The Business Counselor Blog™

California Recognizes Two New Special Purpose Corporations

The corporation is the most widely used form of business organization in the United States. Several different types of corporations are recognized in most jurisdictions: general business or profit corporations; statutory close corporations, which offer the opportunity for shareholders of a small closely held enterprise to combine the flexibility of the partnership form with the advantages of the corporate form; non-profit corporations; cooperative corporations; and professional corporations. Also, many jurisdictions provide for the creation of special purpose corporations.  California is an example of the level of creativity in this area.  For many years that state has recognized consumer cooperative corporations, small business corporations and business and industrial corporations.   Recently, however, the choices have been expanded to include two additional corporate entities: flexible purpose corporations and benefit corporations.  The formation and operations of California flexible purpose corporations is governed by the California Corporate Flexibility Act of 2011 (“CFA”) [Ca. Corp. Code §§ 2500 et seq.], which provides that a flexible purpose corporation may be formed for special purposes, in addition to any other lawful purpose, including, but are not limited to, charitable and public purpose activities that could be carried out by a nonprofit public benefit corporation. [Ca. Corp. Code § 2602(b)(2)]  The CFA requires management and directors to specify objectives for measuring the impact of the flexible purpose corporation's efforts relating to its special purpose, and to include an analysis of those efforts in annual reports, together with specified financial statements, to shareholders and requires that specified information be made publicly available. [Corp. Code §§ 3500]  California benefit corporations are governed by Ca. Corp. Code §§ 14600 et seq. and may be formed for the purpose of creating general public benefit, defined as a material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard that satisfies certain requirements. [Ca. Corp. Code § 14601(c)]  A benefit corporation may also identify one or more specific public benefits as an additional purpose of the corporation including, without limitation, providing low-income or underserved individuals or communities with beneficial products or services, promoting economic opportunity for individuals or communities beyond the creation of jobs in the ordinary course of business, preserving the environment and improving human health. [Ca. Corp. Code § 14601(e)(1)-(7)] Directors of benefit corporations are required to consider the impacts of any action or proposed action upon specified considerations including, among others, the shareholders and employees of the corporation, customers of the corporation who are beneficiaries of the general or specific public benefit purposes and the environment. [Ca. Corp. Code § 14620(b)(1)-(7)]  In addition, directors of benefit corporations are allowed to consider the impacts of those actions on, among other things, the resources, intent, and conduct of any person seeking to acquire control of the benefit corporation. [Ca. Corp. Code § 14620(c)]  Benefit corporations must prepare an annual benefit report which includes, among other things, a statement indicating whether, in the board's opinion, the benefit corporation failed to pursue its general public benefit and any specific public benefit, a description of the ways in which the benefit corporation pursued those benefits, the extent to which those benefits were created and the process and rationale for selecting the third-party standard used to prepare the benefit reports. [Ca. Corp. Code § 14630]  A handful of other states have adopted similar legislation covering benefit corporations, sometimes referred to as “B corporations”, and there viability will depend in large part on the development of case law regarding the permissible purposes of such corporations and the flexibility afforded to directors in discharging their fiduciary duties.

New Supply Chain Management Disclosure Requirements

This issue of Business Counselor Update includes new forms and commentary that will be incorporated into the Westlaw database Business Transactions Solutions (BTS) in December.  Access to further information requires a Westlaw subscription, which can be obtained by using the contact and ordering information included in the materials.  This issue highlights new supply chain management disclosure requirements adopted in California and include information on launching relationships with new vendors.  Protection of personal information is addressed by a social security number policy and counsel representing employers can take advantage of a template for disclosure of certain basic employment-related information to new employees.  Finally, the issue provides advice on creating a library of the forms needed to quickly and efficiently assist clients in forming and organizing a new corporation.

California's Trademark Registration Law

Doing business in California?  Don't forget opportunities to protect your valuable brand through registration of trademarks under California's own trademark law.

