April 2018 Update
Effective January 2018, applications to file a trademark or service mark registration can be submitted online through the Secretary of State’s bizfile California portal (https://tmbizfile.sos.ca.gov/Registration/). See §1.5.
In City of San Diego v San Diegans for Open Government (2016) 3 CA5th 568, the court held that a nonprofit corporation could not recover private attorney general fees under CCP §1021.5 in a validation action, because it was suspended at the time of its appearance. In addition, its attorney acted contrary to Rev & T C §§19719(a) and 23301 by appearing on the corporation’s behalf without disclosing its suspended status, while knowing that it was suspended. Finally, the corporation was ineligible to recover its attorney fees, because its corporate status was not revived until after expiration of the time for an interested party to appear in the validation action. See §1.100.
In Casiopea Bovet, LLC v Chiang (2017) 12 CA5th 656, the court held that the assignee of a suspended corporation’s rights to escheated property lacked capacity to claim that property. An assignee “stands in the shoes” of the assignor and takes on the “rights and remedies, subject to any defenses which the obligor has against the assignor prior to notice of the assignment.” Cal-Western Bus. Servs., Inc. v Corning Capital Group (2013) 221 CA4th 304. See §1.100.
In Beachcomber Mgmt. Crystal Cove, LLC v Superior Court (2017) 13 CA5th 1105, plaintiffs brought a derivative suit on the company’s behalf to challenge various actions defendants took in managing the company. They sought to disqualify the law firm representing the defendant insiders because the firm had previously represented the company regarding the issues raised in the suit. The trial court disqualified the law firm, but the court of appeal reversed. The court noted that California courts have identified two separate categories in which actual or potential conflicts of interest arise in counsel’s representation of multiple clients. One category is successive representation, where the attorney’s representation of the current client may conflict with the interests of a former client. Under those circumstances, the chief fiduciary value jeopardized is that of client confidentiality. The other category is concurrent (or dual) representation, in which the primary value at stake is the attorney’s duty—and the client’s legitimate expectation—of loyalty, rather than confidentiality. In the court’s view in this case, the law firm’s representation of the insiders did not threaten the attorney’s duty of confidentiality to the company, because the insiders already were privy to all of the company’s confidential information. Indeed, they were largely the source of that information. See §§2.8, 6.26.
Given that the fiduciary duties of loyalty and care are owed only to the corporation and its shareholders, directors generally do not owe fiduciary duties to creditors or the holders of stock options or warrants, whose rights are based mainly on contract law. See Speirs v BlueFire Ethanol Fuels, Inc. (2015) 243 CA4th 969, 983. See §2.77.
For any public corporation, IRC §162(m) disallows a deduction for compensation paid to a covered employee, to the extent that the amount exceeds $1 million annually. Previously, the $1 million amount did not include compensation payable solely on account of the attainment of one or more performance goals, if certain outside director and shareholder approval requirements were met (“performance-based compensation”). Under the so-called Tax Cuts and Jobs Act (HR 1) (Pub L 115–97, 131 Stat 2054) signed by the President on December 22, 2017 (official title: “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), the exception for “performance-based compensation” was eliminated. As a result, all compensation paid to a covered employee that exceeds $1 million is not deductible. See §2.100.
In Schueneman v Arena Pharms., Inc. (9th Cir 2016) 840 F3d 698, officers of a pharmaceutical company expressed confidence to investors that a weight-loss drug they were developing would be approved by the Food and Drug Administration (FDA). However, they failed to disclose studies indicating that rats receiving the drug developed cancer, and that the FDA, in a highly unusual move, had requested ongoing bimonthly reports and follow-up studies. The Ninth Circuit concluded that these omissions were deliberately reckless and sufficient to plead scienter under SEC Rule 10b–5 (17 CFR §240.10b–5). See §3.18.
In Minnick v Automotive Creations, Inc. (2017) 13 CA5th 1000, the court held that an employer could lawfully exclude employees from earning vacation pay until after the completion of their first year of service. See §3.47.
Under the Tax Cuts and Jobs Act, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse, if such payments are subject to a nondisclosure agreement. IRC §162(q). This provision is effective for amounts paid or incurred after the date of enactment (December 22, 2017). See §3.51.
