Page 8 – Adishian Law

Minority shareholder rights in California include protections from a breach of fiduciary duty by the majority shareholder.

Majority shareholders may be held liable for damages for breach of a fiduciary obligation to minority shareholders, Jones v. H. F. Ahmanson & Co., 1 Cal.3d 93, 81 Cal.Rptr. 592, 460 P.2d 464; Brown v. Halbert, 271 A.C.A. 307, 316, 76 Cal.Rptr. 781; and 3 Witkin, Summary of Calif. Law (1960) Corporations, s 99, p. 2390 (1967 Supp. p. 998). A majority shareholder breaches his fiduciary duties to the minority when he uses his control to distribute a disproportionate share of corporate profits (whether in the form of a dividend of excessive executive compensation), depriving the minority of its fair share of corporate profits. See Jara v. Suprema Meats (2004) 121 C.A.4th 1238, 18 C.R.3d 187; Witkin Summary of California Law, Tenth Edition 2. [§ 181].

In Jara, the court found that a minority shareholder had the right to bring an individual action against the corporation for excessive compensation paid to the two other shareholders, who were also executives and directors of the corporation. The court stated, “The objective of encouraging intracorporate resolution of disputes and protecting managerial freedom becomes meaningless where defendants constitute the entire complement of the board of directors and all the corporate officers.” See Jara, supra, at 1259.

About Adishian Law Group, P.C.

Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.

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If you are about to be fired (or just got fired)…What Should You Do?

Whether you see your own layoff on the horizon or think it could never happen to you, it is important to be prepared for a layoff in today’s economic climate. Lawrence Mishel, president of the Economic Policy Institute in Washington, D.C. recently told the New York Times, that the state of our economy right now is “indistinguishable from a recession.” Families are “losing jobs, and they’re getting a double bite as wage growth slows down and inflation kicks up. People are losing out on both ends.” Part of any economic downturn includes layoffs, as companies often look to cutting their payroll as a first option for eliminating costs.

Treading lightly around the office or storming out is the wrong move and could adversely affect your chances of a severance package or preserving your rights. Losing your job can be, and often is a traumatic experience (it ranks up there with divorce, death or bankruptcy for many people). Being prepared for a layoff and knowing your legal rights can help to minimize the negative aspects, and even turn it into a positive event for you and your career growth. So, what should you do?

1. Stay Calm, Don’t Take It Personally

The first reaction for most terminated employees is an emotional one. The pressures of financial and familial obligations can be overwhelming when you see your job and cash flow flash before your eyes. However, your last few hours in the workplace may be your best chance to get important information regarding your employment. If you can, obtain an electronic or hard copy of your personal files (including contact lists, photos), any performance reviews, customer/client commendations, or emails which you think may be important. [In California, you have the right to view your personnel file (California Labor Code §1198.5), which contains important information regarding your hiring, employment and possibly your termination. Ask human resources for a copy of your file before you leave on your last day.

2. Contact Our Firm

If you believe your termination was (or will be) wrongful, or if you simply are not sure please fill out our free wrongful termination submission form on our website for a free, no obligation review. You can also call us at 415.955.0888 or 310.726.0888. Many times these cases start with circumstantial evidence (i.e. it just seems like it was wrong, or something doesn’t seem right). Use our free case submission to organize your facts and submit it to us.

The law favors those who act on their rights. Undue delays result in a violation of a statute of limitations, causing you to lose your rights. Acting quickly also increases the likelihood that evidence (witnesses, documents, etc.) will be available.

3. Don’t Sign Away Your Rights

Do not let company management or human resources intimidate or coerce you into signing anything which you have not fully read or do not understand. Ask questions, ask for time to consult your own attorney – this is a reasonable request that any company should grant. Yes, you may be losing your job, but you don’t want to lose any of your legal rights. Most companies have form separation and release agreements on file for such an occasion which release the company of any and all liability. Do not take the word of a co-worker or superior as to the contents of any document you sign. Ensure you know what the consequences of signing are and consult an attorney.

4. Keep Detailed and Thorough Notes of Any Meetings and Events

Many times, we meet with clients to hear their stories and collect important information about their employment. More often than not, clients call us two, three, even ten days later to say, “I just remembered, there was that one time when . . .” Details can often slip your mind when you are being ushered out your office door, or rumors of layoffs have your head spinning. After conversations or meetings regarding your termination or related events, write down the date, time, and details of each. Ideally, you will already have a record of key workplace related evets written down in a personal notebook or on your home computer (not at the office).