California Affirms Narrow Enforceability of Noncompetition Agreements

The California Supreme Court has affirmed that noncompetition agreements, even if written narrowly enough not to deprive persons of their right to pursue their profession, are invalid under California law unless they fall within one of the few statutory exceptions.  See Edwards v. Arthur Andersen LLP, 189 P.3d 285 (Cal. 2008).

Raymond Edwards II (“Edward”) was a CPA of Arthur Andersen LLP (“Andersen”). When he was hired by Andersen, he signed a noncompetition agreement which prohibited him from working far or soliciting certain Andersen clients for limited periods following his termination. In June 2002, Andersen went out of business and announced that HSBC USA, Inc. (“HSBC”) would acquire a part of Andersen’s business, including Edwards’ section. HSBC offered Edwards employment on condition that he sign a “Termination of Non-compete Agreement” (“TONC”). The TONC required Edwards to, among others, (1) voluntarily resign from Andersen, and (2) release Andersen from “any and all” claims, including claims that in any way arise from or out of, are based upon or relate to Edwards’ employment by, association with or compensation from Andersen. In exchange, Andersen would agree to accept Edwards’s resignation, agree to Edwards’ employment by HSBC, and release Edwards from the noncompetition agreement.

Edwards signed the HSBC offer letter, but refused to sign the TONC because he was afraid that he would lose his right to request Andersen to indemnify his cost that may arise from the government investigation and civil lawsuits against him in connection with Andersen’s involvement in the Enron scandal. Andersen terminated Edwards’ employment and withheld severance benefits. HSBC withdrew its job offer to Edwards.

Edwards sued Andersen and HSBC for intentional interference with prospective economic advantage under the California statute. Edwards alleged that the noncompetition agreement violated California Business and Professions Code § 16600’s prohibition on restraining a lawful profession, trade, or business, and it constitutes one of the elements of the cause of action, i.e., a wrongful and intentional act by the defendant, designed to disrupt the relationship. In addition, Edwards alleged that the TONC was designed to have Edwards waive his indemnity right protected by California Labor Code Section 2804 making all contracts that waive an employee’s right to indemnification invalid, and thus unlawful. The California Court of Appeals agreed with Edwards’ view regarding the both allegations.

The Supreme Court of California agreed with Edwards’ first allegation only. Business and Professions Code § 16600 prohibits noncompetition agreements except for those in the sale or dissolution of corporations, partnerships, and limited liability corporations. The noncompetition agreement in this case did not fall within this exception. Andersen argued that the Ninth Circuit once ruled that another exception is available when a noncompetition agreement is drafted narrowly enough not to deprive the employee’s right to pursue his or her profession, and this case would be covered under this exception. However, the Court held that the Ninth Circuit misunderstood California law and California's strong policy in favor of open competition and employee mobility, and thus did not constitute a precedence. For Edwards’ second allegation, the Court interpreted the TONC narrowly so that it would not violate Section 2804. Under the Court’s interpretation, the waiver required TONC would not encompass Edwards’ right to request indemnity against Andersen, and thus not unlawful.

As a conclusion, the Court held that Andersen’s noncompetition agreement was unlawful and invalid, but the TONC was not unlawful and thus would not support Edwards’ tort claim.

This material will appear in Alan Gutterman’s publication entitled “California Business Transactions” and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.  Alan Gutterman is the Founder/Principal of Gutterman Law & Business (www.alangutterman.com), which publishes the Emerging Companies Blog and the Business Counselor Blog, and a Partner of The General Counsel LLC (www.thegeneralcounsel.net).

 

Registered Limited Liability Partnerships

Professional firms practicing in specified areas, such as law and accounting, may be able to take advantage of state laws that allow general partnerships reclassify themselves as registered limited liability partnerships (RLLPs) and thus afford partners of the RLLP with statutory protection from liability for debts and obligations resulting from errors, omissions, incompetence, negligence or malfeasance committed by other partners or partnership agents who are not under the supervision of the protected partner at the time of the act.  Protection would not be available to partners who have directly participated in the claimed act or who have knowledge of the act during its occurrence but fail to take appropriate actions.

