On July 15, 2011, California Code of Civil Procedures Section 580e was passed by the California Legislature. That section changes the law of short sales for residential properties in two significant ways. First, it expands the protection for a borrower in a short sale scenario, so that if all lenders whose loans are secured by the property approve the short sale, none of the lenders may seek a deficiency judgment against the former borrower.

Also, it adds an additional protection by stating that none of the lenders who approve the short sale may require the former borrower to pay any additional compensation, aside from the proceeds of the short sale, in exchange for the written consent of the sale.

Prior to July 15, 2011, in a short sale situation, the former borrower still had to address a second or third loan, or for that matter, an equity line, recorded against the property. Only the first lender was prohibited from seeking a deficiency judgment.

Next, a significant case was decided in 2011, protecting commercial landlords. In that case, Frittelli, Inc. v. 350 North Canon Drive LP, the California Court of Appeal enforced the landlord’s liability exemptions in a commercial lease at the summary judgment stage of a litigation brought by the tenant alleging that the landlord’s renovation of the shopping center destroyed the tenant’s business. Specifically, the exculpatory clause in the commercial lease had exempted the landlord from liability for breach of lease, breach of the implied covenant of quiet enjoyment, rescission, and ordinary negligence. The lawsuit had arisen from the landlord’s alleged interference with the tenancy in remodeling the shopping center; the clause at issue stated that the landlord had no liability under “any circumstances” for breaches of the lease, and/or negligence for damages or injury arising from any cause in the areas of the shopping center outside the leased premises, or for injuries to the tenant’s business.

The lease was a “net lease”, which the court found ordinarily signals that the parties intended to transfer from the landlord to the tenants the major burdens of ownership of the real property over the life of the lease.

The lease at issue was a standard form agreement entitled “Standard Retail/Multi-Tenant Lease-Net”. While the court’s decision did not specify which form lease was utilized, in the commercial leasing field, it is quite common to use form leases which often contain similar types of exculpatory language.

This is an excellent case for commercial landlords. It is highly unlikely though that these types of exculpatory provisions would apply in a residential lease context.

Conversely, however, a decision of the Court of Appeal in Avalon Pacific – Santa Ana LP v. HD Supply Repair and Remodel LLC reached a decision that was not favorable for the landlord. In that case, the court found that the landlord could not recover costs of repair damages for the tenant’s breach of maintenance and repair obligations when the lease had neither expired nor been terminated. Similarly, the court found that when the lease will be in effect for an extended term, the landlord may only recover waste damages before the lease expiration of termination or a showing of substantial and permanent damage resulting in a reduced market value.

In other words, the court found that the time for a landlord to raise maintenance and repair damages (arising from the condition of the property) is when the lease expired, or was terminated from some action of the landlord, such as in an eviction action.

The first question courts will always ask in a dispute involving a trademark is whether the name a party seeks to protect is in fact entitled to such protection under the law.  There are five categories of trademarks according to their protectability: (1) generic; (2) descriptive; (3) suggestive; (4) arbitrary; and (5) fanciful. KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., 408 F.3d 596, 602 (9th Cir. 2005). “The latter three categories are deemed inherently distinctive and are automatically entitled to protection because they naturally ‘serve[ ] to identify a particular source of a product . . . .’ ” Id. (quoting Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 768 (1992)). Descriptive marks “define a particular characteristic of the product in a way that does not require any exercise of the imagination.” Surfvivor Media, Inc. v. Survivor Productions, 406 F.3d 625, 632 (9th Cir. 2005). A descriptive mark can receive trademark protection if it has acquired distinctiveness by establishing “secondary meaning” in the marketplace. Filipino Yellow Pages, Inc. v. Asian Journal Publ’ns, Inc., 198 F.3d 1143, 1147 (9th Cir. 1999). “Generic marks give the general name of the product; they embrace an entire class of products.” Kendall-Jackson Winery, Ltd. v. E. & J. Gallo Winery, 150 F.3d 1042, 1047 n.8 (9th Cir. 1998). “Generic marks are not capable of receiving protection because they identify the product, rather than the product’s source.” KP Permanent Make-Up, 408 F.3d at 602.

