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California Corporate and Securities Law

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californiacorporate&securities 3/19/2018
Court Of Appeal Upholds Dismissal Of Purely Foreign Dispute

Seven years ago, I wrote about California's "million dollar contract" statute - CCP § 410.40.  That statute permits any person to maintain an action against a foreign corporation or nonresident person when the action arises out of, or relates to, any contract "for which a choice of California law has been made in whole or in part by the parties thereto" and the contract involves an aggregate value of at least $1 million.  By expressly permitting a party to maintain these actions, did the legislature intend that California courts must hear them?

californiacorporate&securities 3/16/2018
Control Persons And Underwriter Status

Yesterday's post concerned someone who allegedly bragged about being in control of an issuer, but not taking a formal position with the issuer so as to avoid the volume limitations under Rule 144.  Despite this alleged admission, the SEC was not able to win partial summary judgment because Rule 144 is a non-exclusive safe harbor.  SEC v. Hemp, Inc., 2018 U.S. Dist. LEXIS 38396.

californiacorporate&securities 3/15/2018
Court Reminds SEC That Rule 144 Is A Non-Exclusive Safe Harbor

Just over five years ago, Barry Epling went to breakfast with two of his business colleagues.  At the breakfast, he discussed his relationship with Hemp, Inc., explaining that he and his long-time friend and business advisor, Bruce Perlowing, "run Hemp, Inc."  Despite this protestation of control, Mr. Epling said that he avoided any official title because, among other reasons, "if you're an officer or director or if you're a controller in the company, you're what is called an affiliate. And if you're an affiliate, you can sell one—an amount of stock equal to 1% of the issued shares of that classic [sic, probably "class of"] stock every 90 days."  Unfortunately for Mr. Epling, his prandial remarks were being recorded.

The Securities and Exchange Commission ended up charging Mr. Epling and others with violating the registration requirements of Section 5 of the Securities Act.  The SEC's argument was straightforward: Mr. Epling admitted that he controlled Hemp, Inc. and that made him an affiliate subject to Rule 144's volume limitations.  Relying on this analysis, the SEC sought partial summary judgment.

U.S. District Court Judge Jennifer A. Dorsey, however, didn't see the SEC's case as "open and shut", noting that 

"[F]alling outside the Rule 144 safe harbor does not automatically make someone an underwriter.  An individual who fails to satisfy Rule 144 may still not be an underwriter after a fact-intensive analysis—an analysis that is inappropriate at the summary-judgment stage.  Plus, Epling vigorously denies the veracity of the statements that he made to his ex-business partners.

SEC v. Hemp, Inc., 2018 U.S. Dist. LEXIS 38396.  The SEC, of course, knows this already because Rule 144 itself states: 

"Rule 144 is not an exclusive safe harbor.  A person who does not meet all of the applicable conditions of Rule 144 still may claim any other available exemption under the Act for the sale of the securities."

The SEC didn't achieve an early victory, but it may still ultimately prevail.  If the SEC succeeds in getting the taped conversation introduced, a jury may decide that Mr. Epling was telling the truth at breakfast and that his later sworn testimony abjuring his earlier statements is false.

californiacorporate&securities 3/14/2018
Court Of Appeal Finds Mortgage Servicer To Be A Debt Collector

Rosenthal Fair Debt collection Practices Act defines a "debt collector" as "any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engaged in debt collection".  Cal. Civ. Code § 1788.2(c).  "Debt collection" under the Rosenthal act means "any act or practice in connection with the collection of consumer debt".  Cal. Civ. Code § 1788.2(b) ("consumer debt" is defined in § 1788.2(f)).  The Rosenthal Act doesn't say whether it applies to persons attempting to collect mortgage debt and the federal courts have split on the question.  

californiacorporate&securities 3/13/2018
California Court Finds Russian Court's Service Comported With Due Process

California adopted the 1962 Uniform Foreign Money-Judgments Recognition Act in 1967.  The Act was intended to encourage the reciprocal recognition of United States judgments abroad by codifying rules as to foreign money judgments.  In 2005, the Uniform Law Commission updated the 1962 Act and renamed it the Uniform Foreign Country Money Judgments Recognition Act.  In California, the act is codified in its present form at Sections 1713 to 1725 of the Code of Civil Procedure.

californiacorporate&securities 3/12/2018
The Brochure Rule And Fund Advisers - This Surely Is Stupid Stuff!