The partnership agreement for an RLLP is similar in form and content to the agreement used whenever a service-related partnership is formed; however, there are certain provisions that should be included in order to ensure that RLLP status is achieved and maintained:

• The agreement should state the intent of the partners to comply with the applicable state requirements for RLLP status including registration with the Secretary of State and any state agencies that prescribe rules and regulation for practice of the profession to be engaged in by the partnership. 
• The statement of purpose of the partnership should be consistent with the conditions for eligibility for RLLP status provided by statute. 
• The term of the partnership should be co-extensive with compliance with the registration requirements (i.e., the term should not begin until the registration as an RLLP has become effective and all other requirements for limited liability have been satisfied). 
• The name of the partnership should identify the fact that it is operating as an RLLP (e.g., name of partnership, LLP). 
• The partners must comply with any security requirements imposed by statute including maintenance of specified amounts of professional liability insurance and/or posting of a bond with the state (see, e.g., California Corporations Code § 16956(a)(1)).

Other issues that should be addressed in a comprehensive form of partnership agreement include capital contributions and capital accounts; rights, powers and liabilities of the partners, including participating in day-to-day management and voting requirements for extraordinary partnership decisions; restrictions on competition; allocation of income, gain, losses and distributions; books and records, accounting procedures and reporting requirements; meetings; interested party transactions; transfers of interests; dissociation of partners (i.e., retirement, withdrawal, death, disability or bankruptcy of partners); admission of new partners; dissolution and liquidation; failure of partners to make required contributions or otherwise comply with the terms of the agreement; and dispute resolution.  In addition, since each partner will also be an employee of the partnership and perform professional services on behalf of the partnership the agreement should outline the general terms of this employment relationship: salary or draw; vacation; facilities and support; benefits; professional licensure requirements; automobile and travel expenses.  Finally, to the extent permitted by applicable state law, the partnership agreement should include limitations on competitive activities by partners during his or her time with as a partner and for a specified period after dissociation to ensure that he or she does not misappropriate proprietary and confidential information regarding the partnership’s client base and use such information to engage in unfair competition with the partnership.

The content in this post has been adapted from material that will appear in California Transactions Forms: Business Entities (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

Attorney-Client Privilege for Transactional Lawyers III

I’ve been discussing some of the challenging ethical issues that can arise with respect to protection of confidential communications between a transactional lawyer and his or her client.  Another issue that often arises when the attorney-client privilege is asserted with respect to sensitive information that has been shared with the other party to a prospective business transaction is whether or not the disclosure to the other party destroys the disclosing party’s right to later assert the privilege with respect to such information in a litigation setting.  The potential dilemma for the disclosing party is deciding whether to disclose the information, and possibly lose the privilege, in order to pursue the potential business transaction or refusing the disclose the information to preserve the privilege and risking that the other party to the transaction will refuse to proceed since it cannot access valuable information that it deems necessary to make a decision about the proposed transaction.

Once again, the laws of each state should be reviewed to determine which rules will apply in this situation.  The general rule under California law is that disclosure of a confidential communication by the client or the client’s attorney to a third party waives the attorney-client privilege with respect to the communication.  However, California Evidence Code § 912(d) does allow disclosure of privileged communications without waiving the privilege if the disclosure is made in confidence and is "reasonably necessary" to accomplish the purpose for which the lawyer was consulted and California Evidence Code § 952 clearly allows disclosure of confidential communications to third parties "who are present to further the interest of the client" or those "to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted." 

