faith and exercised due caution in relying on another individual’s statements because they believed that person to be reliable and competent.  However, the business judgment rule will not protect directors who were not reasonably diligent in informing themselves about a transaction prior to agreeing to take on the work.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims, including claims involving the business judgment rule. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

What is a Director’s Duty of Care?

Generally, a corporation’s articles may limit directors’ personal liability for money damages to a corporation or to its shareholders for actions taken or for failure to take action. However, the articles may not eliminate liability for a director’s breach of duties owed to the corporation. For example a corporation’s articles cannot eliminate liability for receiving financial benefits to which the director is not entitled, intentionally inflicting harm on the corporation or its shareholders, unlawful corporate distributions, or an intentionally violating criminal law.

Duty of Care

Every director owes the corporation a duty of care. This means that he or she must manage the corporation to the best of his or her ability, act in good faith, and do what a prudent person would do with regard to his or her own business.

An example of acting in good faith includes diligently obtaining and reviewing financial statements when the corporation is in the process of purchasing a new business or business assets. The directors must review the new business or assets thoroughly before voting to proceed with the purchase or acquisition.

The directors may rely on the assurances of another director, committee, or professional advisor’s that the new business is financially sound. However, in the event that the transaction goes through but the new business was not financially sound, a court may determine that  the directors have breached their duty of care if a prudent director would have made further inquiry than the sole reliance upon another director, a committee, or an advisor’s assurances.  This duty of inquiry is part of the duty of care.

To avoid personal liability, directors guiding a corporation in a corporate transaction should exercise due diligence to avoid being found liable for any corporate losses because of their breach of duty of care.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

What is a Breach of the Duty of Loyalty?

The relationship between an officer or director and a corporation gives rise to certain fiduciary obligations as a matter of law. One of the fiduciary duties that an officer or director owes the corporation is a duty of loyalty. The duty of loyalty requires every officer or director to act in good faith and with a reasonable belief that what he or she does is in the corporation’s best interest.

A classic example of a breach of the duty of loyalty is where a director profits at the corporation’s expense, meaning that a director acts in furtherance of his or her own personal financial interests, separate business interests, or a family member’s business.  If the corporation loses money as a result of a transaction in which the officer or director has a personal interest, that director could be found liable for the corporate losses.  However, even if there is no loss to the corporation (for example, if the corporation could not have gotten a better price), the officer or director may still be forced to disgorge any profits (i.e., give them to the corporation).

Where an officer or director’s actions are in furtherance of the corporation’s businesses, and he or she has no connection to any personal interests tied to the corporate transaction, there is usually little to no risk of a breach of the duty of loyalty.  Similarly, an officer or director with a personal financial interest may disclose that fact to the corporation and seek the approval of the transaction by disinterested members of the board.  Assuming that a full disclosure was made and board approval was obtained, there would likewise be little to no risk of a breach of fiduciary duty.

Another part of the duty of loyalty comes into play where an officer or director plans to terminate their employment and join a competing company or venture.  In the absence of an agreement to the contrary, a director may engage in competition with the corporation after termination of his or her directorship relationship. However, before planning or deciding to compete with the corporation, whether before or after deciding to leave, an officer or director should consult with an attorney to determine the scope of any noncompetition or nonsolicitation clauses in their employment agreements.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and property claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

What is a Fiduciary Duty?

A fiduciary relationship is about trust and confidence; it exists where one or more parties are bound to act in good faith toward and for the benefit of one or more other parties.  A fiduciary relationship is often comprised of the duties of care, loyalty, confidentiality, and obedience, i.e., fiduciary duties to the parties in the relationship.

Before a person can be charged with a fiduciary obligation, he or she or it must either knowingly undertake an agreement on behalf of and for the benefit of another, or enter into a relationship which imposes a fiduciary duty as a matter of law. Some of the relationships in which a fiduciary duty arises as a matter of law include:

  • principals and agents
  • business partnerships
  • attorneys and clients
  • joint venturers
  • corporate officers/directors and corporations
  • corporations and shareholders
  • controlling shareholders and minority shareholders

An example of where a fiduciary relationship exists under California law is the duty of loyalty that prohibits an agent, during the course of his or her or its agency, from undertaking activities adverse to the interests of his or her or its principal.  Similarly, a director also owes a duty of care that requires him or her to manage an entity, its property, or subject matter of the relationship with due care.  The duty of obedience requires a fiduciary’s actions to be consistent with the organization’s articles of incorporation, bylaws, mission statement, and tax-exemption documents, where applicable.  In other circumstances, a fiduciary owes the client an utmost duty of confidentiality, such as the fiduciary relationship between attorneys and their clients.

Generally, a breach of a fiduciary duty will entail a breach of the duty of care, loyalty, obedience, and/or confidence. To establish such a breach, a plaintiff will have to prove the existence of a fiduciary duty, show that the duty was breached, and establish what damages were suffered as a result of that breach; such damages may simply be all profits that were earned as a result of the breach.  Intentional wrongs such as fraud and negligent misrepresentation also may constitute a breach of fiduciary duty.  The measure and types of damage or other relief available in breach of fiduciary claims depend on the nature of the breach. In certain egregious cases, punitive damages may be available to a plaintiff.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.