Seven years ago, the Securities and Exchange Commission amended Part 2 of Form ADV to require investment advisers to provide new and prospective clients with a brochure and brochure supplements written in plain English.  The SEC's stated purpose was "to provide new and prospective advisory clients with clearly written, meaningful, current disclosure of the business practices, conflicts of interest and background of the investment adviser and its advisory personnel".  While a brochure delivery requirement might make sense in some situations, it becomes foolish when applied to investment fund advisers.

californiacorporate&securities 3/9/2018
Bill Aims At Prohibiting Public Pension Fund Investments In Alternative Investment Vehicles Lacking Race And Gender Pay Equity Policies

Last year, Assembly Member Lorena Gonzalez Fletcher authored a bill, AB 1209, that would have required employers with 500 or more employees in California to provide to the Secretary of State specific information regarding gender wage differentials for exempt employees and board members.  After Governor Jerry Brown vetoed the bill, Assembly Member Gonzalez Fletcher stated "We are far from done and we will be bringing legislation next year to further address the gender pay gap."  She followed up in February by introducing AB 2571.

californiacorporate&securities 3/8/2018
California Lawsuit Against President Trump Raises Issue Of Consent

Earlier this week, Stepanie Clifford, aka Stormy Daniels, filed a lawsuit against President Donald Trump in the Superior Court for the County of Los Angeles.  Clifford v. Trump, L.A. Super. Ct. Case No. BC 696568 (filed Mar. 6, 2018).  The complaint asks the court to declare that the two agreements attached as exhibits "do not exist" because Mr. Trump never signed the agreements nor did he provide "any other valid consideration".  The agreements at issue are a confidential settlement agreement and a side letter.

californiacorporate&securities 3/7/2018
If There Are No Minds, Can There Be A "Meeting Of The Minds"?

Old school lawyers are familiar with the notion that "the failure to reach a meeting of the minds on all material points prevents the formation of a contract even though the parties have orally agreed upon some of the terms, or have taken some action related to the contract." Banner Entertainment, Inc. v. Superior Court  (Alchemy Filmworks, Inc.)  62 Cal. App. 4th 348, 359 (1998).  Even as technology advanced, the idea that a contract required an agreement remained.  Thus, California's Uniform Electronic Transactions Act (aka UETA) defines a contract as "the total legal obligation resulting from the parties’ agreement as affected by this title and other applicable law."  Cal. Civ. Code § 1633.2(d).

californiacorporate&securities 3/6/2018
Author Wagers Prize Linked Savings Accounts Are Not Lotteries
Recently, I wrote about  Senator Josh Newman's attempt to legalize prize linked savings accounts in California.  Senator Newman's bill,  SB 1055 , would allow a bank or credit union to offer prizes if, among other things depositors are not required to pay any fee or otherwise provide any consideration in order to enter the savings promotion.  The bill could be subject to challenge because  Article IV, Section 19(a) of the California Constitution states:

"The Legislature has no power to authorize lotteries, and shall prohibit the sale of lottery tickets in the State."

SB 1055 tries to avoid this problem by declaring that a prize linked savings account shall not be considered a lottery.  

Recently, I heard from a representative of Commonwealth, a Boston based organization that claims to have worked with over 30 states to help authorize prize linked savings accounts.  He pointed out that other states had authorized such accounts notwithstanding contstitutional provisions.  For example, Delaware, which has a similar constitutional bar, recently enacted HB 31 which declares:

"A savings promotion raffle that conforms with the requirement of Section 933 of Title 5 is not gambling and does not constitute a lottery unless the chance to win a prize requires consideration.  The deposit of a specified minimum amount of money in a savings account or other savings program that results in an entry in a savings promotion raffle is not consideration."

