Doing Business in California: “Transacting Intrastate Business”

We have previously written about doing business in California, and how the California Corporations Code uses a “transacting intrastate business” test.  Importantly, if a corporation or other entity is deemed to be doing business in California under the “transacting intrastate business” test, that entity must obtain a “Certificate of Qualification” under Corporations Code § 2105.  This post will look at what will and will not constitute “transacting intrastate business.”

Transacting Intrastate Business

Transacting intrastate business means that the entity or some part thereof enters into or conducts repeated and successive business transactions (sales, deals, etc.) in California.  Like many legal tests, certain factors will be weighed to determine whether or not the test is satisfied.  To assist courts and businesses in determining what may or may not qualify as transacting intrastate business, Corporations Code § 191 sets out what activities will not be considered to be transacting intrastate business, although a listed activity may be taken with other activities that, taken together, constitutes transacting intrastate business.  Some of the protected activities include:

(1) Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof or the settlement of claims or disputes.

(2) Holding meetings of its board or shareholders or carrying on other activities concerning its internal affairs.

(3) Maintaining bank accounts.

(4) Maintaining offices or agencies for the transfer, exchange, and registration of its securities or depositaries with relation to its securities.

(5) Effecting sales through independent contractors.

(6) Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance outside this state before becoming binding contracts.

(7) Creating evidences of debt or mortgages, liens or security interests on real or personal property.

(8) Conducting an isolated transaction completed within a period of 180 days and not in the course of a number of repeated transactions of like nature.

Likewise, a foreign corporation will not be considered to be transacting intrastate business solely because one of its subsidiaries transacts intrastate business.  A foreign corporation or other entity  will also not be considered to be transacting intrastate business solely because of its status as any one or more of the following:

(1) It is a shareholder of a domestic corporation.

(2) It is a shareholder of a foreign corporation transacting intrastate business.

(3) It is a limited partner of a domestic limited partnership.

(4) It is a limited partner of a foreign limited partnership transacting intrastate business.

(5) It is a member or manager of a domestic limited liability company.

(6) It is a member or manager of a foreign limited liability company transacting intrastate business.

In addition to the above, it is important to note that, in the digital age, an entity conducting significant business over the internet may have sufficient contacts with California to allow a court to exercise personal jurisdiction over the entity.  Furthermore, California law permits a plaintiff to conduct initial discovery against a defendant corporation or other entity to determine whether or not the corporation has been doing business within the state.

California’s Presumption Against Non-Compete Agreements Recognized in Delaware

Terms of Employment ContractPreviously on the blog we discussed how non-compete agreements in California are presumed void unless they meet one of two very narrow statutory exceptions. A recent decision from the  Delaware Court of Chancery further emphasized the reach and effect of this presumption by upholding a California employee’s right to contract despite a non-compete agreement in an employment contract governed by Delaware law.

Specifically, in  Ascension Insurance Holdings, LLC v. Underwood et al., the Delaware Court addressed the issue of whether a non-compete provision governed by Delaware law could be enforced against a California-based employee competing against his California-based employer. Ascension Insurance Holdings, LLC v. Underwood et al., C.A. 9897-VCG (Del Ch. January 28, 2015). 

Ascension is a limited liability company incorporated in Delaware, but its principal place of business is in California.  Ascension acquired the assets of another company and as part of the acquisition Underwood entered into agreements not-to-compete with Ascension or its subsidiary Alliant Insurance Services, Inc. (“AIS”), where Underwood had been previously employed.

Underwood allegedly began competing in violation of the agreement’s non-compete, and Ascension sought an injunction seeking to enforce the non-compete against Underwood. The defendants argued that the covenant was not enforceable as it was against the public policy of California. However, Ascension argued that the covenant not-to-compete signed by Underwood contained a Delaware choice of law provision, and therefore the covenant was enforceable.

The Delaware Court of Chancery concluded that California law, not Delaware law, applied. Despite the fact that the employment agreement contained a Delaware choice-of-law provision, the court did not enforce the non-compete agreement and denied the request for an injunction. The court noted that it does not have to automatically defer to the parties’ choice of law selection, but rather examined whether enforcement of the non-compete would conflict with California’s strong statutory policy against non-compete agreements.  In fact, the court found that such a conflict did exist, and it also found that California’s interest in upholding its policy against the enforcement of non-competes outweighed Delaware’s interest in enforcing the non-compete agreement.

The impact of this case is significant in light of the fact that many companies chose to incorporate in Delaware but principally operate in California, and that those companies may also choose to apply Delaware law to their contractual agreements.  A recent report found that out of 211,929 observed businesses nationwide, 54.57% incorporated in Delaware. The next biggest state is New York with 5.15%, followed by California with 4.38%.  The top 10 states make up over 80% of all corporations.