Business Law and Cloud Computing

Every day more companies move towards cloud computing, but recent cyber-attacks have raised questions about security and reliability. Several other legal considerations have been raised, and it is therefore important for businesses considering this path to make sure to weigh the legal factors as well as cost benefits.

There are many reasons why companies are switching to cloud computing. According to the National Law Journal, some experts think that cloud computing could cut corporate IT costs by half. The cloud also offers attractive flexibility, with usage-based fee structures and the ability to scale performance up higher than any typical corporate IT.

The biggest down-side to cloud computing has to do with security concerns (perceived or otherwise), such as whether cloud service providers can be trusted to look after critical and confidential business data. The consequences of lost data, as seen from high profile data loss cases, can lead a business to lose billions of dollars.

If a company is moving to the cloud, they need to make sure they are protected legally. This involves knowing the relevant security and data laws to ensure that corporate and consumer interests are protected. This will also involve having a designated employee or attorney who monitors the business policies to make sure they are compliant, particularly when laws about data and security are diverse and constantly changing. There are very strict data security requirements specific to industries (like health care), and these must be met to avoid fines or graver penalties. Companies must also be aware of applicable laws outlining notification requirements in case of a data security breach. These regulations can be different through the country, but the business will need to be aware of the rules in any states they are in.

Additionally, a business switching to cloud computing needs to investigate and monitor any potential cloud vendors. Strict terms and conditions governing how the vendor will store, care for, and protect data need to be established. A contract with a cloud servicing vendor should also address liability issues in the event of a breach.

What is a Mechanic’s Lien?

A Mechanics’ Lien is a statutory remedy most often used by contractors and subcontractors.  Nearly anyone who contributes labor or materials to a real estate improvement project can use a mechanics lien as a mechanism to resolve issues with receiving payment.

 

What is a Mechanic’s Lien?

Specifically, California law allows the use of a Mechanics’ Lien to exact payment by placing a lien on the property.  The existence of the lien on the property inhibits the property owner’s ability to sell or refinance his or her property, at least while any debts secured by a lien are unpaid.  If debt payments continue to go unpaid, the lienholder could potentially go to court to have the property sold at auction to pay the debt and/or lien.

 

Removing a Mechanics Lien

Once a Mechanics’ Lien has been recorded, a claimant has 90 days to file a court action to enforce it. If this step is not taken in a timely fashion, the lien will not be valid for most purposes. That said, even if the lien is not timely enforced in court, a title company will likely still require that the lien be removed before passing clear title.

 

A lien can be removed if the lienholder files a Release of Lien. The property owner usually pays the lienholder what is owed and makes this request. If the Release of Lien is not filed, a property owner can petition the court to release the property from the Mechanics’ Lien.

 

Whenever there is a Mechanics’ Lien on property, there is a risk that the property could be sold to pay the lien. This is a motivating factor for property owners to pay off debts, or at least fight the lien. If a property owner chooses to fight a lien, both sides should be prepared for a technical and potentially lengthy legal battle.

Alternative Dispute Resolution

The legal conflicts that businesses most often face are contract disputes, financial disputes, and employer-employee issues. If your business is facing such a conflict, it will be encouraging for you to know that most of these disputes can and are resolved without going to court. Alternative dispute resolution (“ADR”) can save your business a lot of time and money if you utilize it as a means to resolving your legal issues. There are many kinds of ADR, but the most commonly used are negotiations, mediations, and arbitrations.

In a negotiation, the parties involved in the dispute, or their attorneys, communicate directly with each other to try reaching a mutually agreeable resolution.

In mediation, a neutral third-party (the mediator) serves as a middleman in a confidential process. Each party spends time alone with the mediator engaged in a discussion aimed at finding a way to resolve the conflict. The mediator switches between the parties communicating possible resolutions until an agreement is made. A mediator generally does not have the power to decide the case if an agreement is not reached.

In arbitration, a neutral arbitrator is the one that makes the final decision after reviewing presentations from both sides. The presentations usually include documents and witness testimony related to the dispute. If the arbitration was set up by a court, the arbitrator’s decision may be binding, meaning that the case will not proceed to trial. If the arbitrator’s decision is non-binding, however, the parties will still have the option to take their case to trial.

Alternative Dispute Resolution can be used instead of filing a lawsuit, or if a lawsuit has been filed, it can help avoid trial. Unless mandated by a court, the parties can usually pick which type of alternative dispute resolution to pursue. In addition to resolving a dispute faster than is possible in court, alternative dispute resolution has many other benefits. It is often less costly and time intensive, it is usually confidential, and it can help preserve relationships through better communication.

