Contracts for Sale of Goods Must Be in Writing but Can Be Enforceable Even When Not in Writing or When Missing a Contract Term

You are in the business of selling or buying things (as opposed to real property), which is the realm of commercial law.

These types of transactions are frequently done quickly with little thought to “putting it in writing.”

Maybe you send out a purchase order and that is the extent of any writing between you and the seller.

Can that P.O. be enough to show that there is a contract between you and the seller in case something goes wrong?

What if there is nothing written between the parties? Are you out of luck with no way to enforce the agreement between the parties?

Maybe not.

The commercial code regulates in general the sale of goods.

There’s a Uniform Commercial Code (UCC) that is a model code which many states use as the basis their own code.

In California, the UCC is found in the California Commercial Code.

Sales of goods that are covered by the commercial code are transactions that are generally between merchants or parties who are in the business of buying or selling a given product.

This means that the parties are assumed to be well-aware of how to fend for themselves in a business transaction.

So the commercial code allows for more leeway in forming contracts to promote commercial intercourse.

“Goods” are basically anything that is not fixed to a building or the ground. So pretty much any “widget” you can think of is likely a “good” under the commercial code.

Except when “goods” are crops and the contract states that the given crops will be harvested (“severed”) from the ground. Such crops, before “severing,” when contracted for sale are considered “goods” just as an order of widgets would be.

If the transaction for sale of goods is for $500 or more, the contract for such transaction cannot be oral but must be contained in “some writing.”

But because the commercial code is very concerned with facilitating commerce, the writing that satisfies the rule for a written contract can be any writing that is sufficient to establish that there is a contract between the parties.

So if a buyer submits a purchase order and the seller sends goods in response to that purchase order, the purchase order is a sufficient writing (against the seller).

A seller might send back an order acknowledgment. If that is done, the contract between the parties is comprised of both the purchase order and the acknowledgement.

(When the forms from the seller and buyer conflict, or one form adds a new term, that problem is the so-called “battle of the forms,” which is another topic altogether.)

Whatever writing or writings there are to evidence the contract between the parties, the contract is still enforceable even if the writing(s) omits or states incorrectly a term between the parties.

The main point is that the writing or writings be detailed enough to show that the buyer and seller agreed to buy and sell some identifiable goods.

The commercial code in this regard is so flexible that even if one party sends the other party a letter confirming the transaction, that writing is also sufficient to satisfy the written contract requirement against the recipient of the letter (unless the recipient objects within 10 days).

The code is so flexible in supporting commercial transactions, that even when there is not a sufficient writing a contract can still exist between the parties under certain situations.

If the goods are to be specially made just for the buyer, and the seller has started making the goods or procuring the goods, that is enough to establish an enforceable contract even without a sufficient writing.

If goods, whether specially made or otherwise, have been paid for (and payment has been accepted  by the seller) or the goods are received (and the goods have been accepted by the buyer), that can establish the contract even if there is no sufficient writing.

So the commercial code is one of those areas of the law that really works hard to help the parties transact business.

Knowing the rules of contract formation under the commercial code can help you protect yourself in the event something goes wrong and you need to prove what was agreed between the parties.

References: California Commercial Code section 2201.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , | Leave a comment

Restraining a Seller of a Business From Competing is Legal

Competition is the backbone of a market-based economy.

Fair competition is supposed to help consumers have more choices and pushes competing businesses to operate more efficiently.

But sometimes it makes sense to limit competition.

When you buy a business from someone the last thing you want is for them to set up shop across the street from you and take your customers away.

Or when you are co-owner of your business with someone else, and the other co-owner is bought out, you don’t want the former co-owner competing with your business.

In most similar situations the seller can be restrained from competing with the business that was sold.

The law, in California for example, allows the parties to agree to restrain the seller from competing.

The main thing to look out for is if the seller is either selling all of their ownership in the business or sells the goodwill of a business.

If you have some form of either situation, a restraint is allowed.

So in many business sales, the seller can be restrained from competing with the business sold.

The restraint must be in an agreement between the buyer and seller. It is not an automatic restraint.

The restraint applies to the entire geographic area where the sold business conducted its business.

Let’s say your business operates in a given county, the seller of that business cannot compete with your business in that same, entire county.