If you have any questions about on-compete clauses, consult with an experienced attorney. 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.

Enforcing Restrictive Land Covenants

Land Covenant AttorneysRestrictive covenants are contract clauses that  limit a contracting party’s future conduct. A restrictive land covenant prevents certain use of the land. In this article, we will discuss restrictive land covenants, and how to enforce them in California.

In general, restrictive land covenants serve the purpose of enforcing neighborhood presentation standards. These are your restrictive easements, Covenants, Conditions, and Restrictions (“CC&Rs”), and other Home Owner’s Association rules. They can range from mandating where a home owner puts his trash cans to the permissible colors of a home’s façade. Such covenants are typically written into a deed, or at least referenced in the deed and recorded. Nahrstedt v. Lakeside Village, 8 Cal.4th 361 (1994). Restrictive land covenants are usually created by developers of a planned community, and enforced by community representatives or land owners.

Restrictive covenants “run with the land.” This means that they are tied to the property (land), and not to a  specific owner(s). In other words, the limitations of a restrictive land covenant are legally binding for anybody who subsequently buys the property.

A restrictive land covenant is enforceable as long it was recorded, it is being enforced in a fair and non-discriminatory manner, and there is still an individual or group benefiting from it. It can be enforced by any individual land owner who benefits from the restriction, or the collective homeowner’s association if there is one.  (Cal. Civ. Code §5975).

For the most part, homeowner’s associations are the principal enforcers of restrictive land covenants. California’s Civil Code authorizes these types of associations to initiate legal action, defend, settle, or intervene in litigation, arbitration, mediation, or administrative proceedings on behalf of the association membership (Cal. Civ. Code §5980). An association can take action to enforce CC&Rs, resolve issues concerning damage to common areas, and similar land-use matters.

Steps for enforcing a restrictive land covenant will vary based on the planned community. For example, one particular homeowner’s association may have outlined provisions for commencement of an enforcement action. In the absence of a homeowner’s association, the land owner seeking to enforce a restrictive land covenant can sue. A plaintiff in an action seeking to enforce CC&Rs can petition the court for an injunction against the defendant, which would require the defendant to stop non-compliance and seek money damages.

If you have any questions about restrictive covenants, consult with an experienced attorney. 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.

LLC Creation Checklist for California

CaliforniaPreviously on the blog, we provided some general information about the formation requirements for various business entities. One of the most commonly utilized entities in California is the limited liability company (LLC). Generally speaking, the steps for forming an LLC in California include the following:

  • Pick a Name for the LLC. Selection of the name is limited by the California Revised Uniform Limited Liability Company Act (RULLCA). See California Corporations Code Section 17701.08. The name must contain the words “limited liability company,” or some permitted abbreviation of those words, i.e., “LLC” or “L.L.C.”

  • File Articles of Organization (Secretary of State Form LLC-1) with the California Secretary of State’s office and pay the associated filing fee. The type of management that is desired, i.e., manager-managed by one or more managers or member managed, is indicated by checking a box on the Articles of Organization, and should be carefully considered.

  • Designate an Agent for service of process. The agent shall be an individual that is a resident of the State of California, such as the company’s lawyer if a resident, or a corporate agent that complies under California law (Corporations Code Sections 17701.13(c), 1505) and whose capacity to act as an agent has not been terminated.

  • File a Statement of Information (Secretary of State Form LLC-12) with the California Secretary of State’s office within 90 days after filing the original Articles of Organization (biennially after that) and pay the associated filing fee.

Although some states have publication requirements for a newly formed LLC, California does not. California also does not legally require a newly formed LLC to prepare and file an LLC Operating Agreement. However, it is highly advisable to have an LLC Operating Agreement prepared (and negotiated if there is more than one member) before making any filings with the Secretary of State.

If you have any questions about forming a limited liability company, consult with an experienced attorney. 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 needs.

Cardinal Change vs. Abandonment

Previously on the blog, we defined what constitutes a cardinal change in a construction contract. Importantly, California is one of the few states that differentiates between a cardinal change and the related legal theory of  “abandonment.”  It is important for property owners and contractors to understand the difference and the implications of both.

A cardinal change is a change that goes beyond the permitted changes detailed in the contract.  It is usually a request so far outside the scope of the original contract that it frustrates the very purpose of the contract (click here for examples from our previous blog).

“Abandonment” occurs when a property owner is said to have “abandoned” a project or property.  Abandonment can be shown where parties fail to follow change order procedures, when the final product differs substantially from the original contract, and even when there are impermissible cardinal changes.