In the PRETZEL CRISPS dispute cited in the NY Times article, Frito-Lay seeks to cancel a trademark registration in the U.S. supplementary register and oppose trademark applications that were conditionally approved by the U.S. Patent and Trademark Office for registration in the primary register.  The trademark applicant Princeton Vanguard, LLC (“Applicant”) seeks registration of its mark in connection with “pretzel crackers.”   Last year, Frito Lay filed a motion for summary judgment requesting the Trademark Trial and Appeals Board (“TTAB”) to rule that, as a matter of law, the trademark PRETZEL CRISPS is generic for “pretzel crackers” and is therefore not entitled to registration.

To prove its claim that the trademark is generic, Frito-Lay must show that the mark refers to the class, genus or category of goods on which it is used.  In other words, it must show that that terms “pretzel crisps” that compose the mark refers to the goods “pretzel crackers.” While this might be the case in the United Kingdom, I am not aware of the term crisps being used specifically to describe the genus of goods synonymous with crackers or chips in the United States.  The Applicant provided substantial evidence, including expert surveys, to support its position that American consumers did not view the mark as referring to the genus of pretzel cracker products.  The Board agreed with the Applicant and denied Frito-Lay’s motion.  This decision leaves the trial of this case primarily on the issue of whether the mark has “secondary meaning.”

To determine whether a descriptive mark has secondary meaning, a finder of fact considers: “(1) whether actual purchasers of the product bearing the claimed trademark associate the trademark with the producer, (2) the degree and manner of advertising under the claimed trademark, (3) the length and manner of use of the claimed trademark, and (4) whether use of the claimed trademark has been exclusive.” Levi Strauss, 778 F.2d at 1358 (quoting Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1015 (9th Cir. 1985)) (alteration omitted).  While the Applicant has provided a preview of its “secondary meaning” case when it opposed Frito-Lay’s summary judgment motion, the substantive case has not yet apparently been submitted to the Board.

While the PREZEL CRISP case is not ground breaking trademark precedent, the parties recently engaged in discovery disputes over the unresolved scope and duties of providing “electronically stored information” or ESI, a topic ripe for a separate blog post.

Patrick E. Guevara is a senior associate and represents small and mid-sized businesses and entrepreneurs in the Tri-Valley, the Greater San Francisco Bay Area, and the Central Valley in the areas of intellectual property, trademarks, copyrights, employment, real estate, and immigration.

Calfornia’s settlement is valued at $18 billion.  Unlike past mortgage crisis relief programs, the five banks have purportedly agreed to make principal reductions for California homeowners of at least $12 billion total.   AG Harris also noted that the California settlement is unique from “the larger multistate agreement, which is enforceable in a federal court in Washington, D.C.,” in that the AG can enforce the settlement agreement in California state court.  Also, the settlement does not include mortgage loans owned by the government sponsored enterprises (“GSEs”) Freddie Mac and Fannie Mae, which make up around 60% of residential mortgages nationwide.

AG Harris also took this opportunity to announce that she will propose “a comprehensive legislative agenda to protect homeowners in the mortgage market…including a single point of contact for mortgage-holders and an end to the unfair and confusing system of dual-track foreclosures.”  These proposals are very relevant to the foreclosure cases I have recently worked on.

In a case before a federal court in San Francisco entitled Sohal v. Freddie Mac, we recently defeated the banks’ motion to dismiss.  The primary issue was whether the foreclosing party, which sold the mortgage to Freddie Mac and merely acted as a servicer, had the standing and authority to foreclose on the property.  Freddie Mac and Fannie Mae do not service loans so the point of contact of the loans they own are the servicers, who also typically originated the mortgage.  While there have been numerous problems in dealing with the servicer, I don’t think a single point of contact will resolve the problem.  The problem lies in the tangled web of  ”back-end” contracts from the securitization of the mortgages.  Servicers do not make the actual decisions.  They have to obtain consent from the “investors.”  Any proposed legislation should, instead, focus on properly define the roles, rights, and obligations of all parties in the transaction, including the originator, the servicer, the fictional “nominee” MERS, and the “investors.”