But suppose the business expands to another county, the restraint wouldn’t apply there.

That restraint can last indefinitely as long as the business continues to operate in the original county.

That means the restraint can have no specific ending date and it is valid.

But the agreement must provide that a time limitation is tied to however long the business sold continues to operate its business.

Once the sold business stops to operate, the seller can then compete because the business no longer conducts business.

If the seller opens a different type of business in the original county where the business sold operated, that is allowed even if there is a restraint. The different business just does not compete.

These non-competition restraints can be used for nearly all types of businesses, including sole proprietorship, partnerships, corporations or limited liability companies.

So if you are buying a business you will want to make sure that part of the deal includes a restraint on the seller from competing with your acquired business.

If you have co-owners, you will want to make sure that you have agreements in place that require non-competition in the event any co-owner is bought out.

References: California Business and Professions Code section 16601.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , | Leave a comment

Invention Developer Services for Inventors Are Highly Regulated

You’ve had that moment.

I’ve had that moment.

The moment when the light bulb turns on and the idea hits you.

You are now convinced that this is the million dollar idea.

But you have no experience with taking an idea from just an idea to a marketable product.

This is where some of you might end up going down a frustrating path.

Maybe you see an advertisement on television or do an internet search and find a company that offers to take your idea and develop it into a marketable product.

They make it sound so easy for you. You just need to sign the contract and they take care of everything else. You just collect royalties from your invention.

If you live in California, the contract you enter with such a company, called an invention developer, is subject to certain regulations.

According to California legislators, the odds of your making any profits from your idea when you contract with an invention developer is very slim.

To protect the public from unscrupulous invention developers who collect fees from would-be inventors, California law imposes certain safeguards.

If you have that once-in-a-lifetime idea, and want to sign up with an invention developer, make sure certain things are in place because the law requires them.

The contract you enter into with the invention developer must be in writing and you should get a copy of the contract.

You have the right to cancel the contract for any or no reason within 7 days after entering into the contract. This applies even if the contract has a provision that prohibits you from canceling during this time.

The contract must have a cover sheet with certain disclosures about your right to cancel within 7 days.

Other disclosures on the cover sheet regard waiving certain rights under patent law once you try to commercialize your invention without securing a patent and that the invention developer cannot advise you about patent law and cannot secure patent protection for you.

An invention developer cannot take an ownership interest in your invention unless the developer is contracting to manufacture your invention and your assignment of ownership is stated in the contract.

But even though an invention developer is generally not allowed to take an ownership interest in your invention, the developer is still allowed to contract with you for a percentage of your earnings as part of the payment for the developer’s services under the contract.

Once you have entered into the contract with the invention developer, the invention developer has to give you a quarterly statement of what services they have provided to you.

Your contract with the developer also needs to have several other required disclosures. And the invention developer must maintain a surety bond in an amount of at least $25,000.

The idea part is always the easy part.

Once you have THE idea be careful about signing up with an invention developer to take your idea to the marketplace.

There have been many unscrupulous companies that take advantage of would-be inventors.

At the very least, check that the contract has all the required disclosures.

Check to make sure the invention developer has the necessary surety bond on file.

You can also have your contract reviewed by an attorney to make sure the contract satisfies all the legal requirements, which is a good sign the company is legitimate.

But even better, you can also consult with a qualified intellectual property attorney who can advise you on the best way to protect your idea while getting it to market.

References: California Business and Professions Code sections 22370-22371, 22372-22378, 22379, 22389.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Shareholder Assets at Amazon Books
Inventions at Amazon Books
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , | Leave a comment

Daily Penalties for LLC Failing to Keep Records

Record-keeping is never fun.

But once you formed your limited liability company (LLC), the LLC becomes subject to specific requirements of keeping certain records.

For example, your LLC must keep a list of members and their share in profits and losses.

A copy of the articles of organization, plus any amendments, must also be kept by the LLC.

Income tax returns for the six most recent fiscal years must be kept too.

Your LLC must keep a copy of the operating agreement and amendments thereto.

Financial statements of the LLC for the last six fiscal years must also be kept.

And general books and records of the LLC’s internal affairs for the past four years must be maintained.

