Articles Posted in Corporate Law


Paris, France, December 10, 2013. LeWeb Day 1. Image by Dan Taylor/Heisenberg Media

Ride sharing behemoth Uber is keeping plenty of lawyers busy. The latest lawsuit concerns control over its board of directors and whether its founder and former CEO, Travis Kalanick, hid critical, damaging facts when he asked the board to allow three more members who he could name. This lawsuit comes after Kalanick resigned as CEO of the company in June after tales of company misbehavior and sexual harassment emerged but as he left as CEO he returned as a board member.

Earlier this month Benchmark Capital Partners, one of Uber’s first investors, sued Kalanick to try to prevent his return as CEO, reports the Los Angeles Times. The lawsuit was filed in Delaware Chancery Court and claims Kalanick breached his fiduciary duty and contractual obligations and engaged in fraudulent concealment by stacking the company’s board with allies to insulate him from possible repercussions of his actions and enable him to return as CEO. Uber and Kalanick are both named but damages are only sought from Kalanick.

photo-LLC-law-change-225x300All good things come to an end and that could include a limited liability company or LLC. California law will change in 2017 and make it easier to dissolve and to wind up its affairs. If you’re involved in an LLC and thinking it’s run its course and time to pull the plug, depending on the circumstances, you may want to wait another couple months.

An LLC is a hybrid business entity. It’s a combination of a partnership and corporation.

  • Its main advantage over a partnership is like the shareholders of a corporation the LLC’s owners’ (members’) liability for its debts and obligations is limited to their financial investment.
  • However LLC members can participate in its management and profits or losses flow through to its members like a partnership.
  • An LLC can’t be formed for businesses that provide professional services that require a state professional license, such as a legal or a medical practice.
  • Forming an LLC is easier to form and maintain than a corporation. LLC’s don’t issue stock, are not required to hold annual meetings or keep written minutes, which a corporation must to preserve the liability protection for its owners.
  • Articles of organization must be filed with the state and LLC members must enter into an operating agreement. An oral one will suffice but a formal, written agreement is a better idea for all those involved.
  • An LLC is normally managed by its members, but they can agree to hire a manager to handle its affairs.
  • For state income tax purposes an LLC will be classified as a partnership if there is more than one owner but members can elect to have it taxed as a corporation.

Earlier this year the California legislature made minor language changes to the Revised Uniform Limited  Liability Company Act (RULLCA) and they will go into effect in January. RULLCA currently states that an LLC could be dissolved and its activities wound up if, among other things, a majority of its members voted to dissolve it. Continue reading

photo-conflict-of-interet-boad-members-300x200Corporate board members can have a tremendous, beneficial impact on a company. If they have they company’s best interests at heart and have relevant but diverse backgrounds their input can help guide a company through tough times into much better times. That’s a difficult task if a board member has a connection to a competitor or potential competitor. Every board member has a fiduciary duty to the corporation to act in its bests interests and not use his or her access to benefit a competitor.

In the evolving world of autonomous vehicles companies that weren’t building vehicles in the past may be building them in the future. Two of those companies are Google and Uber. This summer David Drummond, the chief legal officer at Google parent Alphabet Inc., stepped down from Uber’s board of directors, citing a conflict of interest. Drummond joined Uber’s board of directors in August 2013, according to TechCrunch.

This issue has been simmering for a while. Uber’s first fleet of self-driving cars is running in Pittsburgh. The cars are modified Volvo XC90’s, co-piloted by an engineer who can take the wheel when necessary. Google is also working on its own self driving cars. A joint venture between Google and Ford enabling both to leverage their technologies with Ford’s expertise creating cars and Google’s ability to deliver software has yet to come to fruition. of us running businesses have a supporting cast, whether they’re contractors, suppliers, funders, banks, attorneys or employees. If a trusted cast member disappears at a critical time what do you do? Susan Jeske found herself in that situation in September. Like most of us she made due with what she had and went forward.

Jeske owns the Ms. America® Pageant. She purchased it in 1999 after winning the competition in 1997. Ms. America contestants are often well into their careers, sometimes are married and often range from 26 to 40 years old. The 2017 event was scheduled for September 3 in Brea. At the last minute Jeske got some bad news.

She learned on August 30 that Costa Mesa based BTB Event Productions, the company hired to produce the pageant, was shutting down and their equipment was being sold off. As a result Jeske was left scrambling to find a stage, runway and proper lighting. “I have 43 contestants flying in from across the country that are coming in tomorrow and I don’t have anything,” Jeske told the Orange County Register on August 31.