We also have a wrongful foreclosure action in state court involving dual-track.  It’s not necessarily confusing.  However, from the borrower’s point of view, it is certainly unfair that the lender can sue for foreclosure and at the same time go forward with a non-judicial foreclosure sale.  The primary advantage for the lender (in addition to forcing the borrower to incur additional attorneys fees to deal with both proceedings) is that the lender can request the Court to appoint a receiver to collect rents if there is an assignment of rents.  California’s nearly century old non-judicial foreclosure scheme was intended by the legislature to provide a streamlined process while balancing the interests of both the lender and borrower.  The trend has been and continues to be in favor of lenders.  Courts are unlikely to reverse this trend, so ultimately it will be up to legislative action to re-balance California’s foreclosure scheme.  With the public backlash and the revitalized momentum of the recent settlements, foreclosure law should have very interesting year or two.

(a)  By January 1, 2013, whenever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.

(b)  The employer shall give a signed copy of the contract to every employee who is a party thereto and shall obtain a signed receipt for the contract from each employee. In the case of a contract that expires and where the parties nevertheless continue to work under the terms of the expired contract, the contract terms are presumed to remain in full force and effect until the contract is superseded or employment is terminated by either party.

(c)  As used in this section, “commissions” has the meaning set forth in Section 204.1.  “Commissions” does not include short-term productivity bonuses such as are paid to retail clerks; and it does not include bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed.

According to California Labor Code section 204.1, commissions are “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.”

The California Court of Appeal, Second District, clarified that compensation will be considered “commissions” if:

• the employees are “involved principally in selling a product or service, not making a product or rendering the service”; and
• “the amount of their compensation [is] a percent of the price of the product or service.”

Keyes Motors v. DLSE, 197 Cal.App.3d 557, 565 (1987).

If an employee’s compensation meets the Keyes test, then the employer must meet the following requirements of Section 2751 by January 1, 2013:

• Commission Agreements must be in writing
• The agreement must contain the method of computation and payment
• Employee must receive copy of signed agreement
• Employee must sign a receipt acknowledging he or she received the signed copy

This new law reaffirms California’s well-established rule that the right of an employee to commissions are governed by the terms of the contract for compensation. See Steinhebel v. Los Angeles Times, 24 Cal.App.4^th 696, 705 (2005).  Thus, it is important for employers to regularly review their sales commission agreements and consult legal counsel, if necessary, to ensure that commission computation and payment terms are clear and that they have complied with section 2751.

Risks

On the downside, the use of the electronic devises can actually result in a loss of efficiency due to employees’ use employer-provided devices for personal, non-work-related use during work hours.  Employees might use the web to visit pornographic websites or disburse inappropriate materials via company email, and therefore expose employers to legal liability for permitting a hostile work environment due to harassment or defamation. Further, the unscrupulous employee could expose the employer’s trade secrets, proprietary and confidential information, or engage in inappropriate contact with competitors or customers.

How can you as an employer protect against these risks?  The easiest way is for the employer to monitor communications between employees and other parties.  But isn’t that an illegal invasion of the employee’s privacy?

Governing Laws – Employee Protections

Both federal and state law limit an employer’s ability to monitor employees’ communications. The Fourth Amendment to the Constitution protects every citizen against unreasonable search and seizure, and The Electronic Communications Privacy Act of 1986 (ECPA), 18 U.S.C. §§ 2510 et seq extends Fourth Amendment protection to include email and other digital communications. Under the ECPA, the lawfulness of particular monitoring activities will depend heavily upon whether employees’ messages are intercepted during transmission or are retrieved from storage on the company’s server. Another provision of the ECPA prohibits disclosing “to any person or entity the contents of a communication while in electronic storage by [the company's] service.” In other words,  employers may under certain circumstances be permitted to discuss the contents of an employee’s communications with that employee, but the employer should seek legal advice before disclosing the contents of such communications to anyone else.