If any member makes a demand that such records be kept when they are not, the LLC will be subject to a daily penalty of at least $25 per day.

The penalty is payable to the LLC member making the demand for keeping of records.

So if your LLC is a single member LLC, these rules may not seem to have a practical effect because you are the sole party who would demand and benefit from record-keeping.

But if you are a sole member LLC you will still want to keep good records because you may one day bring in another member into the LLC and they may make a demand for these records to be kept.

Of course, if there are multiple members of the LLC anyone of you has the right to demand that the LLC keep these records.

And those members would have the right to the daily penalties for every day the LLC fails to keep the required records.

References: California Corporations Code sections 17701.13 and 17713.07.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , | Leave a comment

Dissociation of LLC Member Does Not Discharge Them from Liability to LLC Members

Limited liability companies can be tight-knit operations.

The owners, or members, are usually friends or associates that decided to go into business together.

They liked the ease of operation of the LLC so they chose that over a corporation.

But even the best business relationship can come to an end.

When an LLC member leaves the company it is called a “dissociation.”

That has an amicable, almost noble, sound to it but there are serious consequences when an LLC member dissociates from the company.

And dissociation can occur for many reasons.

A member can dissociate at any time, whether it is rightful or wrongful.

So, let’s say that the operating agreement requires that a member can only dissociate afrer the company has reached certain milestones.

But a given member needs to leave the business for personal reasons before the agreement allows it.

This is a wrongful dissociation under the operating agreement but the LLC member has the power to nonetheless dissociate.

For a wrongful dissociation, the other members or LLC itself would have a claim against the wrongfully dissociating member for breach of contract.

Breach of the operating agreement is not the only way a dissociating member can wrongfully leave the company.

Wrongful dissociation can occur involuntarily when the member becomes a debtor by filing for bankruptcy protection.

Or if the member is itself a corporation or partnership, for example, and it terminates or is dissolved, that is also considered a wrongful dissociation of that member from the subject LLC.

If the LLC member dissociates wrongfully, regardless of the means, the wrongfully dissociating member is liable to the LLC and other members for any damages that may be suffered as a result of the wrongful dissociation.

Damages could arise in a wrongful dissociation case if there was a funding requirement that was due when the member dissociated and the member failed to make the capital contribution.

An LLC member can also be expelled from the LLC. In such event, the member is deemed dissociated too.

The bases for expelling a member from the LLC are limited.

One way is when the other members agree unanimously to expel a member due to such member having transferred all of their interest in the LLC.

Or the members can agree unanimously to expel a member when it would be unlawful for the LLC to continue to operate with such member.  This could occur if the member being expelled is not licensed in the field of business that the LLC operates and all members must be licensed for that field.

Another way is for the LLC to obtain a court order to expel a member when the member is engaging in wrongful conduct that adversely and materially affects the LLC’s activities.

These are a few examples of how a member can be expelled from an LLC and end up being dissociated.

Other ways that a member can be deemed dissociated include obvious scenarios such as death of a member who is a natural person.

Regardless of the path to dissociation, once a member is dissociated, the rights and obligations of the dissociated member are immediately affected.

The dissociated member’s right to vote or make decisions for the LLC terminates.

The dissociated member’s fiduciary duties to the LLC terminate for events that occur after dissociation.

The dissociated member’s interest in the LLC becomes immediately a transferee’s interest (with only a simple proportional profits and losses interest).

Finally, just because a member dissociates, regardless of the reason or basis for that, the dissociated member is not discharged from liabilities or debts or obligations owed to the LLC or other members that were incurred prior to dissociation.

Becoming a member in an LLC is a serious commitment and dissociation does not relieve the dissociating member from liability, whether the dissociation is voluntary or not.

References: California Corporations Code sections 17706.01, 17706.02, and 17706.03.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , | Leave a comment

Oral Agreements of LLC Members Can Be the Operating Agreement

Your business is organized for simplicity and ease of maintenance as a limited liability company (LLC).

You like how the LLC gives you the same liability protection as a corporation.

A big plus is that you do not need to follow as many of the formalities as you would under a corporation structure.

No cumbersome bylaws are needed with an LLC.