The legal implications of cardinal changes and abandonment, and specifically the remedies and damages that are available to both, provide that a contractor may recover damages that are a result of excessive, owner-directed changes to a project, beyond what the parties could have reasonably anticipated at the time of contracting.

In fact, in most jurisdictions the two terms are sometimes used interchangeably.  However, according to the California Supreme Court, the two doctrines are “fundamentally different” and the scope of damages available also differ.  This nuanced issue in construction contract law may seem small, but it can have a significant affect on the amount of damages a contractor may recover.

In Amelco Electric v. City of Thousand Oaks, 15 Cal.Rptr.2d 900 (2002), the California Supreme Court held that under an abandonment claim, a contractor is entitled to recover the total cost (less payments received) for work both before and after the contract was abandoned. Under a cardinal change claim, however, the contractor is only entitled to breach of contract damages for the additional work constituting a cardinal change.

If you have any questions about construction contracts, consult with an experienced attorney. 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.

Liability in an ADA Compliant Commercial Lease

The Americans with Disabilities Act (ADA) requires anyone who owns, leases, or operates a place of public accommodation to make sure that the place or premises complies with ADA guidelines. This means that when drafting an ADA compliant commercial lease, a property owner must address how the parties to the agreement will comply with the ADA, and who will absorb the cost of a potential ADA lawsuit.

Title III of the ADA requires “barrier removal” for existing structures and prevents modifications or new construction that can impede access by the disabled persons. Barrier removal imposes a range of compliance obligations that may include installing ramps, creating designated and accessible disabled  parking spaces for the disabled, widening doors, installing special door hardware, and removing certain types of carpeting.

Determining and memorializing which parties are responsible for meeting ADA requirements is important. At least one individual will have the burden of paying the costs associated with ADA compliance. Generally, the landlord will be responsible for meeting any compliance requirements that deal with the structure of the building, while . A tenant will usually be responsible for issues that are solely within the tenant’’s control. To avoid any confusion about who has what responsibilities, there should be a provision clear language in the commercial lease spelling out the landlord’s and tenant’s respective responsibilities.

NoteablyNotably, both a landlord and tenant can be held liable to a third party plaintiff for violations of the ADA. In Botosan v. Paul McNally Realty, 216 F. 3d 827 (2000), a court held that despite the tenant’s contractual responsibility to ensure ADA compliance, either a landlord or tenant can be liable to a third party.

At the very least, a commercial lease should include language representations and warranties stating whether the property complies with the ADA, provisions setting forth who will be responsible for any required retrofitting, how future liability will be allocated, and how the potential cost of compliance costs will be allocated.

If you have any questions about ADA compliant commercial lease terms, consult with an experienced attorney. 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, commercial and real property claims. Contact us at (310) 277-7747 to see how we can help you.

Contract Law: Defining Conflicting Terms- Part 2

Previously on the blog, we discussed ambiguous and conflicting terms in contracts. Most contracts include clauses which provide interpretation rules for ambiguous and conflicting terms. In the absence of such a clause (or if the provisions of the clause do not resolve the conflict), certain California statutes, and case law interpreting and applying those rules, will provide the method of determining  which, if any, ambiguous or conflicting terms can be enforced.

Generally speaking, an ambiguous term can reasonably be read in more than one way.  Likewise, a conflicting term exists where compliance with one or more contractual provisions would violate another contractual provision.

The California Legislature codified contract interpretation rules in the California Civil Code to cover a variety of circumstances that can arise with ambiguous or conflicting terms. A summary of a few of the most common principles  follows below.

Contract Interpretation in General

  • A contract must be interpreted to give effect to the mutual intention of the parties as they existed at the time of contracting, so far as such intentions are both ascertainable and lawful. Civil Code § 1636
  • The whole of a contract should be taken together, so as to give effect to every part, if reasonably practicable, with each clause helping to interpret the other. Civil Code § 1641
  • Several contracts relating to the same matters, between the same parties, and made as part or parts of substantially one transaction, are to be taken together. Civil Code § 1642
  • A contract may be explained by reference to the circumstances under which it was made, and the matter to which it relates. Civil Code § 1647
  • No matter how broad a contract is, it extends only to those things the parties intended to contract. Civil Code § 1648
  • Inconsistencies in a contract must be reconciled, if possible, by an interpretation that will give some effect to the inconsistent clauses, subordinate to the general intent and purpose of the whole contract. Civil Code § 1652