Much of the uncertainty in this area for California lawyers was resolved in STI Outdoor v. Superior Court [91 Cal.App. 4th 334 (2001)] where the court of appeal made it clear that the attorney-client privilege associated with confidential communications was not automatically waived by disclosure of the communications during business negotiations and that the privilege would be available provided that the disclosing party could demonstrate that the communications were otherwise eligible for the privilege, there was a reasonable expectation that the communications would be maintained in confidence, and it was reasonably necessary to disclose the communications in order to accomplish the purpose for which the lawyer was consulted.  From this we can derive the following additional guidelines:

• Before disclosing confidential communications to other parties make absolutely sure that the recipients have signing a confidentiality, nondisclosure, or joint defense agreement that includes specific and comprehensive restrictions on disclosure and use of the information in the communications.
• Whenever possible, disclosure should be limited to those with a real “need-to-know” and a record of how the information was used by the receiving party should be created and maintained.
• Information disclosed to other parties involved in a proposed transaction should be strictly limited to that which is reasonably necessary for the attorney to accomplish the purpose for which he or she was retained. 
• All such information should be prominently marked with legends that make it clear that the disclosing party intends to assert that it is confidential, attorney-client privileged, or joint-defense privileged.
• A privilege log should be created for the communications for which protection will be asserted and declarations should also be prepared to demonstrate that the disclosures were reasonably necessary in order to accomplish the purpose for which counsel was consulted.

The content in this post has been adapted from material that will appear in Business Counsel Update (Summer 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

New California Sexual Harassment Prevention Training Regulations Take Effect

After substantial debate, and a number of changes, the California Fair Employment and Housing Commission issued final regulations, which took effect as of August 17, 2007, relating to California’s mandatory sexual harassment prevention training law (i.e., Ca Gov C § 12950.1 et seq) that has been in place since December 2005.  The regulations can be found at Title 2 California Code of Regulations § 7288.0 (the “Regulations”).  Employers subject to the Regulations who made a substantial, good faith effort to comply with the statutory training requirements by completing training of its supervisors prior to the effective date of the Regulations will be deemed to be in compliance as though it had been done under the Regulations. [Title 2 CCR § 7288.0(e)]  The Regulations also include remedies for the failure of an employer to comply with the Regulations.  [Title 2 CCR § 7288.0(d)]

The Regulations apply to “employers,” which include any person engaged in any business or enterprise in California, who employs 50 or more employees to perform services for a wage or salary or contractors or any person acting as an agent of an employer, directly or indirectly; or the state of California, counties, and any other political or civil subdivision of the state and cities, regardless of the number of employees. [Title 2 CCR § 7288.0(a)(4]  The term “employee” includes full time, part time, and temporary workers. [Title 2 CCR § 7288.0(a)(3]  When used in the Regulations, the phrase “having 50 or more employees” means employing or engaging fifty or more employees or contractors for each working day in any twenty consecutive weeks in the current calendar year or preceding calendar year. There is no requirement that the 50 employees or contractors work at the same location or all work or reside in California. [Title 2 CCR § 7288.0(a)(5]

Under the Regulations, employers meeting the definition above are required to provide two hours of training, once every two years, to their California-based “supervisory employees” or “supervisors,” as those terms are defined in Cal Gov C § 12926 (r) [Title 2 CCR § 7288.0(a)(8], to achieve the learning objectives of the training mandated by Cal Gov C § 12950.1, which are to assist California employers in changing or modifying workplace behaviors that create or contribute to “sexual harassment” as that term is defined in California and federal law; and to develop, foster and encourage a set of values in supervisory employees who complete mandated training that will assist them in preventing and effectively responding to incidents of sexual harassment. [Title 2 CCR §§ 7288.0(b)(1) and (c)]. Towards that end, the mandated training must include but is not limited to [Title 2 CCR § 7288.0(c)(1-11)]:

1. A definition of unlawful sexual harassment under the Fair Employment and Housing Act and Title VII of the federal Civil Rights Act of 1964. In addition to a definition of sexual harassment, an employer may provide a definition of and train about other forms of harassment covered by the FEHA, as specified at Cal Gov C § 12940(j), and discuss how harassment of an employee can cover more than one basis.
2. FEHA and Title VII statutory provisions and case law principles concerning the prohibition against and the prevention of unlawful sexual harassment, discrimination and retaliation in employment.
3. The types of conduct that constitutes sexual harassment.
4. Remedies available for sexual harassment.
5. Strategies to prevent sexual harassment in the workplace.
6. “Practical examples,” such as factual scenarios taken from case law, news and media accounts, hypotheticals based on workplace situations and other sources which illustrate sexual harassment, discrimination and retaliation using training modalities such as role plays, case studies and group discussions.
7. The limited confidentiality of the complaint process.
8. Resources for victims of unlawful sexual harassment, such as to whom they should report any alleged sexual harassment.
9. The employer’s obligation to conduct an effective workplace investigation of a harassment complaint.
10. Training on what to do if the supervisor is personally accused of harassment.
11. The essential elements of an anti-harassment policy and how to utilize it if a harassment complaint is filed. Either the employer’s policy or a sample policy shall be provided to the supervisors. Regardless of whether the employer’s policy is used as part of the training, the employer shall give each supervisor a copy of its anti-harassment policy and require each supervisor to read and to acknowledge receipt of that policy.

The term “training” is defined as effective interactive training, which can be accomplished through any of the following means [Title 2 CCR §§ 7288.0(a)(2) and (10)]:

• “Classroom” training, defined as in-person, trainer-instruction, whose content is created by a trainer and provided to a supervisor by a trainer, in a setting removed from the supervisor’s daily duties. [Title 2 CCR § 7288.0(a)(2)(A)]
• “E-learning” training, defined as individualized, interactive, computer-based training created by a trainer and an instructional designer, which is defined as individual with expertise in current instructional best practices, and who develops the training content based upon material provided by a trainer [Title 2 CCR § 7288.0(a)(6].  An e-learning training shall provide a link or directions on how to contact a trainer who shall be available to answer questions and to provide guidance and assistance about the training within a reasonable period of time after the supervisor asks the question, but no more than two business days after the question is asked. [Title 2 CCR § 7288.0(a)(2)(B)]
• “Webinar” training, defined as an internet-based seminar whose content is created and taught by a trainer and transmitted over the internet or intranet in real time. An employer utilizing a webinar for its supervisors must document and demonstrate that each supervisor who was not physically present in the same room as the trainer nonetheless attended the entire training and actively participated with the training’s interactive content, discussion questions, hypothetical scenarios, quizzes or tests, and activities. The webinar must provide the supervisors an opportunity to ask questions, to have them answered and otherwise to seek guidance and assistance. [Title 2 CCR § 7288.0(a)(2)(C)]
• Other “effective interactive training” and education, defined as including the use of audio, video or computer technology in conjunction with classroom, webinar and/or e-learning training. [Title 2 CCR § 7288.0(a)(2)(D)]

For any of the above training methods, the instruction must include questions that assess learning, skill-building activities that assess the supervisor’s application and understanding of content learned, and numerous hypothetical scenarios about harassment, each with one or more discussion questions so that supervisors remain engaged in the training. [Title 2 CCR § 7288.0(a)(2)(E]

“Two hours” of training is two hours of classroom training or two hours of webinar training or, in the case of an e-learning training, a program that takes the supervisor no less than two hours to complete. [Title 2 CCR § 7288.0(a)(11)]  The training required by the Regulations does not need to be completed in two consecutive hours. For classroom training or webinars, the minimum duration of a training segment shall be no less than half an hour. E-learning courses may include bookmarking features which allow a supervisor to pause their individual training so long as the actual e-learning program is two hours. [Title 2 CCR § 7288.0(b)(6]

The Regulations specify qualifications for the trainers who provide the required training to supervisors.  Specifically, “trainers” or “trainers or educators” qualified to provide the mandatory training are individuals who, through a combination of training and experience have the ability to train supervisors about the following: 1) what are unlawful harassment, discrimination and retaliation under both California and federal law; 2) what steps to take when harassing behavior occurs in the workplace; 3) how to report harassment complaints; 4) how to respond to a harassment complaint; 5) the employer’s obligation to conduct a workplace investigation of a harassment complaint; 6) what constitutes retaliation and how to prevent it; 7) essential components of an anti-harassment policy; and 8) the effect of harassment on harassed employees, co-workers, harassers and employers. [Title 2 CCR § 7288.0(a)(9)] 