So you organized your LLC but did not bother to prepare an operating agreement for your company.  Does this mean you are without any operating agreement?

Not necessarily.

Agreements between the LLC members, even if there is only one member (a “sole member”), could end up being deemed as the LLC’s operating agreement.

For example, under California law, an oral agreement between the LLC members that regards the relation between the members, the rights and duties of the LLC managers, the activities of the LLC, or the amending of the operating agreement is enough to qualify as an operating agreement.

Even if such an oral agreement fails to address all of the listed items, the missing item can be addressed through the default rules stated under California law.

So, for example, you can have a situation where the LLC members have not entered into a written agreement and have only an oral agreement about only how each member will deal with each other and nothing more, that would be enough for there to be an effective LLC operating agreement.

In this example, rules about the rights and duties of the managers, the activities of the LLC or amending the operating agreement would be provided by the default rules in the California code.

An operating agreement doesn’t even need to be in writing or be oral.

It can be implied by the circumstances.

Let’s say that the LLC members have developed a custom or practice between them about how they will manage the LLC or about how they will deal with each other as members of their company.

Such custom or practice can be deemed an operating agreement between the LLC members.  Of course, in these situations there is a difficulty of proof because that usually involves testimony or other documentation (for example, text messages can be used to support the existence of an operating agreement).

A sole member of an LLC can also have an operating agreement, whether written, oral or implied.

But what would it matter to a sole member of an LLC to have an operating agreement?

A sole member will want to have an operating agreement if they want to recruit investors as new LLC members. A well organized and operating LLC will be more valuable to a prospective investor.

On the other hand, if a sole member LLC does not have a formal written operating agreement, an implied agreement could be found in the customs or practices of the member.

This could be important if a third party, such as a creditor, sues the LLC and uses the implied operating agreement against the sole member.

A specific failure to follow the operating agreement in a sole member LLC could be used to “pierce the veil” of limited liability to make the sole member personally liable for the debts of the LLC.

Although the law is flexible on how an operating agreement can be formed, and even provides for any gaps in the agreement to be filled by default rules, it is better practice to have a written operating agreement in place.

Even if you are the sole member of your LLC.

And having a written operating agreement is just a first step.

The provisions of your operating agreement must be diligently followed.

References: California Corporations Code sections 17701.02(s), 17701.10(a).

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , , | Leave a comment

Some Shareholders Have an Absolute Right to Inspect Corporation Records

Absolute rights are scary or wonderful, depending on your point of view.

Absoluteness means that there is no exception.

Inspecting corporation records puts a spotlight on the inner workings of the corporation. That should be a good thing. It helps keep everyone who runs the corporation honest.

If your corporation is subject to California law, then shareholders who hold 5% or more of the outstanding shares have an absolute right to undertake certain, specific inspections.

Such shareholders have the right to inspect and copy the names and addresses of other shareholders.  They even have the right to find out how many shares are owned by the other shareholders. Because this is an “absolute”right of inspection, it does not matter the reason for the inspection request.

To obtain such a list of shareholders, the requesting shareholder must give the corporation at least 5 days’ prior notice of the inspection.

So this right does have some conditions before it become absolute, it seems.

If the corporation fails to provide the shareholder roll to a properly requesting shareholder, the requesting shareholder has a right obtain a court order to postpone any pending shareholders’ meetings.

Any and all shareholders, regardless of how many shares held, can also demand to inspect and copy shareholders’ records so long as the inspection is “reasonably related” to the requesting shareholder’s interest as an owner of shares in the corporation.

So for this inspection right, the request cannot be for just any reason at all but must be for a reason related to the requester’s ownership of shares.

Any of the above discussed inspection rights cannot be restricted by the corporation’s bylaws or its articles of incorporation. So check the bylaws and articles to make sure they do not contain restrictions on inspection rights.

Even if your corporation is incorporated in another state, if the corporation has its executive office in California or regularly holds board meetings in California, these rules will apply to your corporation.

How about inspecting accounting books and records? Those records can reveal important problems with the corporation’s cash flow or maybe even embezzlement.

As you might expect, any shareholder has the right to inspect accounting records of the corporation.

Any shareholder can also request to inspect the minutes of the meetings of the shareholders and board.