Interpreting Specific Contract Language

  • Contract language should be understood in an ordinary and popular sense, not in its strict legal meaning. The exception to this is when parties use words meant to be taken in a technical sense. For example, construction contracts often use language that references published trade standards, which can be used to interpret the contract. Civil Code § 1644
  • Technical words should be interpreted as usually understood by individuals in the profession or business to which they relate, unless clearly used in a different sense. Civil Code § 1645
  • Contract words that are wholly inconsistent with a contract’s nature, or with the main intention of the parties, are to be rejected. Civil Code § 1653

If you have any questions about ambiguous or conflicting terms in a contract, consult with an experienced attorney. 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, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

Using Power of Attorney in a Real Estate Transaction

A power of attorney is a legal document that grants a person the legal authority to sign documents and enter into transactions on someone else’s behalf.  If you give a trusted professional, friend, or family member power of attorney, their signature on your behalf is legally effective to the same extent as if you had signed.

There are several reasons why you may give someone power of attorney, such as anticipation of your own incapacity or extended travel. In the actual power of attorney document, you can limit the extent of an individual’s powers to sign agreements on your behalf. For example, you may give someone power to only handle medical or only financial matters.

Similarly, some power of attorneys are granted specifically for real estate transactions only.  In fact there are often practical considerations that weigh in favor of considering a power of attorney in a real estate transaction. If you are in the middle of a real estate purchase or sale, it can be hard to predict a close of escrow date, or difficult to coordinate a close date with work or leisure travel schedules.  By granting your attorney or other trusted professional power of attorney in a real estate transaction, he or she can sign all the closing documents while you maintain your travel plans.

Another reason to consider a power of attorney for real estate transactions is to protect your interests in the event of your incapacity. Planning for incapacity by creating a power of attorney can make sure your real estate is taken care of as you intend by allowing someone else to step in and take care of your property for you.

Always remember that when an individual uses their power or attorney to sign on your behalf, they are binding you to all agreements just as if you had signed them yourself. A power of attorney does not absolve you of any future responsibilities or obligations associated with a real estate transaction.

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, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

What is a Change Order in a Construction Contract?

“No prudent individual would make a contract for the construction of a building of any magnitude without incorporating a provision somewhere making specific and definite arrangements concerning extra work.” City Street Improvement Company v. Kroh, 158 Cal. 308, 321 (1910).

Previously on our blog, we discussed how changes to construction contracts are often unavoidable, but that there are limitations to how much a construction contract can change. In this article, we will discuss the proper tool for acceptable change requests: the “change order.”

A change order is essentially an amendment to a construction contract. It represents the mutual consensus between the parties on a change to the schedule, price, work, or other contract term.  Like any other contract amendment, a change order has to meet the requirements of valid contract formation (offer, acceptance, reasonable identification of changed terms, exchange of consideration, and be signed by both parties).

A change order should always be accompanied by documentation, such as original contract documents, emails discussing the change, revised plans and specifications, meeting minutes, and any other reports that might be related to the change order.  Change orders and associated documents should be kept on file with all other project records.  Moreover, since the statute of limitations for most construction claims is ten years, every contract, change order, and supporting document for a change order should be kept at least that long. Finally, it is especially important to determine and document the cost of a change order.

If you have questions about construction contract claims, consult an experienced attorney. 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, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.

What is Incorporation by Reference in a Contract?

Previously on our blog, we discussed how more complex contracts allude to other existing contracts and documents. Incorporation by reference is the method of making these alluded-to documents part of a contract, and is often used to save space when parties want to include or reference another legal document or contract into a new contract. To properly incorporate another document by reference, it has to be adequately described in a new contract, and it is good practice also to attach a copy of the referenced document to the new contract to which it is being incorporated.

The concept of incorporation by reference is similar to that of flow-down contract clauses in construction contracts.  For example, a flow-down clause is used to bind subcontractors to the general contractor in the same fashion as the general contractor is bound under its contract with the property owner. In the same vein, subcontracts usually incorporate general contracts by reference.

When drafting an incorporation by reference clause, parties have the option to incorporate certain provisions of an existing legal document, or the entire document. If the parties make it clear that only certain provisions are to be incorporated, the incorporation by reference clause should be explicitly clear in its limited scope and purpose. However, if the incorporation clause is very general, this could lead to potential disputes about which provisions to a contract were incorporated. To avoid any confusion, parties should specify exactly which terms are being incorporated.

Any time existing legal documents are incorporated by reference, there is a potential for conflicting terms. It is therefore important that all provisions are reviewed for conflicts, and a contract provision dictating how conflicting terms will be resolved should also be included.

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, real estate, construction and property claims. Contact us at (310) 277-7747 to see how we can help you with your business, real estate or construction law needs.