Reliving the details of your layoff may be the last thing you want to do. However, writing down the details in an orderly chronology [date, time, event] will help you recall events to the best of your ability and better assist any attorney who tries to assess your situation or make an argument on your behalf. The smallest details can make the biggest of differences, and many times you may not recognize what those important details are until after consulting with an attorney.

It is perfectly acceptable to ask a friend, or co-worker, to sit in on the meeting and take notes. Having a more objective listener’s perspective can add more details to your timeline, bring a sense of calm to the proceeding and of course serve as a witness.

Apply for Unemployment Benefits

Lastly, apply for unemployment benefits. You can apply via the web at https://eapply4ui.edd.ca.gov/. It is important to do this as soon as possible after your termination. Some people, especially in the higher earning salary brackets (six figures and up) feel reluctant to apply for unemployment. Our position is: Apply for it. You pay into it while you are working, and it is another source (other than your personal savings) to help you bridge the gap economically until you land your next job.

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California Non-Compete Agreements: It’s No Contest after Edwards

Long-term employment when companies quickly become aware the past for most American workers, especially in the technology forward California economy. Employers have benefited from these changes, by receiving the benefit of rapid flexibility in their employee base and hence cost structure. Employees have arguably benefited in some ways as well, by taking advantage of easy mobility within the workforce. Some employers have also gone one step further, by seeking to you protect themselves by adding “non-competition clauses” to their employee’s contracts.

What is a non-competition clause?

Generally speaking, a non-competition clause is any form of language in an employment contract that seeks to limit the employee’s ability to “compete” against his/her former employer once he is no longer employed by that employer.

Governing statutory law

California Business and Professions Code Section 16600 clearly forbids non-competition contracts and non-competition clauses, providing “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” In spite of the plain language of Section 16600, companies have continued to require that their employees sign non-competition agreements, asserting that these agreements somehow comply with Section 16600.

California Supreme Court Decision

In Edwards v. Arthur Andersen LLC 2008 DJDAR 12286, the California Supreme Court unambiguously held that non-competition agreements are void in California. In summary, this case arose out of the collapse of Arthur Andersen. Edwards had been an employee of Arthur Andersen, which was subsequently purchased by HSBC.

Before hiring any of Andersen’s employees, HSBC required them to execute a “Termination of Non-compete Agreement” (TONC) in order to obtain employment with HSBC. Among other things, the TONC required employees to, inter alia, (1) voluntarily resign from Andersen; (2) release Andersen from “any and all” claims, including “claims that in any way arise from or out of, are based upon or relate to Employee’s employment by, association with or compensation from” defendant; (3) continue indefinitely to preserve confidential information and trade secrets except as otherwise required by a court or governmental agency; (4) refrain from disparaging Andersen or its related entities or partners; and (5) cooperate with Andersen in connection with any investigation of, or litigation against, Andersen. Edwards signed the HSBC offer letter, but he did not sign the TONC. In response, Andersen terminated Edwards’s employment and withheld severance benefits. HSBC withdrew its offer of employment to Edwards. Litigation ensued.

At trial, the court “specifically decided that (1) the non-competition agreement did not violate section 16600 because it was narrowly tailored and did not deprive Edwards of his right to pursue his profession;…..” Edwards appealed. The Court of Appeal held that the non-competition agreement was invalid under section 16600. The decision was appealed and the California Supreme Court granted review.

In reaching its decision, a unanimous Court wrote: “We hold that the non-competition agreement here is invalid under section 16600, and we reject the narrow-restraint exception urged by Andersen. Non-competition agreements are invalid under section 16600 in California even if
narrowly drawn, unless they fall within the applicable statutory exceptions of
sections 16601, 16602, or 16602.5.” [J. Kennard and Werdeger concurred with respect to the non-competition issue, and dissented on a separate issue].

Lessons from Edwards

Clarity provided by this decision is significant especially in the California economy particularly Northern California, where high-tech job hopping is more common than not. This decision is also supported by some recent studies that concluded the constant shifting of resources and personal intellectual capital from one company to another was a major contributor to innovation and growth. See generally, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128 and Covenants Not to Compete, 74 N.Y.U.L Rev. 575 (1999).

The lesson is that if a California employer asks you to sign a non-competition agreement it should be viewed as a cautionary sign. If you have already signed a non-competition agreement within California, you should feel comfortable that such an agreement is void, absent the agreement falling “within the applicable statutory exceptions of sections 16601, 16602, or 16602.5.”

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Sometimes employers and employees both find themselves saying, “Give me a break!”

Must an employer provide a rest break to a worker during the day?