Starting a business can be very exciting. You make plans for a bright future. You’re optimistic not only about how well the business will run, but how profitable it will be too. Plans and dreams are great, but it’s preparation and work that may help you avoid conflict with co-owners. If it happens there are things you can do to protect yourself.

Whether you formed a partnership, limited liability corporation, partnership or limited liability partnership, a big step to manage expectations and make sure everyone knows their responsibilities is an effective partnership agreement, LLC operating agreement or shareholders agreement.

If despite those documents owners are at a stalemate or relationships have simply broken down it may be time for disputes to be resolved or for people to go their own ways. How this takes place should be spelled out in the agreement which should be tailored to the needs of the business and the owners. If there is no such agreement state statutes cover these topics in a “one size fits all” approach that may or may not work very well.

If things are going poorly you may want the other owners out, they may want you out, or both. It’s possible that the company’s not doing well and everyone’s miserable. Maybe it’s going very well and some are trying to get more of their fair share of the profits.

If there is an agreement,

  • Who has the ability to make what decisions for the business?
  • Has one or more parties over-stepped their bounds?
  • Have obligations been met?
  • If the agreement has been breached, are remedies spelled out in it?
  • How are disagreement supposed to be resolved?
  • If the parties can’t do it themselves, must a mediator or arbitrator be used?
  • If the disagreement goes to court, must it be filed in a particular place using the laws of a specified state?
  • Does the agreement state attorney’s fees and costs of litigation can be awarded to the prevailing party?
  • Can a judge or arbitrator award attorney’s fees?

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If you hear the term “insider trading” you may think about corporate big wigs sneaking off and secretly buying or selling stocks to cash in on inside information. That scenario happens but there’s a wide range of people who may seek to profit on information unavailable to the public. One recent case involves an optical physicist.

Guolin Ma was a former consultant for two China-based private equity firms. He agreed to pay more than $756,000 to settle insider trading charges filed by the federal Securities and Exchange Commission (SEC), according to an SEC press release. It charged Ma with breaking the Securities Exchange Act of 1934.

The agency claims Ma traded on confidential information he received while working for two firms as they sought to buy Silicon Valley-based OmniVision Technologies, which makes optical semiconductor devices used in mobile phones and webcams.

Ma is an optical physicist who lives primarily in China but who resided in Mountain View during the period in question. He attended various meetings and performed technical due diligence related to the potential acquisition of OmniVision. He also obtained a timeline and strategy documents from the firms about the OmniVision purchase. The SEC’s complaint filed in federal court in San Jose in June states,

  • One of the firms Ma advised joined a group of Chinese investment firms to make a bid for OmniVision.
  • Ma worked regularly for the investment firm. He monitored their current investments and evaluated possible investments in the area of optical technology.
  • Ma was aware his consulting exposed him to non-public information about the firm’s investments and other entities and that such information needed to be kept confidential.
  • Ma signed a confidentiality agreement with the firm in March 2014 prohibiting him from trading on the non-public information he learned through his work with the firm.
  • Ma owed a duty of trust or confidence to the firm he worked with and he and those at the firm shared confidential information regarding potential investments.
  • Ma “knew or recklessly disregarded” the fact he owed a duty of trust or confidence to keep the information confidential and used the inside information to place trades in his personal brokerage accounts.
  • Ma bought 39,373 shares of OmniVision in a number of purchases in April and May 2014. OmniVision’s stock price climbed 15% when the proposed purchase was announced in August 2014.
  • That gain created $367,387 in illegal profits for Ma.

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2013_02_15__4814Normally a judge will not get involved in the sale of the business as long as there was no fraud and there was fair dealing with the purchase. In May the Delaware Court of Chancery did something out of the ordinary in a decision with potentially broad implications for the future of corporate takeovers, according to the New York Times. The judge decided that the board of directors of Dell Inc. under priced the company by $6 billion when the formerly public company was taken private by a buyout group led by company founder Michael Dell in 2013 for $24.4 billion.

Vice Chancellor J. Travis Laster stated in his decision there had been no higher offer and the board “and its advisors did many praiseworthy things.” However he ruled that shareholders had been short changed and Dell had to pay the plaintiff shareholders their portion of the difference. The decision got Wall Street’s attention because Laster essentially decided the free market didn’t set the right price.

Under the decision a board of directors doesn’t just have a fiduciary duty to find a buyer willing to pay the highest price, but it needs to operate knowing that a judge may finally decide later what that price should have been. Not surprisingly the decision was applauded by shareholder advocates and it may spark future lawsuits involving other companies.