This inspection right even applies to records of any subsidiaries of the corporation.

Although this right is not “absolute,” it is very broad as to what the requester can ask for.

There is, however, a very important limitation on a shareholder’s right to ask for accounting records or minutes of meetings.

The purpose of the request must be “reasonably related” to the requester’s interest as a holder of shares in the given corporation.

In other words, a requesting shareholder cannot ask for these records to help a third party who is an outsider to the corporation.

The requester cannot ask for records to further his or her own interest that has nothing to do with the ownership in the shares.  For example, to embarrass another shareholder or a director.

But if the requesting shareholder suspects malfeasance with the finances of the corporation, a request to inspect accounting records is clearly within such shareholder’s interest as a holder of shares in such corporation.

Corporations that are subject to this broad right to inspect accounting books and records include not only California corporations but out-of-state corporations that keep their records in California or have their executive office in California.

Finally, directors of a corporation have the “absolute” right to inspect any and all corporate records and to inspect the corporation’s physical property. This right even applies if the director is not a shareholder.  This, of course, is necessary because the directors are ultimately responsible for running the corporation and have a need to know all aspects of its operations.

Inspection rights are important to shareholders and directors. The corporation has an obligation to provide access to its records according to applicable law. Even corporations incorporated in another state than where it operates may be required to comply with the local inspection laws.

References: California Corporations Code sections 1600, 1601, 1602.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , | Leave a comment

Securities are Stocks, Debentures, Viatical Settlement Contracts, Straddles, and More

You are on your way to raising money for your startup and you want to offer investors a chance to get in on a great business opportunity.

Or you have an idea for raising money that doesn’t include forming a corporation and you are only selling investment contracts.

Maybe you are just selling promissory notes where your company promises to pay back the investors’ monies at a certain percentage rate of interest on a certain due date.

How about option contracts?

Offering viatical settlement contracts?

It could be that your fast food restaurant has taken off.  You have locations 1 through 20 going strong and now you want to start franchising the restaurant to would-be restaurant owners.

There are many other ways that a business can solicit money from someone in return for a promise of some kind of return, or potential return, on the investment.

In a very broad sense, that is the core principle behind a “security” that is regulated by securities laws.  Once you have a security that you are offering or selling, you will need to make sure you are complying with federal and state regulations.

What types of investments are considered “securities” that are subject to regulation can vary quite a bit.  California law is typical in this regard.

Under California law, a security includes a debenture.  A debenture is essentially a type of bond.  It is debt that is sold to the investor (who becomes a creditor) and the debt has no collateral.

The investor only has the good faith and credit of the issuer of the debenture to rely on.

So with a debenture, the issuer is the debtor and sells these “securities” to investors who are guaranteed a certain rate of return in a certain amount of time.

So if you are thinking of selling an investment in your business to someone and want to characterize it as a loan to your company, you may need to ensure the securities laws are satisfied.

Viatical settlement contracts are akin to betting on when someone will die.  This is an insurance related transaction wherein a third party buys out a life insurance policy to cash out the person whose life is insured.

Because these types of contracts are generally used to help individuals who are terminally ill, and because they involve highly regulated insurance policies, it is no surprise that the offer and sale of such contacts would be regulated.

But why are they considered a “security?”

The seller of such a contract is offering for sale a right to receive payment pursuant to the underlying insurance policy.  Because there is no certainty as to when the person whose life is insured will pass away, there is plenty of risk involved.

When someone offers for sale an investment, whatever the form (usually signified by putting money at risk), that will trigger some kind of regulation under securities laws.

Straddles are simply a particular type of option transaction in securities (usually stocks).  Options are derivatives because they are based on the underlying securities.  But even so, they are regulated securities.

Options to buy, or sell, stock can be very easy to create even for a privately held corporation.

You may decide to offer an incentive plan to key personnel and offer them an option to buy your company’s stock at a later time at a predetermined price.

This creates a nice “carrot” incentive for good employees.

But it also can lead to problems with securities regulations.

There are usually some exemptions for employee plans, but it is best to be sure about that.

A franchise is one of the clearest investments that would qualify as a security covered by regulation.  However, a franchise also involves licensing the franchisor’s trademarks and business methods and involves participation in a standardized system of marketing, etc.

