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Can Shareholders Waive Directors’ Fiduciary Duties?

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In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try to convince shareholders… Read More

In California, directors and officers have fiduciary duties, or legal obligations, that they must adhere to when making decisions for the corporation and the shareholders. If they do not fulfill their fiduciary duties, the directors and officers can be sued. Therefore, in order to minimize their risk, directors and officers may try to convince shareholders to release them of these duties. Such efforts are illegal under California law.

Background on Fiduciary Duties

Fiduciary duties imposed on directors and officers of corporations generally fall into one of two categories: duty of loyalty and duty of care. The duty of loyalty requires directors and officers to always act in the corporation’s best interest and forbids them from engaging in “self dealing,” or taking advantage of their position in the corporation to benefit their own interests. The duty of care obligates directors and officers to carry out their duties as a normal prudent person would do under the circumstances, including making sure that they are completely informed before making decisions.

If a director or officer makes decisions for the shareholders or the corporation in a manner that does not meet these obligations, then the shareholders can bring a lawsuit against the director or officer for breach of a fiduciary duty. Additionally, in small, non-public corporations, majority shareholders can generally control the corporation by electing themselves as directors and officers, thereby “freezing out” minority shareholders. Therefore, directors and officers of small or close corporations are generally held to a higher standard for fiduciary duties.

Waiver of Fiduciary Duties is Void

California statutory law and common law expressly prohibit the waiver of fiduciary duties for directors and officers. In particular, California Corporations Code section 204(a) states that a corporation’s Articles of Incorporation may not “eliminate or limit the liability of directors” for acts or omissions that violate the directors’ fiduciary duties to the corporation and shareholders. Furthermore, section 1668 of the California Civil Code provides that any contracts (such as a shareholders agreement) that “exempt any one from responsibility for his own fraud, or willful injury to the person or property of another” are against public policy. Based on these statutes and prior court cases, the California Court of Appeals in Neubauer v. Goldfarb held in 2003 that “waiver of corporate directors’ and majority shareholders’ fiduciary duties to minority shareholders in private close corporations is against public policy and a contract provision in a buy-sell agreement purporting to effect such a waiver is void.” As a result, directors and officers cannot limit or avoid their fiduciary duties through the company’s incorporation documents or another contract.

Minimizing Risks for Directors and Officers

Although directors and officers cannot obtain a waiver from shareholders of their fiduciary duties, there are a number of ways to minimize the risk of a shareholder lawsuit:

1. Fulfill duty of loyalty

Directors and officers should make sure that all decisions are made in the best interests of the corporation and all the shareholders, not just one or a small number of shareholders. Robust, detailed written board and/or shareholder resolutions or minutes documenting the reasons for a decision are recommended so they can be provided to the shareholders and also as evidence in the event of a lawsuit.

2. Fulfill duty of care

Directors and officers should obtain and review all information necessary for making a decision and, when helpful, either include this information in board resolutions or refer to it. Again, the more detailed the board and shareholder resolutions or minutes, the better the historical and legal record that is created. All shareholders, even minority shareholders, have the right to request information from and about the corporation with reasonable cause. Therefore, while directors may not want to include confidential company information in a resolution that is being freely circulated, otherwise it is prudent to add whatever supporting information was used for a decision to a resolution since it is open to shareholders anyway.

3. Sign indemnification agreements between the company and the directors

In the event that a director acts in good faith and is still sued, the company is then agreeing to pay for the lawsuit.

4. Provide E&O (“Errors and Omissions”) insurance for directors

The financial viability of this option generally depends on the size of the company and can be discussed with a business insurance broker.

