Page 8 – Adishian Law

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

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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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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