A trainer must be one or more of the following: (1) “attorneys” admitted for two or more years to the bar of any state in the United States and whose practice includes employment law under the Fair Employment and Housing Act and/or Title VII of the federal Civil Rights Act of 1964, or (2) “human resource professionals” or “harassment prevention consultants” working as employees or independent contractors with a minimum of two or more years of practical experience in one or more of the following: (a) designing or conducting discrimination, retaliation and sexual harassment prevention training; (b) responding to sexual harassment complaints or other discrimination complaints; (c) conducting investigations of sexual harassment complaints; or (d) advising employers or employees regarding discrimination, retaliation and sexual harassment prevention, or (3) “professors or instructors” in law schools, colleges or universities who have a post-graduate degree or California teaching credential and either 20 instruction hours or two or more years of experience in a law school, college or university teaching about employment law under the Fair Employment and Housing Act and/or Title VII of the federal Civil Rights Act of 1964. [Title 2 CCR § 7288.0(a)(9)(A)]

Individuals who do not meet the qualifications of a trainer as an attorney, human resource professional, harassment prevention consultant, professor or instructor because they lack the requisite years of experience may team teach with a trainer in classroom or webinar trainings provided that the trainer supervises these individuals and the trainer is available throughout the training to answer questions from training attendees. [Title 2 CCR § 7288.0(a)(9)(B)]

When providing the mandatory training, employers may use either of the following methods or a combination of the two methods to track compliance:

• An employer may track its training requirement for each supervisory employee, measured two years from the date of completion of the last training of the individual supervisor. [Title 2 CCR § 7288.0(b)(1)(A)]
• An employer may designate a “training year” in which it trains some or all of its supervisory employees and thereafter must again retrain these supervisors by the end of the next “training year,” two years later. Thus, supervisors trained in training year 2005 shall be retrained in 2007. For newly hired or promoted supervisors who receive training within six months of assuming their supervisory positions and that training falls in a different training year, the employer may include them in the next group training year, even if that occurs sooner than two years. An employer shall not extend the training year for the new supervisors beyond the initial two year training year. Thus, with this method, assume that an employer trained all of its supervisors in 2005 and sets 2007 as the next training year. If a new supervisor is trained in 2006 and the employer wants to include the new supervisor in its training year, the new supervisor would need to be trained in 2007 with the employer’s other supervisors. [Title 2 CCR § 7288.0(b)(1)(B)]

Employers are required to keep documentation of the training it has provided its employees under this section to track compliance, including the name of the supervisory employee trained, the date of training, the type of training, and the name of the training provider and shall retain the records for a minimum of two years. [Title 2 CCR § 7288.0(b)(2]

Businesses created after January 1, 2006, must provide training to supervisors within six months of their establishment and thereafter biennially. Businesses that expand to 50 employees and/or contractors and thus become subject to the Regulations, must provide training to supervisors within six months of their eligibility and thereafter biennially. [Title 2 CCR § 7288.0(b)(3)]

New supervisors (i.e., employees promoted or hired to a supervisory position after July 1, 2005) must be trained within six months of assuming their supervisory position and thereafter shall be trained once every two years, measured from one of the tracking methods described above. [Title 2 CCR §§ 7288.0(b)(4) and (7)]

A supervisor who has received training in compliance with the requirements of the Regulations within the prior two years either from a current, a prior, an alternate or a joint employer need only be given, be required to read and to acknowledge receipt of, the employer’s anti-harassment policy within six months of assuming the supervisor’s new supervisory position or within six months of the employer’s eligibility. That supervisor shall otherwise be put on a two year tracking schedule based on the supervisor’s last training. The burden of establishing that the prior training was legally compliant with the Regulations falls on the current employer. [Title 2 CCR § 7288.0(b)(5]