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californiacorporate&securities 4/19/2018
Department Of Business Oversight Found Liable For Investors' Attorney Fees

In 2011, the Department of Business Oversight filed a civil action against Investco Management & Development LLC and its promoters alleging various violations of the securities laws in connection with the offer and sale of LLC membership interests.  In 2012, the DBO obtained an interlocutory judgment.  The investors subsequently filed their own civil actions.  Investco and the promoters moved to amend the interlocutory judgment to stay all actions.  The DBO filed a written joinder in support of the motion.  The investors successfully opposed the motion to modify and then obtained an attorney fees against the DBO pursuant to Code of Civil Procedure § 1021.5, which has been described as codifying California's version of the private attorney general doctrine.

 
californiacorporate&securities 4/18/2018
Legislature Mulls Mandating Board Interviews Of Everyone But Nonbinary Persons And Caucasian Males

I have previously written about one California legislator's plan to impose gender quotas on publicly traded companies that have their principal executive offices in the state.  The bill is being heard today by the Senate Banking and Financial Institutions Committee.  The bill, SB 826, is being sponsored by the National Association of Women Business Owners - California (NAWBO-CA) and has the support of the Consumer Attorneys of California.  The bill is opposed by a coalition of 24 business groups, including the California Chamber of Commerce.

 
californiacorporate&securities 4/17/2018
Industrial Development Bonds And The Mystery Of Federal Preemption

This should be a straightforward question - Are qualification and registration requirements under state securities laws preempted with respect to industrial development bonds?

 
californiacorporate&securities 4/16/2018
Industrial Loan Company Securities - They May Or May Not Be What You Assume Them To Be

California Corporations Code Section 25100 is a long list of securities exempt from the qualification requirements of the Corporate Securities Law of 1968.  Last on this list (Section 25100(t)) is any security issued or guaranteed by and representing an interest in or a direct obligation of an industrial loan company incorporated under the laws of the state and authorized by the Commissioner of Business Oversight to engage in industrial loan business.  This may seem relatively unambiguous, but it turns out that it is far from clear which type of industrial loan company is the subject of this exemption.

 
californiacorporate&securities 4/13/2018
Material Breach Releases Obligation To Third Party Beneficiaries

Yesterday, the Nevada Supreme Court held that one party's material breach of a contract releases the non-breaching party's contractual obligation to a third-party beneficiary.  Cain v. Price, 134 Nev. Adv. Op. 26 (2018).  In this case, the contract was a settlement agreement.  The Settlement Agreement provided that C4 Worldwide, Inc. would pay $20 million to Peggy and Jeffrey Cain within 90 days.  In return, the Cains agreed to release C4 and its officers.  When C4 failed to pay, the Cains sued C4 and six of its officers.  Two of the officers moved for summary judgment based on the release included in the settlement agreement.  The Nevada District Court granted summary judgment for the two officers and the Cains appealed.

 
californiacorporate&securities 4/12/2018
Bill Would Require Race And Gender Pay Equity Reports

In March, I wrote about AB 2571 which would have prohibited public pension fund investments in alternative investment vehicles that lacked race and gender pay equity policies.   Yesterday, the bill was amended to require public investment funds to obtain reports on these issues from alternative investment vehicles involved in the hospitality sector.  The bill defines "alternative investment vehicle" as "a limited partnership, limited liability company, or similar legal structure through which a public investment fund invests in a private equity fund, venture fund, hedge fund, absolute return fund, real estate fund, joint venture, coinvestment vehicle, comingled investment, direct investment, or any other investment that is not a publicly traded security or debt fund."

 
californiacorporate&securities 4/11/2018
California Gender Equity Quota Bill Advances

An effort by several California legislators to impose gender quotas on publicly held corporations will be heard next week by the Banking and Financial Institutions Committee.  SB 826, as amended on April 3, will apply to both California domestic corporations and foreign corporations, as defined in Corporations Code §§ 167 & 171.  In the case of a foreign corporation, the jurisdictional hook is the location of its principal executive office as disclosed on its Form 10-K.  If enacted, corporations would be required to have at least 1 female director by the end of next year.  By December 31, 2021, the quota increases to 2 female directors if the corporation has 5 authorized directors or to 3 directors if the corporation has 6 or more authorized directors.  Corporations that fail to meet these goals would be subject to fines.

 
californiacorporate&securities 4/10/2018
Cede Freeze Fails To Kindle Personal Jurisdiction In Nevada

Many may have heard of Cede and Company, but what exactly is it and who owns it?  Cede is a New York partnership, of which Depository Trust Company and The Depository Trust and Clearing Corporation are partners.  The former, DTC, is a New York corporation that is a wholly owned subsidiary of the latter, DTCC, which is also a New York corporation.  DTC is an SEC registered clearing agency that contracts with broker-dealers who constitute its participants to provide them with book-entry services for securities that they deposit with DTC. Those securities are held in the street name of DTC's nominee, Cede, which is thus the legal owner of the securities.

 
californiacorporate&securities 4/9/2018
Nevada Supreme Court Accords Preclusive Effect To Subsequent Federal Court Order