Under California privacy laws, specifically Cal. Penal Code §§630 et seq,  the Wiretap Statute provides that the employer must have the consent of both parties to the communication, not just the employee, to monitor real time communication via any media, or else be exposed to criminal and/or civil liability.  The California Eavesdropping Statute prohibits anyone who does not have the consent of all parties to a confidential communication from eavesdropping upon or recording that communication.  Employers also should be aware of electronic surveillance laws in other states in which they do business and with which employees are likely to have online contact.

Employer Protections

So, then, how does an employer protect himself and his business against inappropriate use of electronic communications by an employee?

The ECPA allows employers to intercept electronic communications if the employee consents in advance. To remove the expectation of privacy by employees, employers should establish a formal Internet Acceptable Use Policy (IAUP) that puts an employee on written notice that any electronic non-business-related activities are done at the employee’s own risk and can by monitored by the employer, and that password protection is not an indication of personal privacy. In consideration of the two California statutes, the safest approach is for employers to review the contents of employee communications, not in real time, but only after those communications have been stored on the employer’s server. Cell phone calls and text messaging a little trickier to monitor, because California is one of only a handful of states that requires permission of both sender and recipient of a communication to the eavesdropping or recording of that communication. 

One circumstance when the retrieval of an employee’s text messaging or cell phone records is legal is if it is motivated purely by a legitimate business need and if it is not excessive in scope.  For example, in City of Ontario v. Quon, 78 U.S. L. W. 4591, 201WL 2400087 (U.S. June 17, 2010) (No. 08-1332), it was decided that the employer was reasonable in procuring two months’ worth of text message records of the employee’s, because the employer only wanted to determine if the monthly limit on characters on the current plan was too low for sending work-related messages and if the limit should be increased to accommodate legitimate business requirements. 

An IAUP should be a written policy covering all modes of electronic communications, not just internet use. Each employee should sign a copy of the company IAUP in acknowledgement of receipt, and the signed copy should be kept in the employee’s file.  The policy should clearly establish a code of conduct and specify what is not allowed, e.g. access to pornographic or racist websites; revelation of company trade secrets; obscene, profane, or abusive language;  offensive or derogatory images on screen savers; and so forth.  The policy should also specify the consequences of violating the policies, such as whether warnings will be issued, or when immediate termination of employment can be expected.  Employers should review their IAUP every one or two years to make sure that any new technological advances in communications or changes in the law are addressed.

Another means of protecting the employer (as well as the employee) is to implement periodic training sessions to sensitize employees as to what is not only questionable but is in direct violation of the IAUP; and to emphasize the legal and other consequences of a violation of the IAUP both for the employee and for the company.

Electronic communication is here to stay.  Although it provides many advantages to businesses, certain uses of it by employees can also expose an employer to serious risk and liability. The best protection for the employer is to establish a written, comprehensive policy concerning employee use of email, the internet, texting and cell phones. The policy should be periodically updated and reinforced by training sessions.

If you need assistance in drafting an effective Internet Acceptable Use Policy, please contact your attorney.

What can you do to protect yourself from unlicensed contractors?  Ask to see a copy of the license held by your potential contractor.  Then, check the status of the license with the CSLB at http://www.cslb.ca.gov/Consumers/HireAContractor/ to make sure that all required insurance is in place and that the license is current.  Make sure that your contractor obtains all the necessary permits and inspections.  Have your attorney review the contract presented to you by the contractor before you sign or pay any money. There are many other tips in vetting your contractor provided on the CSLB website. 