In conclusion, although shareholders cannot waive their right to sue directors and officers for breach of fiduciary duties, directors and officers can protect themselves from such a lawsuit by making all decisions in the best interests of the corporation, being properly informed before making any decisions, and documenting all decisions and reasoning in writing thoroughly.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article

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Preparing an Employment Agreement

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By Doug Bend When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions: The position… Read More

By Doug Bend

When a small business or startup considers offering an employment position to a candidate, it’s common practice to create an employment agreement, or offer letter, which stipulates the general terms of the relationship. Before presenting such an agreement to a candidate, make sure you consider a couple of key provisions:

  • The position and title, including whether the offer is for full time employment, and the expected days and hours the candidate should fulfill
  • Whether or not the position is considered exempt or non-exempt, as defined by the Fair Labor Standards Act
  • The rate of pay and if the offer includes any equity compensation
  • The term of employment; the law presumes the relationship is “at will” (See Cal. Labor Code 2922) unless specifically changed within the agreement
  • The statement of benefits being offered, if any.

To help highlight the “at-will” nature of the relationship, many employers will bold or place the at-will provision in all caps. Speaking generally, if the employer provides a clear at-will provision within an employment agreement or offer letter, it hinders the ability of the employee to later claim there was an inferred agreement that the employee could only be terminated for cause (See Guz v. Bechtel Nat. Inc., 24 Cal.4th 317 (2000)).

Under CA law, certain information must be given to employees at the time of hiring. For non-exempt employees, the employer must give specific information about pay rates and paid sick leaves (See Cal. Labor Code Section 2810.5). Any changes to this information must be provided in writing to employees within seven (7) days of implementing the changes. For employees whose compensation includes commission, the employer must provide a written commission agreement stating the method for computing and paying the commission (See Cal. Labor Code Section 2751).

Finally, it should be noted that for a CA employer, non-compete agreements are generally unlawful. However, a prudent employer can create some indirect non-compete provisions, such as including proper non-disclosure and confidentiality clauses within the employment agreement or offer letter. Furthermore, employers can also include non-solicitation language that would prohibit an employee from recruiting co-workers after the employee leaves.

The information provided above is far from an exhaustive list. Employers should work with an attorney to ensure they are properly following state and federal rules to avoid costly mistakes down the line. If you’re interested in speaking to an attorney at Bend Law Group, please reach out at info@bendlawoffice.com, or give us a ring at (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Is GOOGLE Too Generic To Be A Trademark? Well, Let’s “Google it!”

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By: Vivek Vaidya and Nidhi Kaushal Can I get some Kleenex please! Do you have any Aspirin? How about a Q-Tip? Can you Xerox this for me? We often use popular brand names in our daily life as a stand-in for certain products or services. While it may be a company’s dream to turn its trademark… Read More

By: Vivek Vaidya and Nidhi Kaushal

Can I get some Kleenex please! Do you have any Aspirin? How about a Q-Tip? Can you Xerox this for me?

We often use popular brand names in our daily life as a stand-in for certain products or services. While it may be a company’s dream to turn its trademark into a household name, it could also could result in the death of a brand.

A trademark provides protection to the names, slogans, and logos that distinguish a company’s goods and services from others. However, trademarks that become “generic” lose their distinctiveness, and in turn lose their trademark protection. A trademark becomes generic when the general public start identifying similar products or services through that single name. For instance, Kleenex has become a generic term for tissues, and Xerox has become generic for photocopying devices. When the product or service with which the trademark is associated acquires a substantial market dominance or mind share of the public, it can become victim to “genericide.”

Google faced a situation where two individuals, David Elliot and Chris Gillespie, filed a request for cancellation of the GOOGLE trademark on the grounds that it is generic. They claimed that the word GOOGLE has become synonymous with “search the Internet,” and Google should lose its trademark protection.

In May 2017, the case was heard by United States Court of Appeals for the Ninth Circuit. The court ruled that the plaintiffs were unable to show that there is no other way to describe “internet search engines” without calling them GOOGLE. The court reasoned that “not a single competitor calls its search engine a GOOGLE and because members of the consuming public recognize and refer to internet searches engines using other terms, the plaintiffs have failed to show that there is no available substitute for the word google as a generic term”. However, the court of appeals recognized the possibility that over the time a valid trademark becomes the victim of genericization when the name has become an exclusive descriptor that makes it difficult for the competitors to compete unless they use that name.

