Selected 2016 Developments in Corporate Law

William Ross and Jerry T. Yen

William Ross, Co-Chair of the Corporations Committee of the Business Law Section of the California State Bar, is of counsel to the firm of Hirschfeld Kraemer LLP. He is a transactional attorney with expertise in mergers and acquisitions and corporate governance matters for both for-profit and non-profit entities.

Jerry Yen is a Deputy Attorney General in the Corporate Fraud Section of the California Department of Justice. He is currently the Vice Chair of Publications for the Corporations Committee of the California State Bar's Business Law Section.

The following article summarizes selected California legislative, regulatory, and case law developments in 2016, as well as certain significant actions undertaken by or relating to the SEC in 2016.

Effective January 1, 2016, Governor Brown signed into law Assembly Bill (A.B.) 667, 2015-2016 Reg. Sess.,¹ which creates a new exemption from the broker-dealer requirements for certain individuals acting as finders, codified at section 25206.1 of the California Corporations Code. Among the conditions that must be satisfied to use the exemption are the following:

• the finder must be an individual;
• the size of the offering must not exceed $15 million;
• the finder can only make introductions to accredited investors;
• the finder cannot participate in negotiating any of the terms of the offering; and
• the finder must file with the California Department of Business Oversight ("DBO") an initial statement of information (with a $300 filing fee) and annual renewal statements (with a $275 renewal fee).

On May 17, 2016, the DBO issued proposed regulations² under the Corporate Securities Law of 1968 to implement the provisions of A.B. 667.

Effective January 1, 2016, Governor Brown signed into law changes to California Corporations Code sections 12200 et seq. that amend the Consumer Cooperative Corporation Law relating to worker cooperatives.³ The goal of the legislation was to clarify the law applicable to such cooperatives and promote the establishment of new worker cooperatives. Among the changes was to permit a cooperative to designate itself as a worker cooperative in its articles of incorporation, and to enable a cooperative to have "community investors" who can hold a share or other proprietary interest in a cooperative. Also, the investment limit to qualify for an exemption from the requirements in the Corporate Securities Law of 1968 for shares or memberships in cooperatives was increased from $300 to $1,000.

Effective January 1, 2016, Governor Brown signed into law changes to various sections of the California Corporations Code to expand the permissible titles relating to a chair of the board by for-profit corporations, nonprofit corporations, and consumer cooperative corporations.⁴ As part of the same bill that was signed into law, consumer cooperative corporations were authorized to take certain actions in anticipation of or during an emergency, and to enact bylaws effective only during an emergency regarding the management and conduct of their ordinary business affairs. (For-profit and nonprofit corporations already had this authority.)

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Effective September 16, 2016, Governor Brown signed into law changes to the California Corporations Code expanding when victims of corporate fraud can file an application with the Secretary of State for any unpaid judgment against a corporation for fraud, misrepresentation, or deceit.⁵ Victims may now apply if they obtain a criminal restitution order against an agent of a corporation for fraud, misrepresentation, or deceit, and submit documentation showing that the defendant is an agent of the corporation.

Western Albuquerque Land Holdings, LLC ("Western") served requests for production to SCC Acquisitions, Inc. ("SCC"). Some of the requests sought documents related to "entities that currently are or previously were a subsidiary of [SCC]." SCC objected and declined to produce documents responsive to those requests on the grounds that, among other things, the documents were protected by the right of privacy.

With respect to that objection, the court stated that "corporations do not have a right of privacy protected by the California Constitution." Although corporations do have a right to privacy, it is a lesser right than that held by human beings and is not considered a fundamental right. Accordingly, whether the requests infringe a corporation's right to privacy requires a balancing test—whether the discovery appears to be reasonably calculated to lead to the discovery of admissible evidence balanced against the corporate right of privacy. In this case, the court concluded that (1) Western's requests only sought documents under the possession or control of SCC, (2) any corporate privacy right would have already been compromised, and (3) a protective order could be issued to safeguard any remaining privacy rights.

Appellants, shareholders of Diablo Controls (a California corporation), submitted a written demand to inspect accounting books, meeting minutes, and other records. The demand requested that the inspection take place at Diablo Controls' California office. Diablo Controls located records in its Illinois office, shipped them to California, and made them available for inspection at its counsel's California office. Appellants claimed that the records were incomplete and filed a petition for writ of mandate. After filing the writ, Diablo Controls mailed additional records to California and made them available for inspection at its counsel's California office. Appellants claimed the records were still incomplete, and Diablo Controls opposed the petition on the grounds that section 1601 of the California Corporations Code only obligated it to make the records available for inspection at its Illinois office. The trial court agreed and denied the petition.

The appellate court agreed with the trial court because section 1601 does not specify where the records need to be made available for inspection. The appellate court contrasted section 1601 with section 213 of the California Corporations Code, which requires a corporation's bylaws to be made available for inspection in California or furnished to a shareholder on request. The difference in these two sections buttressed the court's interpretation that section 1601 does not require records to be brought into California for inspection. The court, however, noted that maintaining records in a remote location intentionally to impede inspection would be contrary to section 1601, but there was no evidence of such obstruction in this case.

The Palm Springs Villas II Homeowners Association, Inc. ("Association") was the governing body for Palm Springs Villas II, a condominium development, and was a nonprofit corporation organized under California law. The Association's governing documents included the Covenants, Conditions, and Restrictions ("CC&Rs"), as well as its Bylaws.

Parth was president of the Association and on its Board of Directors. Parth signed a one-year contract with Desert Protection, a security company, without submitting the agreement to the Board for review or receiving authorization to execute it. Without knowing that Parth signed a one-year contract, the Board ultimately selected another security company to provide security services and sent Desert Protection a thirty-day termination letter. Desert Protection sued the Association for breach of contract and the Association filed a cross-complaint against Desert Protection and Parth. The Association eventually settled with Desert Protection.

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With respect to Parth, the Association asserted breach of fiduciary duty and breach of governing documents. Parth demurred to the cross-complaint. For the breach of fiduciary duty claim, Parth moved for summary judgment and argued that the claim was barred by the business judgment rule and the exculpatory provision in the CC&Rs. Parth relied on Biren v. Equality Emergency Medical Group, Inc.⁹ in support of her position that the business judgment rule protects a director who violated governing documents as long as the director believed that the actions were in the best interests of the corporation. The trial court agreed and granted the summary judgment motion because the Association failed to offer any evidence, other than that Parth violated the CC&Rs, to overcome the business judgment rule.

The appellate court determined that the trial court erred in assuming that the business judgment rule applied to actions that violated the governing documents. The court noted that the business judgment rule "raises various issues of fact." The court also reasoned that Biren only held that a director's violation of the governing documents could receive protection from the business judgment rule when the other requirements of the business judgment rule were satisfied. In this case, there were material issues of fact as to whether Parth acted on an informed basis and exercised reasonable diligence. In addition, the court noted that there may also be an issue of material fact as to Parth's good faith. Accordingly, the court reversed the trial court's summary judgment order.

Effective...