What if you find that your contractor was not licensed and the work performed is not up to par?  Complaints against all contractors, licensed or unlicensed, can be filed on the CSLB website.  CSLB will determine if your complaint warrants further investigation, and they do not guarantee restitution.  If you are interested in restitution, you should consult with your attorney.  Business and Professions Code §7031 provides that, with certain exceptions, “a person who utilizes the services of an unlicensed contractor may bring an action… to recover all compensation paid to the unlicensed contractor for the performance of any act or contract.”  In other words, under the right circumstances, you may be entitled to a full refund of all payments made to an unlicensed contractor, not just an award to compensate for the portion of work not properly performed.

 There are several types of easements:

•  Express easements, created by grant deed or contract, i.e., agreed to by the parties and in writing
• Implied easements, arising from the inferred intent of the parties upon conveyance of title under cases of reasonable necessity
• Equitable easements, granted for long-time use and improvement of land, continuance of which would cause little harm to the property owner and cessation of which would cause irreparable harm to the user
• Prescriptive easements, based on continuous, open and observable use of the land for 5 years or more
• Easements by necessity, created to allow otherwise practically impossible use and enjoyment use of property that is landlocked as a result of severance of parcels

 “Landlocked” means that the property is completed surrounded by land belonging to others, making it inaccessible to public streets, roads or highways.  As a result, the property is unproductive and relatively useless.  Landlocked parcels are typically created when a single owner subdivides a parcel, and then conveys an “interior” sub-parcel to another party.  They are more common in rural areas when large tracts of land are subdivided and sold, or when  the property is parceled for bequeathing to multiple heirs (much less common in modern times.)

 Now, there is no statute in California that requires that all properties, landlocked or otherwise, to have access to public streets, roads or highways; so in California the courts decide on easements purely based on the facts of the case.  All easements, except for express easements, are determined in a court of law.  Easements by necessity are relatively easy to determine – either the parcel is landlocked or it isn’t (“strict necessity”.)  But implied easements, prescriptive easements and equitable easements are a little trickier.

 On the basis of equitable easement, the court must determine if the easement was necessary at the time the one parcel was partitioned into two.  Is it a case of strict necessity, of reasonable necessity, or convenience? The court will consider, among other things, the existence, expense, and relative convenience, of constructing and maintaining alternate routes for the petitioning landowner. 

 Equitable easements are decided on the doctrine of “balancing conveniences” or “relative hardship.”  Would the granting of an easement cause more hardship/inconvenience on the owner of the parcel with the easement, than the hardship/inconvenience that would be caused on the owner of the landlocked parcel if the easement were not granted? 

 The three basic tests on which “balancing conveniences” or “relative hardship” are set forth can be found in Christensen v. Tucker (1952) 114 Cal. App. 2d 554, a case where the plaintiff sued for an injunction against defendant from using the easement: 

(1) The defendant must have clean hands; that is, the encroachment must not being a result of defendant’s negligence or willful act, and the defendant must not be responsible for the situation;

(2) The plaintiff must not suffer irreparable injury by the encroachment (except in cases where the rights of the public will be adversely affected); and

(3) The defendant must prove that the injunction against the encroachment would create a hardship to the defendant far greater that the continuance of the encroachment would create to the plaintiff.  When the defendant is unable to clearly prove his case, the injunction should be granted.  id, at pp. 562-563.

Another more recent decision in the Second Appellate District in the State of California granted an equitable easement in the absence of clear grounds for an implied easement or easement by necessity.  In Linthicum v. Butterfield 95 Cal. Rptr. 3d 583 (Ca. App. 2009), both parcels in question changed hands numerous times over the last 118 years.  The original owners had express easements for an access road over Parcel 1 in the form of special use permits obtained from the United States Government (the original owner), but the later owners continued to use the access road under the impression that the express easements remained.  Butterfield, defendant and owner of the landlocked Parcel 2 (as well as owners of other adjacent land-locked parcels) used and maintained the access road for decades. Linthicum, plaintiff and owner of Parcel 1 over which the access road crossed, purchased his Parcel 1 only in 2000, and sued for an injunction against Butterfield from using the access road.