11 Del. Code § 1408A.  The fact that Delaware and other states have enacted similar legislation is, of course, no guaranty that SB 1055 will pass constitutional muster here.  

If there is a constitutional question, is there likely to be a questioner?  Commonwealth also alerted me to an unpublished ruling in Kentucky.  In that case, Kentucky Bank and the Kentucky Bankers Association successfully sued the state's Department of Financial Institutions for a declaration that prize linked savings accounts do not violate state statutes prohibiting gambling.  Bank of Kentucky v. Commonwealth of Kentucky, Franklin Circuit Ct. Case No. 15-CI-722 (Feb. 2, 2018). 

californiacorporate&securities 3/5/2018
Court Presumes LLC Statute Applies Retroactively But Declines To Apply Statute Retroactively

Marlene Dietrich reportedly said "When you're dead, you're dead, that's it."  At one time, that was true of limited liability companies formed under California's Revised Uniform Limited Liability Company Act. 

californiacorporate&securities 3/2/2018
Bill Seeks To Provide Remedy For Unlawful Use Of Personal Identifying Information In Business Filings

Identity theft, including business identity theft, is all too common.  In its most straightforward form, the thief simply appropriates the identity of an individual or business and uses that identity to obtain goods, services, credit or personal information.  Sometimes the misappropriation is indirect.  Sometimes, for example, personal information will be included in a business filing with the Secretary of State's office.  When this happens, your personal identifying information and its misuse become part of an official public record.  

californiacorporate&securities 3/1/2018
How Could So Many Get This Supreme Court Case Wrong?

Try searching for "Supreme Court narrows" and you will find numerous law firm memos and and articles with the following headline (or something very close to it): 

californiacorporate&securities 2/28/2018
Court Finds Trader Joe's To Be A Stranger

To paraphrase Rudyard Kipling, tort is tort and contract is contract, and never the twain shall meet.  Ballad of East and West ("Oh, East is East, and West is West, and never the twain shall meet, Till Earth and Sky stand presently at God’s great Judgment Seat . . . .").  Alas, there is always a linger danger of the "tortification" of contract law.  Often, this arises when someone sues for intentional interference with contractual relations.  

californiacorporate&securities 2/27/2018
California Bill Seeks To Impose Disclosure Requirements On Commercial Lenders

I have often remarked that the California Financing Law (fka Finance Lenders Law) imposes virtually no substantive lending requirements.  That will change if Steve Glazer succeeds in enacting SB 1235.  This bill would require any person engaged in the business of commercial financing to provide to a prospective borrower a written statement showing in clear and distinct terms all of the following:

californiacorporate&securities 2/26/2018
Does The SEC Have A Duty To Correct Its Cybersecurity Statement?

Law firms and legal commentators have been churning out discussions of the Securities and Exchange Commission's Statement and Guidance on Public Company Cybersecurity Disclosures.  Rather than simply regurgitate the statement, I will take issue with the SEC's reminder that issuers owe a duty to update:

californiacorporate&securities 2/23/2018
Did The SEC Violate The APA In Publishing Its Statement And Guidance on Cybersecurity Disclosures?