The general rule is that a worker is entitled to a 10 minute rest break for every 4 hours work, and the employer must not prohibit the workers from taking such breaks. If the nature or circumstance of work prevent the employer from giving the break at the preferred time (i.e. in the middle of the 4 hour period), then the employee must still receive the 10 minute break at another time during the day.

But, an employee cannot unilaterally choose to take his 20 minute break any time that he or she wants. For example, an employee cannot pass on both breaks in an 8 hour day, in order to leave 20 minutes early. The employer can also require that the employee stay on the premises during his or her breaks.

If the employer does not allow a rest break, then the employee can file a wage claim against the employer and recover one hour of pay for each workday that a rest period was not provided. For large employers, the damages can spiral out of control very quickly.

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Are you considering filing a complaint against a California Corporation for money owed to you or your clients? Who can be held liable? Can only the corporate entity be named as a defendant? Can individual shareholders, directors or officers also be named as defendants? Can the alter-ego doctrine be applied to non-profit corporations?

Generally, California corporate law encourages business ventures, risk-taking, and entrepreneurial activity by limiting liability exposure to the assets of the corporation.
But this is not an absolute protection. Courts will disregard the corporate entity, allowing for individual shareholders, directors or officers (i.e. the “alter-egos”) to be held liable in certain circumstances. This is also known as “piercing the corporate veil.”

It is well settled that California courts can pierce the corporate veil when both of the following two requirements are met:

Unity of Interests – The shareholders in question have treated the corporation as their “alter ego,” rather than as a separate entity; and
Inequitable Result – Upholding the corporate entity and allowing for the shareholders to dodge personal liability for its debts would “sanction a fraud or promote an injustice.” Automotriz del Golfo de California v. Resnick (1957)

In California, courts apply a factor-by-factor test to determine whether “alter-ego” liability is appropriate. These factors are laid out in the case of Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962).

Did the individual Defendant(s) act in bad faith?
Did the individuals contract with another with the intent to avoid performance by using a corporate entity as a shield against personal liability?
Did the individuals divert assets from a corporation by or to a stockholder or other person or entity to the detriment of creditors?
Domination of the corporation by a few key individuals?
Did the individuals and corporation use the same office or business location?
Did the individuals and the corporation employ the same attorney?
Did the individuals use the entity to procure labor, services and merchandise for another person or entity?
Did the individuals fail to adequately capitalize the corporation?
Did the individuals fail to maintain minutes or adequate corporate records?
Will there be an inequitable result if the court fails to pierce?

The burden of establishing alter-ego liability is on the plaintiff. Absent factors supporting individual liability, courts are reluctant to pierce the corporate veil because “alter-ego liability is fundamentally at odds with the general rule that dejure (ie. as a matter of law) corporation is a legal entity separate from its founders and owners; and the law specifically permits owners to incorporate a business for the very purpose of shielding them from its liabilities.” Las Palmas Associates v. Las Palmas Center Associates; Rutter Guide.

However, California courts have “followed a liberal policy of applying the alter-ego doctrine where the equities and justice of the situation appear to call for it.” First Western Bank & Trust Co. v. Bookasta (1968). In practice, the alter-ego doctrine is usually applied “where there are only a few shareholders and they have not respected their corporation’s separate identity.” When evaluating alter-ego liability, courts do not make a distinction between forms of corporations, and the doctrine applies equally to non-profit corporations and for-profit corporations.

Case References: Associated Vendors Inc. v. Oakland Meat Packing, Co. (1962); Automotiz del Golfo de California v. Resnick; Las Palmas Associates v. Las Palmas Center Associates; First Western Bank & Trust Co. v. Bookasta

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Are you thinking about investing as a minority shareholder in a company? Perhaps you are thinking about taking on outside investors for your current company? What are your minority shareholder rights as an investor? What should you be concerned about as a majority shareholder?

The Minority Shareholder

Understandably, minority shareholders often are concerned that their rights and interests will be trampled by those of the majority shareholders. It seems that corporations appear to have a greater incentive to cater to the needs of their more substantial investors. However, in California, minority shareholders possess certain crucial rights that cannot be compromised by corporate bylaws or majority shareholders actions. One of the most valuable rights for shareholders is the right to access information about the corporation. In particular, shareholders of California corporations have rights to inspect two different sets of records: (I) record of shareholders; and (II) accounting books, records, and minuts of proceedings.