Tips for Selling a Business in California

There are many reasons to consider selling a business, and there are just as many things to consider before and during the process. To streamline a sale, it would be helpful to be (or get) highly organized, making sure all assets are in order, the logistics of an exit strategy are in line, and all legal forms are squared away.

There will be a lot to do to prepare for the sale, so the best thing to do is begin the process as soon as possible before the actual sale. You will need this time to improve the way you store and organize financial records and make sure your business structure is formed and maintained properly. For example, depending on your business’ structure, state laws may require annual report filings and maintenance of certain records or meeting minutes. By making sure these are in order and fixing any deficiencies, you will also make the transition easier for the new buyer.

Naturally, before even listing your business for sale, you will want to make sure the business looks good on the outside.  Professional cleaning and equipment repair might need to be done. But you also need to make sure everything is equally attractive to a buyer on the inside, meaning that all legal and administrative dealings are in order. Communicate your plans to sell to your staff, and determine if one of them can take on your role. Your business may be more attractive to buyers if there is already someone in place to do your job. Keep in mind, however, that there are often buyers looking to hire their own staff. Bring this up in negotiations if keeping your staffs’ jobs is a priority to you.

Make sure all your legal and tax documents are well maintained and organized. Specifically, buyers will be asking to see, among other things, your balance sheets and tax returns from the past 3-5 years, profit and loss statements, bank statements, lease and vendor agreements, entity formation documents, and license information.

Finally, having your business priced appropriately will make it more attractive to a potential buyer. Work with a business appraiser early in the process to see what improvements you should make to get a better price, then again right before listing. The appraiser should draw up a detailed explanation of the business’ worth, bringing credibility to the asking price. It is also recommended that you work with an attorney on drafting the actual sales agreement to make sure you are protected from future liability.

Legal Considerations When Buying A Business

Buying a business requires a significant undertaking during which you will want to do your best to protect yourself and navigate around risks and hidden issues. This will include hefty market research, financial analysis, and of course legal advice.  Every transaction is unique, and there will be different considerations for different business types, but there are some general steps that each buyer should take when buying a business or assets.

Investigate Prior to Buying a Business

Once a buyer has decided to purchase a business, he or she should complete an intensive investigation (commonly called “due diligence”) into every aspect of the business before completing a purchase. This includes basic steps such as making sure the seller is the actual owner and if a government agency has closed the business, as well as more specific considerations such as:

  • Scrutinizing the business’ books and financial records for accuracy
  • Researching whether anyone has a claim, lien, or charge against the business or its assets
  • Looking up whether the business is properly licensed and if those licenses are transferable
  • Establishing the terms of any existing agreements to which the business is bound
  • Researching whether the business has been recently sued
  • Determining whether the business assets are in good working condition and under warranty
  • Investigating whether there any problems with the business’ physical structure (i.e., mold, termites, non-compliance with government regulations, etc.)

The Sales Agreement

The actual business sales agreement should list everything that is being transferred to the buyer. This includes all service agreements, inventory, leases, intellectual property, equipment, licenses, and accounts receivables. The purchase agreement should also outline the actual logistics of how all these transfers will proceed.

Before buying a business and signing a purchase and sale agreement, consult with an attorney who can advise you and work with other experts (like tax advisors) to help determine how to hold the company, whether all due diligence was exercised, and if the sales agreement is sound.

Has Your Business Been Served?

If your business has been served with legal papers, it is important to act quickly, and determine whether you have been summoned or subpoenaed.

 

The information below assumes valid service and subpoena requests.  Invalid service or an objectionable request may relieve the recipient from responding, appearing, or producing documents.  It is therefore of vital importance to talk to an attorney to determine if you have been validly served and whether and how you should respond.

 

Summons vs. Subpoena

If you have been served with legal papers, they are likely accompanied by either a summons or a subpoena. A summons means someone has brought a lawsuit against you. If this is the case, it will be important to contact experienced legal counsel without delay. A subpoena, on the other hand, can be served on parties and non-parties to a lawsuit or criminal case, and does not necessarily mean that the recipient is being sued. Instead, the court is commanding your presence or your documents at a deposition, trial, arbitration, or hearing.

 

Any person or business that is a resident of California can be subpoenaed. If a business receives a subpoena, they are required by law to produce the person most qualified on the subject matter to testify.

 

Any existing document or item can be subpoenaed for production, but the subpoena has to adequately describe the documents or items requested for production.

 

Responding to a Subpoena

A subpoena that commands a person’s attendance will require testimony at a specific time and place. A subpoena that commands production of documents or items will require production of these things at a specific time and place. A subpoena can command both, requiring a person to appear, testify, and produce documents.

 

The subpoena will outline how much time there is to respond, and where the person or documents must be produced. As stated above, a subpoena must be properly served to be effective.  Even if service is proper, a subpoena can be stopped with a protective order, including a protective order filed by another party.  However, if the deadline is approaching and there have been no objections, the witness must testify or produce the documents at the stated place and time. He or she may redact any private information on the documents.