The federal Administrative Procedure Act is both straightforward and general.  It defines a "rule" as "the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing."  5 U.S.C. § 551(4).  When an agency engages in "rule making" (i.e., formulating, amending or repealing a "rule"), the APA generally requires that the agency provide the public with notice and an opportunity to comment.  5 U.S.C. § 553.

californiacorporate&securities 2/22/2018
Delaware Corporation Headquartered In Utah Agrees To Buy Assets Of Another Delaware Corporation For Cash, So Why Does California Law Govern Shareholder Approval?, Inc. is an on-line retailer with its principal executive offices located in Midvale, Utah.  Earlier this month, announced that it had agreed to buy the assets of Houserie, Inc.  Both companies are incorporated in Delaware and the asset purchase agreement provides that the closing will occur in Utah.  The asset purchase agreement provides that it "shall be governed by and construed in accordance with the internal laws of the State of Utah without giving effect to any choice or conflict of law provision or rule, except to the extent that the Laws of the State of Delaware or California are mandatorily applicable".  How is it possible for California law to govern?

californiacorporate&securities 2/21/2018
Supreme Court Holds Whistleblower Must First Blow The Whistle To The SEC

In 2010, the United States Congress included both whistleblower incentives and protections in the Dodd-Frank Act.  If you are going to reward or protect "whistleblowers", it is helpful to know who they are.  Congress helpfully included the following definition:

californiacorporate&securities 2/20/2018
Court Rules California Unincorporated Association Is A South Dakota Citizen

Diversity jurisdiction in the U.S. District courts requires complete diversity of citizenship between the parties.  28 U.S.C. § 1332.  A corporation can be a citizen of its state of incorporation, as well as the state where it has its principal place of business. 28 U.S.C. § 1332(c). 

californiacorporate&securities 2/16/2018
Legislator Seeks To Require Inspection Of Records In California

Corporations Code Section 1601 requires that records "be open to inspection . . . at any reasonable time during usual business hours . . .".  The statute is silent on where the inspection must occur. In Innes v. Diablo Controls, Inc., 248 Cal. App. 4th 139 (2016), the Court of Appeal held that Section 1601 requires that the records be made available for inspection at the office where those records are kept.  The Court of Appeal cautioned, however, that "maintaining the records in a remote location to intentionally impede inspection would be contrary to the purpose of section 1601".  See  Court Holds Inspection Statute Does Not Require That Records Be Brought To California.  

californiacorporate&securities 2/15/2018
Is A Prize-Linked Savings Account A Lottery?

In 2014, the United States Congress enacted the American Savings Promotion Act, P.L. 113–251 (DEC. 18, 2014) permitting financial institutions to offer savings accounts, with the added feature of offering chances to win prizes.  According to this blog post by John P. Feldman and Kimberly Chow, some 26 states now allow for prize-linked savings accounts.

californiacorporate&securities 2/14/2018
California CPAs Report Few Restatements But Many Are Not Reportable 

California's Accountancy Act requires licensees to report to the California Board of Accountancy, among other things, "Any restatement of a financial statement and related disclosures by a client audited by the licensee".  Cal. Bus. & Prof. Code § 5063(b)(1).  This report must be made within 30 days of the date on which the licensee "has knowledge" of the event. 

californiacorporate&securities 2/13/2018
Just Who Are A Corporation's "Regular Officers"?

California declares it unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within California without first obtaining a real estate license.  Cal. Bus. & Prof. Code § 10130.  The definition of "real estate broker" is extremely broad.  Thus, a "real estate broker" is any person who for compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of a number of enumerated acts "for another or others".  Cal. Bus. & Prof. Code § 10131.  Today's post focuses on corporations and when an act is done "for another or others".

californiacorporate&securities 2/12/2018
Directors Fail To Escape Liability For Approving Dividend

I last wrote about FDIC v. Ching, 2014 U.S. Dist. LEXIS 92687 (E.D. Cal. July 8, 2014) in July of 2014.  That post concerned Judge Kimberly J. Mueller's ruling that California's statutory restrictions on distributions to shareholders preempted the FDIC's common law claims against directors of a failed bank for negligence and breach of fiduciary duty in approving an $8.8 million dividend.  Judge Mueller, however, allowed the FDIC proceed against the directors under Corporations Code Section 309 and 12 U.S.C. § 1821(k).  In the ensuing trial, a jury award damages in the amount of $2.64 million.  As the late Paul Harvey was wont to say, "now, for the rest of the story":

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