Articles Posted in Corporations

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AdobeStock_343368495-300x200The coronavirus has created many new legal issues with unclear answers. Courts across the country will spend months – and likely years – sorting through a backlog of civil cases involving legal questions about the financial losses created by COVID-19. While it is not possible to predict the outcome in every case, there is some guidance from prior case law that can help business owners effectively plan to mitigate their liability. The experienced business lawyers at Structure Law Group can help develop a mitigation strategy that is tailored to your business. Learn more about the history of breach of contract case law – and how it can help you make informed decisions about your company’s contracts in the era of coronavirus.

Is COVID-19 a Valid Excuse to Breach a Contract?

Case law involving breach of contract goes back hundreds of years. Many different reasons for breach have been explored by the courts, but, of course, they have never before faced COVID-19. This is a new global phenomenon that has created unique challenges for business owners all over the world. To predict how courts will treat breach of contract related to COVID-19, one must examine the reasons they have excused breach in the past – or not excused it, imposing liability on the breaching party.

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AdobeStock_311306025-300x200Many business owners are familiar with the discovery process. When a lawsuit is filed, it triggers a formal process of exchanging evidence between the parties to the case. The discovery process has specific rules governed by law. These rules are designed to protect litigants from opposing parties who would misuse – or blatantly abuse – the discovery process. Unfortunately, if your lawyer is not experienced with the discovery process, your business can be hurt by these strategies. The experienced corporate litigators at Structure Law Group know how to protect litigants from discovery abuse. They are familiar with the tricks and strategies that are used, know how to call out other attorney’s misconduct, and know how to seek sanctions from the court when necessary. Learn more about the tactics for discovery misuse that can hurt your business.

Abuse Can Run Rampant

There are many ways in which an opposing party can abuse the discovery system. One strategy is the “war of attrition.” This can happen when one party is a large business with plenty of funds for litigation, and the other party is a smaller business that has limited resources to pay legal expenses. In this case, an opponent may attempt to drag out the discovery process as long as possible in order to run up the opponent’s legal fees. They might request depositions of unnecessary witnesses, or ask for far more documents than they reasonably need, or insist that documents be organized in a different order or format than how they were originally received. They might file frivolous discovery motions with the court in order to delay discovery and increase your attorney’s fees. All of these requests add up. The discovery process can last for months, so if your attorney is working to manage a lot of frivolous requests, your legal fees can become overwhelming very quickly. In this case, your attorney may need to file a motion with the court to curtail the unnecessary discovery requests – and seek monetary sanctions for misuse of the discovery system.

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AdobeStock_69411638-300x200A breached contract can result in significant business losses. The amount of the contract may not reflect lost business, missed opportunities, and other financial losses that can seriously hurt your bottom line. Unfortunately, these losses are not adequately reflected by the value of the breached contract. In some cases, the contract actually specifies a value for breach – an estimate known as “liquidated damages.” This pre-breach estimate rarely reflects the full value of your company’s financial losses. This is why many companies seek punitive damages in addition to their specific losses under the contract. Punitive damages are designed to punish the defendant for misconduct in order to deter such conduct in the future. They are not, however, available in most breach of contract cases. Learn more about punitive damages – and when they might be available to help mitigate your losses under a breached contract.

Can You Get Punitive Damages for Intentional or Malicious Breach?

In California, punitive damages are only available in a breach of contract case if the defendant has also committed an intentional tort. This means that mere negligence, or a poor choice to breach the contract, will not justify punitive damages on its own.

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AdobeStock_271469937-300x200In general, shareholders are protected from liability for the debts of the corporation. This is because the corporation is viewed as a separate legal entity with its own assets and liabilities. This “corporate veil” of protection can, however, be pierced in certain situations, and personal liability imposed on the shareholders. Creditors use this legal tactic strategically to be sure they can access funds for what they are owed. The experienced California business attorneys at the Structure Law Group can help advise creditors on how to effectively pierce the corporate veil in order to satisfy the debts they are owed.

Elements of Alter Ego Liability

In order to pierce the corporate veil, the plaintiff must prove “alter ego liability.” Alter ego literally translates to “other self.” In alter ego liability, the corporation has been treated as an extension of shareholders’ personal interests, so the courts find it fair to hold shareholders liable for the corporation’s debts, as well. Plaintiffs in California must establish: (1) that there is a unity of ownership and interest between the owners (or shareholders) and the corporation, and (2) that it would be unfair to only hold the corporation accountable for its debts in order to establish alter ego liability.

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AdobeStock_252763744-300x200In November 2020, California voters approved what is arguably the most comprehensive privacy rights law in the nation. The California Privacy Rights Act does not take effect until January 1, 2023. But its requirements are far-reaching, and California business owners have a lot of work to do to prepare their businesses for compliance with the law before that date. Moreover, violations of the new Act prior to 2023 can cause bad public relations and potential liability in other areas. Business owners should meet with a California lawyer now to determine how the new law will affect their business, what steps must be taken, and the most efficient process for implementing these measures as soon as possible. The sooner these changes are integrated into a company’s practices and culture, the less likely it is the business will face liability under the Act.