Effective January 1, 2018, the New Parent Leave Act adds Govt C §12945.6, to require employers with 20 to 49 employees in a 75-mile radius to provide up to 12 workweeks of job-protected leave for an employee to bond with a new child within 1 year of the child’s birth, adoption, or foster care placement. The Act essentially extends the protections of the California Family Rights Act to medium-sized workplaces. See §3.54.
Citing to People v Roscoe (2008) 169 CA4th 829, the court in In re Fresenius GranuFlo/NaturaLyte Dialysate Prods. Liab. Litig. (D Mass 2015) 76 F Supp 3d 321 concluded that there are three elements that must be satisfied for the responsible corporate officer doctrine to be applied: (1) the individual must be in a position of responsibility which allows the person to influence corporate policies or activities; (2) there must be a nexus between the individual’s position and the violation in question, such that the individual could have influenced the corporate actions which constituted the violations; and (3) the individual’s actions or inactions facilitated the violations. See §3.65.
A corporation may adopt an exculpatory provision in its articles of incorporation to shield its directors from personal liability for monetary damages for breach of fiduciary duty. If the corporation has done so, a damages action against them will be dismissed, notwithstanding any finding that the directors did not exercise due care under the applicable standard of review. Chen v Howard-Anderson (Del Ch 2014) 87 A3d 648, 675. See §3.73.
In Somers v Digital Realty Trust, Inc. (9th Cir 2017) 850 F3d 1045, the Ninth Circuit held that an employee who reported possible securities laws violations to his company’s management, rather than to the Securities and Exchange Commission, nonetheless constituted a “whistleblower” for purposes of retaliation protection under the Dodd-Frank Act. See §4.40.
In Fleming v The Charles Schwab Corp. (9th Cir 2017) 878 F3d 1146, the Ninth Circuit affirmed the district court’s dismissal of a putative class action for lack of jurisdiction under the Securities Litigation Uniform Standards Act of 1998 (SLUSA) (15 USC §§77p, 78bb(f)). Although plaintiffs’ pleadings carefully alleged several causes of action, the elements of which did not include manipulative conduct under the securities laws, the substance of all their allegations was that Schwab, motivated by a conflict of interest, deceived plaintiffs into believing it would deliver the best execution of their trades, despite knowing that sending all trades to a trading center with which it had a financial relationship would breach that duty. The complaints thus alleged a deceptive practice actionable under federal securities law, depriving the district court of jurisdiction. See §6.50.
Under the Tax Cuts and Jobs Act, the dividends-received deduction for corporate shareholders has been reduced. The Act reduces the 70 percent dividends-received deduction to 50 percent, and the 80 percent dividends-received deduction (for dividends received from a 20-percent-owned corporation) is reduced to 65 percent. This provision is effective for taxable years beginning after December 31, 2017. See §8.55.
Unless there’s a “contrary provision in the articles of incorporation,” in any suit for involuntary dissolution of a corporation, or in any proceeding for voluntary dissolution that’s initiated by shareholder vote, the corporation or the holders of 50 percent or more of its voting power may avoid dissolution by purchasing for cash at fair value the shares owned by the plaintiffs or shareholders seeking dissolution. An amendment to Corp C §2000(a) effective January 1, 2018 clarifies that the “contrary provision in the articles” need only be a reference in the articles to a separate written agreement between two or more shareholders for the purchase of shares; it’s not necessary for the articles to set out the terms relating to the purchase of those shares. See §§11.29, 11.87.
After a corporation files for bankruptcy, its shares are cancelled and its directors are replaced by a court-appointed representative responsible for liquidating the corporation’s assets and paying creditors. Under prior law, that representative didn’t have express statutory authority to execute and file a certificate of dissolution with the Secretary of State when the corporation was completely wound up. As amended effective January 1, 2018, Corp C §1401 and new Corp C §1401.5 remedy that omission and set forth what should be included in a representative’s certificate of dissolution. See §11.92.
Throughout the text of the book, URLs have been updated and tax brackets and rates have been modified to account for changes under the Tax Cuts and Jobs Act.