Because of the added layers of franchise sales, it amounts to more than selling stock in your company to an investor.  And because of that, many states, California for example, have developed elaborate franchise laws that cover offering and selling franchises.

So if your Mexican fast food restaurant chain has taken off and you are ready to offer and sell franchises, the main thing to look into is the franchise sales laws.

Bottom line, if you are offering or selling any kind of investment (some of you might call it a “business opportunity”), even if it is in the form of a debt that your company promises to pay back, you may be offering or selling securities that may be subject to securities laws registration and disclosure requirements.

In other words, whenever you are trying to raise money for your business, no matter how creatively you have structured the investment, odds are you are really just offering or selling securities that will likely need to be registered or otherwise exempt from registration.

References: California Corporations Code section 25019.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , , , | Leave a comment

Shareholder Meetings Don’t Even Have to be Meetings

Your business is incorporated because your accountant or attorney or trusted friend told you that would protect your personal assets from liability.

And now, with a corporation to run comes the housekeeping needed to maintain the corporation’s status.

That means making sure the shareholders hold meetings as required.

Even if there is only one shareholder.

Shareholder meetings can be a problem for many startup corporations because the shareholders or single shareholder do not get around to holding them.

They are busy running their business.

Also, meetings can be a chore to call and undertake. Shareholders must be given prior notice and you have to make sure the quorum requirements are satisfied.

Failure to hold shareholder meetings or to take corporate action with proper shareholder approval can lead to many problems, such as making the corporation illegitimate or a sham.

That could ruin the liability limitation benefits of a corporation.

Fortunately, corporate law gives shareholders some flexibility in how meetings can be convened and held.

For example, if you need the shareholders’ meeting to be held in Florida even though your corporation is organized under California law, the bylaws can provide for shareholders’ meetings to be held in Florida.

If the bylaws are silent on the place where meetings are to be held (it happens, make sure you bylaws are updated regularly), under California law, shareholders’ meetings must be held at the corporation’s executive office.

Suppose the shareholders cannot make it in person to Florida or wherever the meeting is to be held.

There’s a solution for that.

Those shareholders can appear at the meeting by video conference or conference call.

But the bylaws must not prohibit electronic attendance at the shareholders’ meetings. Again, make sure your bylaws are up to date and do not prohibit electronic meetings if you want that option for shareholders.

The shareholders who attend the meeting by electronic means must be able to fully participate in the meeting.

They have to be able to hear and be heard.  Their votes must be able to be recorded the same as those shareholders who attend the meeting in person.

A meeting of the shareholders does not need to include all of the shareholders for the shareholders to be able to take valid action.

So long as you have a quorum in attendance (whether in person or by electronic attendance), then the shareholders can take action.

A quorum generally means a majority of the shares are represented at the meeting. This does not mean a majority of the shareholders.

At a meeting that has at least a quorum, you do not need unanimous approval to achieve a valid vote to pass a resolution or for the shareholders to take valid action.

In such event, a simple majority vote of the shares voting at such shareholder meeting is sufficient.

But check the articles of incorporation.  If the articles allow a lesser amount of shares to be represented at the meeting for a quorum, then you do not need to have a majority of shares represented at the meeting.  But in no event, under California law, can the articles provide for a quorum that is less than one-third (1/3) of the shares.

The point of shareholders’ meetings is to properly have the shareholders vote and take action.

Can shareholders take valid action without meetings? Yes, they can take action even if they don’t meet.

Such action is valid and legal and the shareholders don’t even need to arrange an electronic attendance.

Shareholders can take proper action by merely agreeing in writing to take such action.  In other words, shareholders can take action by written consent.

Any action can be taken by the shareholders that could be taken at an annual meeting or special meeting of the shareholders if the right number of shareholders agree, or give consent, in writing.

No meeting is needed for such action and no prior notice of taking action by written consent is needed.

Such written consent must state what the action is that is being taken by the shareholders.

The written consent doesn’t even have to be unanimous. If the proper minimum number of shares approve the action by written consent, that is sufficient.

The required minimum number of shares depends on the percentage of shares (usually majority) that would be required to approve the action if all the shares were in attendance had a meeting been held.