Corporate Responsibilities Under the California Privacy Rights Act

The CPRA requires businesses to track an entirely new category of user data: “sensitive personal information.” This includes government-issued identifiers, finance information, biometric data, health status, precise geolocation, contents of emails or texts, and race or ethnic origin. Sensitive personal information is a subcategory of personal information that is protected under existing privacy laws. This means that it, too, must be de-identified or subject to an aggregation exception. The CPRA adds an additional requirement for businesses to implement “reasonable security measures” to protect personal information. What measures are “reasonable” will be determined by the type of information that is collected. Detailed financial or medical records will likely require higher levels of security than basic demographic information. Retention periods must also be updated to meet only what is reasonably necessary to perform the purposes for which the data was collected. This means that sensitive personal information might have a shorter retention policy than more general personal information.

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AdobeStock_168271721-300x200Most business owners are aware that they must comply with minimum wage laws. However, what is less well known is that there can be different regulations made by a state, county, or even a municipal government. Even more confusing is that these regulations can change, and the changes can take effect at different times of the year. Working with a Silicon Valley business lawyer ensures your compliance with all current wage laws and prevents costly employment disputes in the future.

State Minimum Wage Changes

The California state legislature sets the state minimum wage. The wage policy is frequently reviewed, with annual changes generally taking effect on January 1 of the next calendar year. California’s statewide minimum wage is currently $13 per hour for employers with 26 or more employees and $12 per hour for employers with 25 or fewer employees. According to the Department of Industrial Relations, California law currently requires an increase in the minimum wage every year, making it important for employers to check every annual change in order to keep current with their legal obligations.

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AdobeStock_74836089-300x200A corporation can be formed under the laws of any state, so long as the business and its owners qualify for business entity status. Many business owners use these laws to find a state that offers the most tax and legal advantages. (This is why so many businesses incorporate in the state of Delaware.) But it is important to understand that California law can still apply to your business even if it was formed out of state. Be sure to consult with a California business lawyer about the implications of California law upon your business entity.

What is the Pseudo-Foreign California Corporation Statute?

Section 2115 of the California Corporation Code applies to foreign corporations that have connections to California and satisfy the applicable statutory tests. If both of the following tests are met, the corporation is considered “pseudo foreign,” and it is treated as if it had been incorporated in California in the first place.

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AdobeStock_170886507-300x200Corporate bylaws are an important tool for ensuring the efficient operation of any business and helping to avoid internal conflicts, such as those relating to founder, director, officer and shareholder conflicts. Not all businesses are required to have corporate bylaws, but it is always a good idea to commit your business plans to writing and take advantage of California corporate law. Bylaws can reduce the opportunities for disputes between owners, shareholders, and corporate officers, which can cost time and money that most startup businesses do not have to spare.

Corporate Officers

Most corporate bylaws establish corporate officer positions. These are usually “c-suite” titles, such as Chief Executive Officer, Chief Operating Officer, Chief Technology Officer, Chief Financial Officer, and similar roles. Your corporate bylaws should clearly state what roles will be created, how they will be filled, and what the scope of responsibility is for each officer. You should also provide a process for arbitrating disputes between officers and replacing officers as needed.

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AdobeStock_303475806-300x200Though privately held companies cannot offer stock for sale to the general public, they can offer stock and stock options to owners, executives, and key employees. Doing so can incentivize critical personnel to perform at high levels and stay with the organization. That said, it is important to be sure that your company structures these incentive options effectively. An experienced business lawyer can help you protect your corporate interests while also providing incentives to your personnel.

Executive Compensation

In today’s current employment market, most executives have a compensation package that consists of stock or stock options, at least in part. This gives executives an incentive to make the company profitable and produce the best possible results throughout their employment.

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AdobeStock_330926552-300x203We are beginning to see hopeful signs about the ongoing COVID-19 crisis, and the conversation about when and how to reopen the U.S. economy is beginning in earnest.  In the meantime, however, the restrictions remain in effect.  What can businesses do to try to increase their odds of surviving the crisis?

  • Assess all costs and expenses to determine if any costs can be eliminated or delayed. Cut back or cut out expenses that are entirely within your control to adjust.  Where you don’t have the right to cut back, speak with vendors to see if they will agree to temporarily modify terms, perhaps in return for longer terms or other compromises.  Evaluate force majeure provisions to see if the coronavirus pandemic might provide grounds to terminate or renegotiate unfavorable agreements.  Determine if any counterparties are failing to perform under your agreements, and if such nonperformance might allow you to terminate or renegotiate those agreements. Weigh the potential long term costs and potential short term benefits of breaching agreements.  Note renewal and expiration dates of all agreements.  Discuss all of these potential actions with an attorney to make sure that you fully understand the potential risk of taking any of these measures.
  • Review existing lines of credit and other sources of cash, and consider drawing down on those lines in full to increase cash reserves. Speak with existing creditors about potentially delaying payments or other forbearance.
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