The case was submitted to the Supreme Court for review. However, in October 2017, the Court declined to hear the plaintiffs’ petition.

Companies spend large amounts of resources to protect and maintain their trademarks. This victory is surely a celebration for GOOGLE and other companies that could fall into the “genericide” trap. However, this issue is on-going, and this case likely marks the beginning of many challenges to the trademark rights of widely used global technology companies.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.  

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Five Key Questions To Ask When Creating Law Firm Equity Agreements

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This article first appeared on Forbes. When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner. We… Read More

This article first appeared on Forbes.

When drafting an equity agreement, partners need to be prepared for many different issues and eventualities. That’s why it is necessary to carefully consider the terms of the agreement, from the allocation of profits and losses to the systems in place when it comes to removing a partner.

We have helped set up several law firms, and these are the five key questions that we find partners should consider:

1. How will the profits and losses of the firm be allocated?

Many law firms equally split the profits and losses. An advantage to this approach is that the partners equally enjoy the ups and downs of the firm. For example, if the firm wins a big contingency case, all of the partners benefit.
Other firms use an “eat what you kill” system where each partner gets their net profits, but is also responsible for their losses. A pro to this approach is it may lead to less friction over time between the partners who want to work 70 hours a week and those who want to spend more time with their families, traveling or on the golf course. An eat-what-you-kill item might also create a framework that leads to less resentment if a partner decides to take off more time with a newborn child, to help a sick family member, or if they have expensive spending habits.

2. How will decisions be made?

Partners also need to decide what decisions will require a majority vote of the partners, a supermajority vote (anywhere from 67-90%) of the partners or the unanimous consent of the partners.
For example, if a majority of partners want to promote an associate attorney to be a new partner, is that sufficient?
It is important to be very clear which items require which voting threshold so there is no dispute over whether an item requires a supermajority or unanimous vote, as opposed to merely a majority vote.

3. How will equity be valued when a partner leaves?

Some law firms value a departing partner’s ownership using a formula in the partnership agreement, such as 1.0-1.5 times the prior year’s gross revenue. Other firms have a business appraiser value the ownership interest of a partner who leaves the firm.
It is important to not only plan for how the fair market value of the equity interest will be calculated, but also how the purchase price will be funded to make sure the payments do not overburden the remaining partners.

4. How can a partner be removed?

Some law firms require a majority vote of the remaining partners to remove a partner whereas other firms have a higher bar for removing a partner.

5. What powers will the managing partner have?

Some law firms like to set checks and balances on the powers of the managing partner. For example, any expenditure above $X requires the approval of a majority of the partners.

There is no one-size-fits-all answer to these questions. The key is partners having a clear equity agreement in place that provides a roadmap when these and other issues inevitably occur.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Raising Capital: The Different Investment Stages

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You’ve hatched an idea, formed a team and now you’re ready to raise private capital to jump start your new company. One of the keys to success is understanding the general process a startup will go through as it continues to grow and expand its operations. Below you’ll find an overview of the three stages… Read More

You’ve hatched an idea, formed a team and now you’re ready to raise private capital to jump start your new company. One of the keys to success is understanding the general process a startup will go through as it continues to grow and expand its operations. Below you’ll find an overview of the three stages we see most of our startups go through on their way to raising multiple rounds of capital.

Seed Stage

A seed investment in a startup is usually between $100,000 and $1M with the primary investors being friends, family, and angel investors. At this stage, the company has little more than a speculative business plan and therefore is primarily selling the founders past experience, vision, and long-term plan to those within their network who believe in the talents of the team.

With little operating capital, startups are looking to keep the transaction as cost effective as possible by using instruments such as convertible notes, SAFE and KISS agreements. These are all instruments that will convert to equity at a later date but do not give the holder actual ownership in the company until they do. However, don’t be fooled into thinking this is not a sale of a “security” – it is, and startups must be compliant at both the state and federal level when closing out this type of transaction.