There are dangers of conflicts of interest and self-dealing when management buyouts take a public company private but in this case the decision found no wrongdoing by Dell or its board. Laster decided that based on the “fair price” of the company, incorporated in Delaware, it was simply sold for too little. This case is part of a growing trend where investors buy a company’s stock after a takeover bid has been made public planning to sue the company claiming the price was too low (known as appraisal arbitrage).

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photo - vizioThe $2 billion sale of Vizio to Leshi Internet Information & Technology Corporation (known as LeEco) is expected to result in the Chinese firm’s much broader reach into the American market. LeEco sells a variety products and the company tries to marry content (some of it of its own making) with the sale of its electronics, according to the Los Angeles Times.

  • LeEco’s Le 2 pro handset sells for $166 in China but for another $15 you get a one-year subscription to the company’s entertainment offerings (Disney’s “Zootopia,” DreamWorks Animation’s “Kung Fu Panda 3,” and live sports broadcasts including Major League Baseball, NBA games and European soccer matches).
  • If you own a LeEco Internet enabled television any shows you stream or bookmark on your phone will be queued up automatically on your TV (and vice versa). The phone is also a remote control for the television set.

That kind of “synergy” may be coming to future Vizio (or LeEco) smartphones sold in the U.S. where, until now, the company is practically unknown. In China and India LeEco has sold millions of phones and televisions. By buying Vizio LeEco enters the U.S. market without having to build its own brand from scratch.

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photo - pick the right boardIf you’ve chosen a corporation as the structure for your business you need to have a board of directors. If chosen well these people can be a huge asset to your company and help your business become more successful. Choosing the wrong people can be a big setback, sucking time, energy and resources away from managing a business and towards a malfunctioning board.

A board of directors is elected by stockholders and it oversees the corporation’s management. Daily functioning of the business should be left to executive officers recruited and retained by the board. Major decisions affecting a business should be decided at the board level.

If you have a new business you need to find directors. If you have an existing company after a board member leaves you may need to find a replacement. In either case, here are some things to think about.

  • Find someone you trust. A board member will be privy to the company’s innermost secrets. A board member who uses his or her position for personal gain, perhaps by starting a competing company or working for one, would be a huge problem. Though this could be grounds for legal action against this individual, the threat of a lawsuit might not necessarily prevent the person from trying to cash in on his or her access to the company.
  • Those to avoid: VentureBeat lists The Do-Nothing, The White Flag (avoids confrontation), The Cabalist (his or her personal agenda is foremost), The Meddler (focuses too much on details) and The Pontificator (just wants to hear himself talk).
  • Are there too many board members? Do meetings get bogged down because too many people are involved? Is it difficult to reach a decision because of so many opinions? A larger board will also probably be less engaged with the business.
  • What skillsets you should be looking for in board members depends on the maturity of the business. Individuals whose skills are especially helpful for a startup may not be so helpful with a mature, established business. Board members should also have a mix of skills that complement each other and members of management.
  • A board member should be a good fit with the culture of the business. Is the culture dominated by those with strong opinions or run by consensus?
  • How much compensation should a board member receive? If you want skilled, experienced people their time is very valuable. It will take a commitment by a board member to become engaged, do the homework necessary to make informed decisions and attend and participate in board meetings.

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Photo - fake hedge fundsA New York resident has been sentenced to five to fifteen years in prison for defrauding investors of about $800,000. Moazzam Ifzal Malik, a.k.a. Mark Malik, 33, of Lahore, Pakistan was a very busy and ambitious guy. Instead of honestly making money he took short cuts and is now in prison.

Malik was convicted in December by a jury after a two week trial in New York County Supreme Court of 28 counts charged in the state Attorney General’s indictment, including grand larceny and securities fraud, according to a press release issued by the Attorney General’s office.

Malik invented a number of fictitious hedge funds which he claimed routinely outperformed the market by over 200%. From 2011 to early 2015 he convinced investors that he managed multi-million dollar hedge funds that earned high returns. Malik,

  • Advertised his hedge funds on his own website and on the internet.
  • Also scammed money the old fashioned way by making cold calls to possible investors/victims.
  • Admitted during the trial he solicited dozens of investors in the United States and abroad.
  • Convinced at least seventeen people to invest more than $800,000 in his hedge funds which was actually spent to support his lifestyle with $215,000 in cash withdrawals from accounts and an additional $210,000 spent on hotels, airline tickets, rental cars, restaurants, electronics, utilities and a karaoke bar.

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