When bad things happen to corporations, derivative suits are sure to follow.  So it was for Galectin Therapeutics, Inc., a Nevada corporation.  Following publication of allegations of a "stock promotion scheme", stockholders filed derivative suits in federal district court and in Nevada state court.  The Nevada judge rule first, denying the defendants' motion to dismiss for failure to plead demand futility adequately.  The Nevada judge gave the plaintiff leave to amend and stayed the case pending a ruling by the federal district court.  Thereafter, the federal district court dismissed with prejudice the claim also due to inadequate pleading of demand futility.  In re Galectin Therapeutics, Inc. Derivative Litig., 2015 U.S. Dist. LEXIS 183340.  The defendants in the Nevada state court action then successfully moved to dismiss, but this time on the grounds of issue preclusion. The state court plaintiff appealed.  Kirsch v. Traber, 2018 Nev. LEXIS 25, 134 Nev. Adv. Rep. 22.

 
californiacorporate&securities 4/6/2018
Alter Ego And The California LLC

Yesterday's post concerned a recent federal district court decision applying the corporate alter ego doctrine to a Nevada limited liability company. Bustos v. Dennis, 2018 U.S. Dist.  LEXIS 45764.  An update to this post noted that although Judge Dawson was under the impression that the Nevada Supreme Court had yet to rule on the question, it in fact had already done so in Gardner v. Eighth Judicial Dist. Court of State, 405 P.3d 651, 656 (Nev. 2017).  Judge Dawson, however, was correct in his "prediction" that the alter ego doctrine pertains to LLCs.

 
californiacorporate&securities 4/5/2018
Court Applies Corporate Alter Ego Law To Nevada LLC

Corporations and limited liability companies share a key feature - insulation of owners from the liabilities of the entity.  In the 19th century, courts began to fashion a significant exception to this principle for corporations.  The exception became known as the "alter ego doctrine".  The exception was not applied to LLCs because they did not then exist.  With the advent of LLCs, courts have had to confront the question of whether the alter ego doctrine applies to LLCs.

 
californiacorporate&securities 4/4/2018
When An LLC Interest Is A Security

Yesterday's post concerned U.S. District Court Judge Cynthia Ann Bashant's recent ruling that a plaintiff had failed to plead adequately the existence of a security.  D.R. Mason Constr. Co. v. GBOD, LLC, 2018 U.S. Dist. LEXIS 41236.  Professor Fershee has followed up on the post in the Business Law Prof Blog: Some Courts Actually Get It: LLCs are Not Corporations.

 
californiacorporate&securities 4/3/2018
A Five Percent Interest Is Not Necessarily Stock

As Professor Joshua Fershee has often noted, many judges fail to distinguish between corporations and limited liability companies.  See, e.g., LLCs Are Not Corporations. Be Vigilant. Respect the Entity.  Therefore, it is nice to see that some judges do recognize that LLCs are not corporations.

 
californiacorporate&securities 4/2/2018
California Statute May Be An Issue In Dispute Between President Trump And  Adult Film Actress

Not too long ago, I wrote about the lawsuit filed in California challenging a confidentiality agreement allegedly entered into by President Donald Trump.  Clifford v. Trump, L.A. Super. Ct. Case No. BC 696568 (filed Mar. 6, 2018).  In that post, I focused on the California Civil Code requirements for contract formation. 

 
californiacorporate&securities 3/27/2018
California Proposes To Base Tax Rate On Compensation Ratio

The California legislature may soon be considering a bill that would revise the tax rates for publicly held corporations based on their compensation ratios.  As introduced by Senator Nancy Skinner, SB 1398 would establish the following rates beginning next year:

 
californiacorporate&securities 3/26/2018
Was This A Case Of A Partnership That Never Was Or A Superseded Partnership?

Three men got together to buy and operate a restaurant.  They formed a corporation, issued shares and made a "Subchapter S" election.  Later, disagreements arose and one of the three sued the other two.  Each side struggled to explain what happened.  The plaintiff alleged the they had formed a partnership and that the partnership survived the incorporation.  The defendants countered that there never had been a partnership, but also that the corporation had superseded the partnership.  

 
californiacorporate&securities 3/21/2018
Cyan And The California Company

On March 20, 2018, the United States Supreme Court issued its decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, reaffirming that a class action alleging only violations of the federal Securities Act of 1933 could be brought in either state or federal court.  The Court’s unanimous decision, penned by Justice Kagan, is a deft textual analysis of an ambiguous statute.  The Court’s decision also could prove significant for the many private companies headquartered in California whose initial public offerings have long been delayed but are expected in the near future.  Absent Congressional action, many of those companies and their directors, officers, and underwriters could find themselves defending Securities Act class actions in state courts ill-prepared for such litigation.

 
californiacorporate&securities 3/20/2018
Will U.S. Supreme Court Decision In Life Insurance Case Affect California's Limited Liability Company Law?

Yesterday, the U.S. Supreme Court heard oral arguments in Sveen v. Melin (Case No. No. 16-1432).  The case involved a dispute over life insurance proceeds between a decedent's former spouse and his children by a former relationship.  After marriage, the decedent had designated his former spouse as the beneficiary of the policy.  Later and while the decedent was still married, Minnesota enacted a statute providing "the dissolution or annulment of a marriage revokes any revocable … beneficiary designation … made by an individual to the individual’s former spouse.” Minn. Stat. § 524.2-804, subd. 1.  After enactment of the statute, the decedent and his spouse divorced, but he did not change his beneficiary designation.  The issue for the Supreme Court is whether Minnesota's revocation-on-divorce statute violates the "Impairment of Contracts" clause of the United States Constitution.  Art. I, § 10, cl. 1.  

 
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.

 
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