 The courts of appeals applied the tests set forth in Christensen v. Tucker  and upheld the decision of the trial court against the injunction and quieted title on the easement for the access road:  

First, the court found that the defendants were innocent in the encroachment.  Defendant landowners may have been negligent in their failure to obtain/renew special use permits for using the road,  but the court decided that because of the existence of prior special use permits and the many decades of use of the road, defendant was not negligent or wrongful in the continued use of the road without formal permits  Further, plaintiff purchased Parcel 1 with full knowledge of the existence and continued use of the access road, and it was only his suit for the injunction that actually created the dispute.   

Second, based on expert testimony and a site inspection, it was shown that plaintiffs had no less than nine suitable building sites on Parcel 2, none of which would be negatively impacted by the use of the present access road.  So, there would be little or no hardship or inconvenience to plaintiff if the access road remained in use.

Third, the court found that the construction of the only possible alternate access road for Lot 2, which would have required the removal of 40,000 cubic yards of earth and the construction of a massive 40-foot retaining wall, would create an onerous burden on defendants.  Additionally, there was serious doubt that the county would grant a permit for such a road.  Therefore, an injunction against the use of the access road by defendant would have created great hardship on the landlocked landowner. 

The moral of the story is, then, if you own (or are considering buying or selling) a property that either uses or is subject to the use by neighbors for any reason, you should confirm that the easement is an express easement documented either in the deed or the title report on the property.  Even if you have a written agreement signed by both parties, the agreement should be recorded on the title of the servient property.[1]  Without a signed, preferably recorded, agreement, then you are always at risk for a lawsuit for an injunction or for a quiet title action.  If you use an easement (or if your property is burdened by an easement) and you are not certain that is properly recorded with the county recorder, now is the time to consult with your attorney before an expensive lawsuit is filed against you.  

 Wrong.  The only thing for certain is change, and some changes in the ownership of a small business are inevitable and can be devastating to the company.  What happens when one of the shareholders, LLC members, or partners (“Owners”) goes bankrupt, or dies? What if a dispute arises between the Owners that can’t be resolved?  What if an Owner-Employee resigns his position or must be terminated for good cause? One way to address these contingencies, and many others, is to have a buy-sell agreement in place. 

 What is a Buy-Sell Agreement?

 Buy-sell agreements (“Agreement(s)”) provide for an orderly transfer of ownership interests in the event of withdrawal, disqualification, or death of an Owner.  The two main purposes of an Agreement are (1) protection of the company and the remaining Owners; and (2) facilitation of the objectives of the Owners and the Owners’ estate plans:  

 For the company, a primary purpose of an Agreement is to control when an Owner can transfer his or her shares, to whom the shares can be transferred, and at what price. Without restrictions on to whom an ownership interest can be transferred, a new shareholder could, either inherently or by his or her volition, disqualify a corporation from S status, resulting in negative tax consequences to the other shareholders.  Or, the remaining Owners may want to exclude as transferees any heirs or buyers whose interests conflict with those of the remaining Owners’. Besides control over ownership interests, the remaining Owners may want to protect and preserve the management structure of the company.

 For the Owners, an Agreement can aid in the optimization of income, gift and estate tax consequences arising from ownership transitions. An Agreement usually fixes the value of a deceased Owner’s interest for federal estate tax purposes.  It can provide a market for the transferring Owner’s interest and set the price for it. By doing so, the burden on heirs of negotiating a price is eliminated, and the liquidation of the ownership interest is facilitated if needed for raising cash to pay estate debts and administration expenses.

 Agreements typically permit some transfers without consent of the other Owners and without triggering the rights of first and second refusal, such as transfers to an Owner’s immediate family member or living trust.  A purchase price can be based on book value, calculated on a formula, or established by some other method (such as by professional appraisal.)  Permissable payment arrangements are provided, such as funding of the purchase price via proceeds from life insurance, buy-out in kind, or structured with installment payments.