Early Stage

This is the stage in which the startup actually begins its operations and is looking to raise capital to expand and continue development of its product or service. This is often the startup’s first engagement with an institutional investor (e.g. venture capitalist), and the amount sought is between $1-3M.

At this juncture, a smart startup is looking for more than just cash. No doubt, the capital is needed to fund its operations, but a savvy startup is also looking to form a relationship with an institutional investor to grant access to experts in their field who can advise on financial, strategic and operational issues, and can help lead a growth stage round down the line.

For early stage financing a startup will often sell “preferred stock”, and the investors who invested in the seed stage will convert their convertible instrument into equity during this round.  This round will often cost two to four times as much in legal and accounting as the seed stage but is hopefully offset by the much larger raise.

Growth Stage

The purpose of this round of financing is to expand the product or service to new markets, develop a new line, ramp up the team to scale, or even consider acquiring another startup/small business. While often turning a profit, or trending in that direction, the startup is often incapable of borrowing the funds it needs from a bank. Therefore they continue to look for a capital raise through a private placement round of financing.

Like the early stage, the investors tend to be large institutional investors, and the offer is for preferred Series B stock. However, unlike the early stage, the growth stage is often complicated by more complex financials and a greater number of shareholders and investors to consider. Additionally, with a longer operating history, the growth stage company is often viewed as less risky by investors.

Unlike seed or early stage startups, a growth stage company will go through an extensive due diligence process as the new investors investigate and kick the tires on the company. A lawyer familiar with the company who assisted with the first two rounds can typically keep the costs of the growth stage in the same ball park as the early stage round, however, because the overall structure has become more complicated it’s not abnormal for the round to exceed what it costs to complete the early stage round.

Having a sense of the process can aid in your discussions with prospective strategic partners, and investors. If you’re considering raising capital for your venture (big or small) please reach out to carry the conversation forward. You can contact us at info@bendlawoffice.com, or at (415) 633-6841.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Brewing Likelihood of Confusion: A Look At Coexistence Agreements

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By: Erica Paige Fang When two trademark owners have developed rights to identical or similar marks, they might enter into a coexistence agreement in order to resolve a potential trademark dispute.  The agreement must clearly state in detail the rights of the respective parties and how confusion in the marketplace will be avoided.  Typically, the… Read More

By: Erica Paige Fang

When two trademark owners have developed rights to identical or similar marks, they might enter into a coexistence agreement in order to resolve a potential trademark dispute.  The agreement must clearly state in detail the rights of the respective parties and how confusion in the marketplace will be avoided.  Typically, the goods and services are unrelated, sold in different geographic areas, or utilize different trade channels.

A consent agreement is a type of coexistence agreement that may be entered into the record of a trademark prosecution in order to obtain registration.  The consent agreement usually limits the rights of the party seeking consent, but will not thoroughly address long-term coexistence.   A consent agreement is a declaration that there will be no confusion.  Courts will consider this as evidence there is no likelihood of confusion because the parties entering into the agreement are those who would be most affected by potential consumer confusion.  It is important to know a court can reject a coexistence agreement if it fails to provide sufficient detail regarding avoidance of confusion, or if they believe consumer confusion is unavoidable.

In re Bay State Brewing Company, Inc. (TTAB 2016) the Board determined the consent agreement was not sufficient to avoid confusion and affirmed the 2(d) refusal on likelihood of confusion.  As discussed above, a consent agreement usually carries great weight in the likelihood of confusion analysis.  The consent agreement relates to the market interface between the parties, and is number 10 of the du Pont factors. Here, Bay State Brewing Company (“Applicant”) filed to register TIME TRAVELER BLONDE (BLONDE disclaimed) as a standard word mark for beer, but was refused based on prior registered standard word mark TIME TRAVELER for beer, ale and lager.   The consent agreement limited the applicant to the geographic area of New York State and the New England area, whereas there were no geographic limitations on the Registrant.  The board found the restriction on use only limiting one party effectively allows for simultaneous use by both parties in the same regions, here New York State and the New England area.   Ultimately, the Board determined the restrictions set forth in the parties’ consent agreement would not eliminate confusion in the marketplace.  Further, the Board held the mark TIME TRAVELER for beer, ale and lager is an arbitrary mark entitled to a broad scope of protection.