Inspection of the record of shareholders

Minority shareholders have the right to inspect a corporation’s record of shareholders. Those who hold either: (a) 5% of the shares; or (b) 1% of the shares and have filed a federal Schedule 14B relating to the election of directors, have an absolute right, on 5 business days’ notice, to both: (1) to inspect and copy the record of shareholders; and (2) to obtain a current list of the names, addressses and share holdings of the voting shareholders (Corp. C. 1600(a)(b)). Furthermore, any shareholder who does not qualify under either (a) or (b) above, with a written demand, has a right to access a corporation’s record of shareholders. BUT if and only if the acquisition of such records is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1600 (c)).

Inspection of the books and records

Minority shareholders also have the valuable right to inspect accounting books, records, and minutes of proceedings. Inspection of said information is provided if and only if the acquisition of such information is directed towards an end deemed reasonably related to the holder’s interest (Corp. C. 1601 (a)).

These are important rights for all shareholders to keep in mind. Indeed, these rights may not be limited by either the bylaws or articles. If a lawful demand for inspection is refused without justification, the superior court can intervene and compel the corporation to forfeit the requested information. In some cases, the courts have exercised their power to award complaining shareholders with reasonable expenses, including attorneys’ fees. (Corp. C. 1600 (b)).

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Does Sexual Harassment Include Sex?

There are two recent decisions that we believe may be very significant for Plaintiffs in wrongful termination actions, particularly gender-based claims.

In Miller v. Department of Corrections, California Supreme Court, July 18, 2005, No. 114097, the court was faced with a fact pattern wherein a prison warden promoted women who were having sex with him, but did not promote women who were not having sex with him. On those facts, the court held that the women who were NOT having sex with the warden, and were being denied promotions, had standing to sue for sexual harassment.

In Christopher v. National Education Association, 05 C.D.O.S. 799, the 9th Circuit reversed a lower court’s dismissal of an action wherein a manager was accused of “shouting, screaming foul language, invading employees personal space, and making threatening gestures,” and held that the manager may be sued for gender discrimination under Title VII of the 1964 Civil Rights Act.

When we look at these cases, in conjunction with the widely acknowledged truism that “Since 2000, California employment law has diverged from federal law even more dramatically with California law being more favorable to employees…” (Rutter, Employment Law), it begins to look very difficult for a Defendant to obtain summary judgment on a gender-related claim in Federal court, and even more difficult in the California court system. It does not take much of a logical leap to apply this same rationale to other well-settled protected classes.

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Many venture backed (and other corporations) choose to incorporate in Delaware due to its well-developed law regarding various common corporate issues. One such issue is a shareholder’s right to inspection.

8 Del. C. Sec. 220

The controlling statute governing shareholder inspection rights is 8 Del. C. Sec. 220, which provides that :

“(b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:

(1) The corporation’s stock ledger, a list of its stockholders, and its other books and records; and

(2) A subsidiary’s books and records….”

Heavy Procedural Requirements

In order to exercise their rights under Section 220, the shareholder must comply with each procedural requirement of the statute. Like many areas of law there are “procedural” requirements that must be satisfied in order for the individual or entity to receive access to the “substantive” benefits of the law. Here, a failure to comply with the procedural requirements of the statute could result in a delay or denial of an otherwise proper request.

Expedited Process Via Summary Proceeding

Delaware courts have a summary proceeding designed specifically for inspection demands brought pursuant to Section 220. The goal is to promote a quick resolution of any disputed inspection demand for both the company and the shareholder.

Each Case Unique

It is common for shareholders to want information about their corporate investments, and it is common for Company management to want to minimize the amount of information disclosed. Often these differences can be resolved informally, however there are many times where a compulsory court process is necessary. If you find yourself at a stalemate with an inspection demand to a Delaware corporation, we recommend that you contact an attorney promptly. Through our network of attorneys, we can refer you to competent, experienced Delaware co-counsel to advance your case.

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On August 3, 2006, the California Supreme Court ruled reversed an appellate court ruling that had reversed a trial court summary judgment on behalf of the defendant employer. The Appellate Court ruling would have allowed Plaintiff Dore to bring specific causes of action against his former employer. However, the Supreme Court’s decision, relying heavily on the express “at will” language in his employment contract, effectively denied any legal recourse to Dore.

Our view at the present time is that this case is not a material change to employment law in California. California is generally an “at will” state, meaning that an employer can fire an employee at any time, for any reason (i.e. no cause is required). However, that is not the end of the inquiry, as there are many causes of action that fall outside “at will” or trump “at will”. Fraud would be an example of the former, and a discriminatory firing of a protected class member would be an example of the latter.