 What events does a well-drafted Buy-Sell Agreement address?

 Typical circumstances that are covered by an Agreement are:

•  An Owner desires to sell his or her ownership interest
• Death or disability of an Owner
• Bankruptcy of an Owner
• Dissolution of marriage or domestic partnership of an Owner
• Attempt at dissolution of the company, either voluntary or involuntary
• Termination of an Owner’s employment with the company
• Loss of license or death of qualifying licensee in a professional corporation
• Criminal conviction, willful misconduct, or incompetence of an Owner
• Breach of the Agreement

 In the absence of an Agreement, disputes arising from any of the above situations can be long, emotional, and costly, and can ultimately end up in court; which can result in the financial ruin of a business and/or its Owners.

 What are the types of Buy-Sell Agreements?

•  Under a cross-purchase agreement, if one of the Owners withdraws from the business, the remaining Owner(s) will acquire the withdrawing Owner’s interest (from the Owner or the Owner’s estate) for a pre-determined purchase price.  The remaining Owner(s) pay the purchase price, the funds often being obtained from the proceeds of a life insurance policy on the lives of the Owners.
•  Under a redemption agreement, the company redeems (buys back) the Transferor’s interest upon the occurrence of a specified triggering event.  Redemption agreements can also be funded through life insurance proceeds. 
•  Hybrid agreements are an amalgamation of cross-purchase agreements and redemption agreements, and are useful in instances such as when a corporation may lack sufficient assets to exercise its right of first refusal.

 All multi-owner corporations, partnerships and limited liability companies will have to address a change in ownership sooner or later, and it is always best to be prepared for the transition. If you already have an Agreement and it is more than two or three years old; or if there have been changes in the company, your personal situation, or your estate plan that could require revisions to your Agreement; it may be time for your Agreement to be reviewed by an attorney.  If you do not have a Buy-Sell Agreement and believe you and your company may benefit from having one, you should contact your attorney to find out if one is appropriate for you.

 First, it is required by law.  California Corporations Code requires that shareholder meetings must be held annually and that director meetings be held on a regular basis.  Written consents in lieu of holding an actual meeting can satisfy this requirement, and meetings can be held by electronic means, e.g. by teleconference, under certain conditions.  At least minimum minutes should be prepared for each year setting forth the elected officers and directors of the corporation, approving the company’s financial statements, and ratifying the actions of the directors and officers of the corporation.

 Second, it is be required by the bylaws of your corporation.[1]  Proper bylaws should state the date and time of the annual meeting of shareholders.  Annual director meetings are typically scheduled to be held immediately following the annual shareholder meeting. Corporate bylaws sometimes require monthly or quarterly director meetings, and special director and/or shareholder meetings can be held at any time.

 Third, it’s just a good idea for everyone to touch bases once in awhile. Often, the officers of a small corporation take care of all of the business decisions and actions, and it’s always good to keep the line of communication open between the officers, the directors and the shareholders so there are no unwanted surprises at inopportune times. 

 Fourth, and perhaps most importantly, besides being required by law, it is important that annual meetings be held to maintain the corporation’s good standing, to preserve important tax benefits, and to the sustain limitation of shareholders’ personal liability. Annual meeting minutes will become especially important if you are audited or if you are sued. Failure to have annual meetings (or written consents in lieu of) is one factor that the IRS, the Franchise Tax Board, the State Board of Equalization, a creditor, or a suing party may use to pierce the corporate veil and expose you as a shareholder to financial liability.

 Finally, if you ever decide to sell your business, a potential buyer may view the failure to observe corporate formalities as an indicator of sloppy or inefficient management of the corporation.  That could either result a reduction of the purchase price, or even kill the deal altogether!

 If you are a little behind in holding your corporate meetings and/or preparing the minutes for them, don’t wait any longer to catch up.  Your attorney can help bring your records current with less cost and bother to you now than if you wait until you are under audit or involved in litigation.  Corporate minutes will be the last thing you want to think about at a time like that!