Business Law

Selected Developments In Business Law Courtesy of CEB — Counseling California Corporations

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the April 2019 update to Counseling California Corporations.  References are to the book’s section numbers.  See CEB’s BLS Landing Page for special discounts for Business Law Section members. 

April 2019 Update

C corporations (i.e., corporations that are not S corporations) and partnerships that have a C corporation as a partner are prohibited from using the cash method of accounting unless the entity is a qualified personal service corporation, is a farming business, or has average annual gross receipts not exceeding $25 million (as adjusted for inflation after 2018). The average annual gross receipts amount was previously $5 million. IRC §448. See §1.98.

On written demand and “for a purpose reasonably related to such holder’s interests as a shareholder or as the holder of such voting trust certificate,” any shareholder or holder of a voting trust certificate may inspect and copy the accounting records, in person or by agent or attorney. Corp C §1601(a). Effective January 1, 2019, such records must be made available to the shareholder at either the corporation’s principal place of business in California, or if none, at the physical location for the corporation’s California registered agent for service of process. A shareholder may require that such records be made available in electronic format if the shareholder pays for the reasonable costs of converting such records into electronic format. See §1.103.

Publicly held domestic corporations, and publicly held foreign corporations with their principal executive offices being located in California (as reported on Form 10-K), must have a minimum of one female director on their boards. By January 1, 2022, such corporations must have three female directors if the number of total directors of the corporation is six or more, and two female directors if the number of total directors is five. See Corp C §§301.3, 2115.5. See §2.34.

To plead falsity of an opinion statement under Rule 10b–5, a plaintiff must allege that the defendant (1) made an objectively false statement it subjectively knew was false; (2) made a materially misleading statement of fact supporting its opinion; or (3) omitted material facts that would conflict with a reasonable investor’s interpretation of the statement. City of Dearborn Heights Act 345 Police & Fire Retirement Sys. v Align Technol., Inc. (9th Cir 2017) 856 F3d 605. See §3.18.

In Abed v Western Dental Servs., Inc. (2018) 23 CA5th 726, the court held that a plaintiff had sufficiently shown discriminatory animus by presenting evidence that a supervisor told her there were no open positions, that this representation was false, and that the supervisor had made remarks suggesting that she would not be considered for a position while she was pregnant. See §3.52.

In In re Twelve Grand Jury Subpoenas (9th Cir 2018) 908 F3d 525, a case of first impression in the Ninth Circuit, the court held that a custodian of records’ status as sole corporate shareholder or sole employee did not give him a Fifth Amendment privilege against the production of corporate records subpoenaed by a grand jury. See §§4.21, 4.27–4.28.

The Supreme Court recently confirmed that Sarbanes-Oxley applies to all employees who report misconduct to the Securities and Exchange Commission, any other federal agency, Congress, or to an internal supervisor. Digital Realty Trust, Inc. v Somers (2018) 583 US ___, 138 S Ct 767. See §4.38.

In March 2018, the SEC awarded $50 million to a whistleblower (the largest Dodd-Frank whistleblower award to date), and in September 2018, the SEC issued the second highest whistleblower award of $39 million. In fiscal year 2018, the SEC under Dodd-Frank awarded more than $168 million to 13 whistleblowers. In total, as of November 2018, the SEC has issued more than $326 million in awards to 59 whistleblowers since the program was established. See §4.40.

As of 2018, a registrant is required to disclose in its Regulation S-K Item 10(a) the pay ratio of the CEO or equivalent position compared to the median of the annual total compensation of all employees. See §5.8.

In Tindall v First Solar (9th Cir 2018) 892 F3d 1043, the court dismissed a shareholder derivative action under Fed R Civ P 23.1 based on failure to show demand futility. The court found that approval of the financial statements and press releases at issue was not a board business decision. See §§5.73, 6.5.

If a plaintiff in a derivative action seeks to amend a complaint to cure defective demand futility allegations or to add new allegations of wrongdoing, then the amended complaint must set forth specific facts showing that it would be futile to demand action from the board as composed at the time of the proposed amendments. Apple Inc. v Superior Court (2017) 18 CA5th 222. See §6.5.

The California Supreme Court recently clarified, for certain specified purposes, that a worker should be classified as an independent contractor only where he or she: (A) is free from the control and direction of the employer; (B) performs work that is outside the usual course of the employer’s business; and (C) is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. Dynamex Operations W. v Superior Court (2018) 4 C5th 903, 964. See §9.18.

For law corporations, a dissolved law firm has no property interest in the fees or profits associated with unfinished hourly fee matters. The process of winding up a law corporation’s hourly fee matters extends no further than to certain acts. These include those acts necessary to: (1) preserve legal matters for transfer to the client’s new counsel or the client itself, (2) effectuate such a transfer, and (3) collect on work done pretransfer. The firm may bill and be paid for the time its lawyers spent filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, packing up and shipping client files back to the clients or to new counsel, and getting new counsel up to speed on pending matters. Heller Ehrman LLP v Davis Wright Tremaine LLP (2018) 4 C5th 467. See §11.46.

Assembly Bill 2503 (2018 Stats, ch 679) created a new procedure by which the Franchise Tax Board may administratively dissolve a corporation that has been suspended for 60 continuous months for nonpayment of taxes. A new section has been added discussing this procedure. See §11.79A.

A Corp C §2000 shareholder buyout is a special proceeding that supplants an action for involuntary dissolution of a corporation. Ontiveros v Constable (2018) 27 CA5th 259, 267. See §11.87.

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