Some of our colleagues representing employers believe that the recent Dore decision has somehow made California a “super at will” state. We don’t read it that way. Our view is that the Dore decision simply stated that absent a legal theory outside of the underlying at will employer-employee relationship, “at will” shields the employer. In Dore the Plaintiff either lacked such claims, failed to plead such claims or lacked sufficient evidence to support such claims. Regardless, nothing we read in Dore seems to abrogate long established employees’ rights under California Public Policy, California Statute or Tort.

Dore’s specific claims included variations on two contract theories, two variations of fraud and one other tort of intentional infliction of emotional distress. In reaching its decision, the Supreme Court noted that the express language of the employment contract, signed by Dore, included unambiguous “at will” language, thereby defeating any contract claims. No surprise there.

In looking at the fraud claims, the Court noted simply that the record did not contain the requisite elements, by Dore’s own admission under deposition, to support his allegations under either fraud theory, and lacking such elements there presumably could be no intentional infliction of emotional distress (although the court did not address this point). We disagree with those who suggest that the Court held that “at will” now trumps fraud.

Based on the foregoing, we view Dore as an opportunity for the Court to refine the meaning of “clear and unambiguous” with respect to the admissibility of parole evidence to clarify and employment agreement with an express “at will” clause, and nothing more. Dore v. Arnold Worldwide, Inc. (2006), Cal.4th [No. S1224494, Aug. 3, 2006.] (7-0, 2 concurring opinions).

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Have you been fired from your job? Do you believe that your termination was wrongful? Would you like to file a wrongful termination complaint against your former employer? Does your employment agreement contain an arbitration clause? What is arbitration? Does an arbitration clause preclude you from filing your claim in court?

What is Arbitration?

Arbitration is the most traditional form of private dispute resolution in which a neutral third party (ie. the arbitrator – who is usually a retired judge or attorney) renders a decision after a hearing at which both parties have an opportunity to be heard. Arbitration is designed to avoid the formalities, delays, expenses, and vexation of ordinary litigation (Black’s Law Dictionary, 6th Ed.).

Arbitration Clauses in Employee Agreements

Many individuals who have endured an injustice at the workplace seek remedy through the courts. However, many employment agreements contain an arbitration clause. Arbitration clauses, in general, stipulate that if there is any dispute or disagreement related to the employment (eg. claims of discrimination, wrongful termination, claims of harassment, etc.) both the employer and employee agree to submit the dispute to binding arbitration pursuant to the California Arbitration Act (California Code of Civil Procedure §1280, et. seq.). The decision reached at the end of an arbitration hearing is final and binding

But the simple inclusion of an arbitration clause does not necessarily preclude access to the courts. If a court finds that the employment agreement is an “unconscionable contract,” the court can refuse to enforce the arbitration clause (California Civil Code §1670.5(a)).

Validity of Arbitration Clauses

So what constitutes an unconscionable contract? In brief, a contract is unconscionable if it is an “adhesion contract,” which is to say that there is no equal bargaining power, no real negotiation, and an absence of meaningful choice (Ellis v. McKinnon Broad, Co. (1993); American Software, Inc. v. Ali (1996); Circuit City Stores v. Adams (2001)). Under California law, unconscionability consists of two components: (1) procedural; and (2) substantive.

Firstly, the procedural element focuses on two factors: oppression and surprise. Secondly, the substantive element focuses on “overly harsh” or “one-sided” terms within the contract (A&M Produce Co. v. FMC Corp (1982)). Arbitration clauses must meet certain requirements to be lawful, including “provid[ing] for more than minimal discovery,” and “not requir[ing]] employees to pay either unreasonable costs or any arbitrator’s fees or expenses as a condition of access to the arbitration forum” (Armendariz v. Found Health Psychcare Servs. (2000)).

What to do First?

Both procedural and substantive unconscionability must be present before a court will refuse to enforce a contract and its arbitration clause. If you believe that both are present in your case, or simply would like legal analysis, we recommend that you consult an attorney, who should b able to advise you of your choices.

[Many thanks to our friends at the Judicial Arbitration and Mediation Services (JAMS) for source materials on this topic.]

[Case References: Ellis v. McKinnon Broad, Co. (1993) 18 Cal.App.4^th 1796, 1803; American Software, Inc. v. Ali (1996) 46 Cal.App.4^th 1386, 1390; Circuit City Stores v. Adams (2001) 532 U.S. 105, 119; A&M Produce Co. v. FMC Corp (1982) 135 Cal.App.3d 473, 486-87; Armendariz v. Found Health Psychcare Servs. (2000) 24 Cal.4^th 83, 114]

[CA Statute References: California Code of Civil Procedure §1280; California Civil Code §1670.5(a)]

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