Resolving Shareholder Grievances in California: Direct Actions vs. Derivative Actions

Resolving Shareholder Grievances in California: Direct Actions vs. Derivative Actions

When a shareholder of a corporation develops a grievance against a corporation with a separation of ownership and management, he must choose between two different approaches, depending on the nature of the complaint and the circumstances: direct action or derivative action. A shareholder must generally choose between these two options – a single complaint will either be eligible for resolution through a direct action lawsuit or a shareholder’s derivative lawsuit, but not both.

Direct Action Lawsuits

In a direct action lawsuit, the shareholder alleges that the company has directly violated his rights in some way (refusing to distribute a dividend he is entitled to, for example, or by refusing to count his vote). The right violated must belong to him specifically, not to the corporation in general. In other words, he cannot maintain a direct action lawsuit if his complaint is based on injury to the corporation.

To maintain a direct action, the shareholder must show that the company’s behavior impacts some but not all of the shareholders. Or, the shareholder must show that the complaint can otherwise be characterized as a complaint about direct injury to him as a shareholder rather than to the corporation itself.

Derivative Action Lawsuits

In a derivative action lawsuit, the shareholder alleges that the directors have indirectly violated his rights by failing to look out for the best interests of the corporation. Since a corporation is a fictional entity, corporate directors act as representatives of the corporation; as such, they are subject to a fiduciary duty to act in the best interests of the corporation. This, of course, indirectly benefits the corporation’s shareholders.

A shareholder who files a derivative lawsuit is alleging that the corporation’s officers and/or directors have failed to properly look out for the corporation by performing acts (or by failing to perform acts) in a manner that is not in the best interest of the company. This indirectly harms the shareholders by reducing the value or marketability of the company’s shares.  

Demand and Futility: Before filing a shareholder’s derivative lawsuit, a shareholder is generally required to issue a formal demand to the company’s board of directors the rectify the complaint. If the board fails to do so within a reasonable time, the shareholder will have standing to file a derivative lawsuit. The demand requirement can be excused if the shareholder shows that any demand would be futile.  

Remedy: Since the shareholder’s claim against the company is derivative, the shareholder’s benefit is also derivative. If the shareholder wins the lawsuit, the court will order the board to remedy the shareholder’s complaint by acting, or ceasing to act, in a manner that will remedy the complaint (by refraining from further licensing its technology to a competitor owned by one of its former directors, for example).

Contact Us ASAP

If your company is subject to or anticipates shareholder litigation or if you are a shareholder contemplating litigation against the company that you hold shares in, call CKB Vienna LLP at 909-980-1040 or fill out our online contact form to learn how we can help you. We serve clients from the Rancho Cucamonga area, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Defenses to Automobile-Based Product Liability Claims in California

Defenses to Automobile-Based Product Liability Claims in California

There are two ways to defend against an automobile product liability claim. One way is to submit evidence to directly refute the plaintiff’s claims – as in “Yes, you did”/”No, we didn’t”. The other way is to raise additional facts that will partially or fully release you from liability. The following list describes several well-known examples of the second variety:

  • The Statute of Limitations: The statute of limitations defines the deadline by which you must either file a product liability lawsuit or forever hold your peace. In California, the general statute of limitations deadline is two years from the date that you knew, or should have known, of the injury caused by the product (exceptions exist). If filed too late, your lawsuit can be dismissed.

  • The Statute of Repose: Many states have passed statutes of repose. A statute of repose sets an age limit on the product itself: the clock begins ticking the day that the product is first sold, and once the deadline expires, no injury arising after the expiration date will be entertained by the courts. Although California has passed a ten-year statute of repose, it applies only to improvements in real estate. No statute of repose exists for any other product.

  • Comparative Negligence: If the plaintiff shares fault for his own injury (an intoxicated driver sues an automobile manufacturer for faulty brake drums, for example), the plaintiff’s percentage of fault will be used to reduce the amount of damages – if he was 25 percent at fault, he would lose 25 percent of his damages; if he was 60 percent at fault, he would lose 60 percent of his damages.

  • Unavoidably Unsafe Products: Certain socially useful products carry with them inherent risks that cannot be completely eliminated. In the case of drugs and vaccines, the defendant can assert this as a defense as long as the drug was properly prepared and accompanied by appropriate risk warnings based on current scientific knowledge.