In re Four Seasons Hotels, Ltd., 987 F2.d (Fed. Cir. 1993), the Federal Circuit found no likelihood of confusion between FOUR SEASONS BILTMORE and THE BILTMORE LOS ANGELES, stating the parties’ coexistence agreement passed scrutiny because the marks were sufficiently different, the services were not identical, and the marks had coexisted in the marketplace for years without confusion.  The Board evaluating Bay State Brewing Company distinguished from this case because the goods, beer, were the identical, and the marks were virtually identical minus the disclaimed and descriptive term for beer, BLONDE.

Parties should weigh future conflicts when considering a coexistence agreement.  Some important considerations include:  1) term of the agreement; 2) rights to license or assign the mark; and 3) potential expansion, particularly into new geographic areas or into new goods and services.  Further, a party should consider whether their mark is arbitrary or fanciful in relating to the goods or services, allowing for a broader scope of protection.   Allowing other coexistence could dilute the mark and weaken the strength of protection.  However, in the right circumstances, a clear coexistence agreement detailing how the parties will avoid likelihood of confusion in the marketplace can help avoid any brewing of confusion, as was the case for the parties in the Four Seasons Hotel.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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The Top Mistakes Of Selling A Business And How To Avoid Them

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This article first appeared on Forbes. If done correctly, selling your business, just like selling your home, can increase your net worth. But if done incorrectly, you can leave a significant amount of money on the table. In my experience assisting with the buying and selling of dozens of businesses, I have discovered that the same pitfalls… Read More

This article first appeared on Forbes.

If done correctly, selling your business, just like selling your home, can increase your net worth. But if done incorrectly, you can leave a significant amount of money on the table.

In my experience assisting with the buying and selling of dozens of businesses, I have discovered that the same pitfalls arise time after time. But by understanding what they are and how to avoid them, you can be satisfied with the sale of your business — not just when you hand the keys over, but for years to come.

Below are my top three tips for avoiding the most common mistakes that befall sellers:

1. Carefully craft the non-compete provision

If there is a non-compete provision, be sure to include a safe harbor for any business ideas you might want to pursue after the sale of your business. The safe harbor should not only create an exception for any similar businesses you would like to work on, but also for any businesses you would like to invest in.

Additionally, the non-compete should include the specific timeframe in which you are prohibited from operating a similar business, as well as the geographic scope. For instance, when selling a business, cap the non-compete at four years within a 40-mile radius of the location.

2. Get as much of the purchase price at closing as possible

The saying “one in the hand is worth two in the bush” is never more true than in the payment of the purchase price for the sale of a business. A buyer is not likely to run the business as well as you have and they might have trouble making payments that are stretched over time.

In addition, by getting as much of the purchase price as possible at closing, you will have the opportunity to invest that capital or enjoy it yourself.

If payment is stretched out over time, be sure that it is secured by the assets being purchased, and ideally by other collateral to help make sure you will get the full sale price.

3. Hold the buyer personally accountable

Ideally, when the buyer signs the purchase agreement, you want them to sign it both on behalf of their company and as an individual. That’s because if the buyer only signed on behalf of their company and that company is dissolved, you have no way to hold them personally accountable for the agreement and you could lose out.

However, as long as the buyer has signed the agreement as an individual, you can still hold them personally accountable if their legal entity (the company) is dissolved. This ensures that the agreement is fulfilled independently of the fate of the company.

Although the terms and pitfalls of selling a business vary from deal to deal, one consistent element is that navigating the sale can often be tricky. However, if you follow the tips above and work with an attorney and a CPA, you can help ensure that you will get as much money as possible for the sale of the business you have invested your hard work, time and capital in.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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