And the articles of incorporation must not prohibit approvals by the shareholders by written consent (they usually don’t, but check your corporation’s articles to make sure they are up to date on this point).

This is a great way to take care of the annual meeting of shareholders.  All you would need is to set forth the actions to be approved (e.g. appoint officers) in the shareholders’ written consent and no actual meeting would be necessary.

There are, as always, exceptions to the rules.

Certain actions cannot be approved by a shareholders’ written consent unless prior notice is given of soliciting such consent.

For example, if the corporation needs approval to enter into a transaction with one of its own directors (or a company that is owned by such director) and a written consent of the shareholders is solicited, the request for such consent must be made at least 10 days prior to the transaction closing.

For other actions, if less than all shares consent in writing to a given action, notice of such consent must be given to all shareholders who have not consented.

But if all shareholders consent, you have unanimous consent and there is no need to give any notice because all shareholders are involved in approving the action.

So a corporation’s shareholders can take care of much of their duties as shareholders either by attending meetings via electronic means or they can use written consents to avoid convening a meeting when that is not practical.

The main thing is to check the specific requirements under the law.

And don’t forget to make sure the bylaws and articles of incorporation allow for such shareholder flexibility.

References: California Corporations Code sections 600, 601, 602 and 603.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , , , | Leave a comment

Board of Directors May Mortgage or Sell All of the Corporation’s Assets

As you may know from one of my past blog posts, a corporation owns its own assets and the shareholders do not necessarily own those assets (they own shares in the corporation).

But what you may not know is that the corporation’s board of directors has broad powers to mortgage or sell the corporation’s assets.

The board doesn’t even need to get the shareholders to approve the mortgage or sale, under California law.

Let’s say that the corporation has a piece of real property that has equity and the corporation is in need of some money.  The board then seeks out a loan for the corporation that will be secured by the property

The lender agrees to loan the money to the corporation but requires that the real estate be put up as collateral with a mortgage on the property.

In other words, the lender wants security for the loan in the event there is a default.  If there is a default, the lender can foreclose on the property.

This means that the mortgage on the property puts the corporation’s property at risk.  Yet, the board of directors can authorize the mortgage even if such mortgage applies to all of the corporation’s property holdings.

Only if the corporation’s articles of incorporation require the shareholders’ approval would their approval be necessary.

Suppose, however, that instead of taking out a loan, the board decides to sell the corporation’s real property.

This situation is a little different from the loan-with-mortgage scenario.

Under California law, if the proposed sale is in the “usual and regular course” of the corporation’s business, the board alone can approve the sale.  Even if it is a sale of all of the corporation’s property or assets.

So if the sale of the corporation’s assets is part of the corporation’s regular business operations, the board does not need to get the shareholders to approve the transaction.

On the other hand, if the sale of assets is not in the “usual and regular course” of the corporation’s business, the shareholders must also approve the transaction.

If the shareholders approve the sale before or after the sale is consummated, that is fine. But it is better practice for all approvals, of the board and shareholders, to be obtained prior to offering for sale any of of the corporation’s assets outside the regular course of business.

In the event any sale transaction craters or otherwise becomes ill-advised, the board has the power to abandon the transaction without the shareholders’ approval.

The board can end the transaction even after the shareholders approved the sale.

If the board takes such action, the board must be careful to not cause a breach of contract with the buyer when terminating any sale.  The board’s right to abandon a sale transaction does not protect the corporation from liability owed to the buyer for breach of contract.

As you can see, the board of directors has broad powers regarding the disposition of the corporation’s assets.  For this reason, members of the board must be carefully selected.

Also, board members must be careful to not run afoul of their fiduciary duties owed to the corporation and shareholders.  Because even though board members are protected from liability if they exercise reasonable business judgment and discretion, they can be held liable if they acted in bad faith.

References: California Corporations Code sections 1000 and 1001.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

SPONSORED LINKS

Electronics at Amazon
Cell Phones and Accessories at Amazon
Amazon Instant Video – Movies
Amazon Instant Video – TV Shows
Accounting and Finance Software at Amazon
Business and Money at Amazon Books

Posted in Uncategorized | Tagged , , , , , , , , , , , , , , , | Leave a comment