  • Product Misuse or Modification: If the product was misused or modified after it left the defendant’s possession in an unforeseeable manner, the defendant can claim that the misuse or modification was (i) the sole cause of the plaintiff’s injury and, therefore, the defendant should not be held liable, or  (ii) a contributing cause of the plaintiff’s injury and, therefore, the defendant’s liability should be reduced.

  • State of the Art: In a design defect case, a defendant may argue that the use of the product carries inherent dangers and that the product’s benefits outweigh its inherent risks. In a failure to warn case, the defendant may argue that the product’s unmentioned risks were neither known nor knowable by the defendant based on the current state of scientific advancement.

The foregoing is not an exhaustive list of defenses available to defendants in product liability claims. A variety of contractual defenses, for example, may be available between commercial parties.

Contact Us ASAP

If your company has become the subject of an automobile product liability claim, telephone CKB Vienna LLP at 909-980-1040 or fill out our online contact form to learn how we can help you defend your interests. We serve clients from the Rancho Cucamonga area, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Preferred Ship Mortgages

Preferred Ship Mortgages

Ships are expensive, which means that they can be used as collateral for more than one debt at a time. This reality often leads to conflicts among competing creditors with liens on the vessel. Since ships are mobile and can traverse the waters of more than one state, the federal government has exercised jurisdiction over ship mortgages in the form of the Ship Mortgage Act. This Act and its implications form most of the law applicable to ship mortgages.  

The Federal Ship Mortgage Act

The federal Ship Mortgage Act created the Preferred Ship Mortgage as an alternative to a mortgage under state law. Creditors who meet the qualifications and create such a mortgage are entitled to priority over most (but not all) possible creditors that may have claims against the ship. If the lender, instead, relies on a state mortgage (which almost never happens), the creditor will rank near the bottom of the line of creditors in the event of a foreclosure.

Requirements for a Preferred Ship Mortgage

Following are some of the requirements for a Preferred Ship Mortgage:

  • The mortgagee must be a U.S. citizen or an FDIC-insured, state or federally chartered, financial institution;

  • The vessel must have been built in the US; and

  • The mortgage must cover the entire vessel, including fixtures.

Other requirements exist as well. One of the benefits of a preferred ship mortgage, however, is that there are no limits on the interest rate that can be charged – even state usury laws are generally preempted under the Ship Mortgage Act.

Superior Claims

Even with a Preferred Ship Mortgage, your lien will not necessarily enjoy priority over all other claims. Claims that enjoy superiority over preferred ship mortgage claims include:

  • Some claims by vessel employees

  • Salvage claims

  • Tort claims

  • General average liens


Despite these limitations, a preferred ship mortgage is probably the most reliable way of holding a lien against a ship.

Remedies

If the borrower defaults on the mortgage, the mortgage holder can choose between two possible remedies:

  • Take action against the ship itself in federal court. If the action is successful, the ship can be sold and the proceeds can be used to pay the mortgage The disadvantage of this method becomes apparent when the proceeds of the sale are insufficient to pay off the mortgage.

  • Take action against the shipowner in state or federal court. An action against the shipowner allows you to secure a deficiency judgment that the owner will be ordered to pay if the proceeds from the sale of the ship turn out to be insufficient to cover the mortgage.

Take the First Step Today

If you anticipate litigation over a ship mortgage or if you simply need transactional advice so that you can more intelligently explore your options, call CKB Vienna LLP today at 909-980-1040, or fill out our online contact form to learn how we can help you. We serve clients from Rancho Cucamonga and surrounding areas, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Five Common Employment Law Mistakes Committed by California Employers

Five Common Employment Law Mistakes Committed by California Employers

California employment law is among the most extensive and employee-friendly of any state in the union. Despite the great volume of legal requirements that apply, ignorance of the law is no excuse and failure to comply with the law could lead to disastrous consequences. The following are only a few of the most common legal mistakes committed by California employers:

  • Misclassifying an employee as an independent contractor: An employer’s duty towards an independent contractor is far less burdensome than his duty towards an employee. This also applies to third parties – an independent contractor’s negligence towards a third party is not automatically imputed to the employer, for example. Nevertheless, it is the courts that ultimately decide whether a laborer is an employee or an independent contractor.   

  • A lackadaisical attitude towards sexual harassment complaints: Sexual harassment complaints must be taken very seriously. In California, for companies with at least 50 employees, all supervisors must be compliant with AB1825. Your company must institute an anti-harassment policy along with a detailed mechanism for handling complaints.

  • Failure to regularly and appropriately revise the Employee Handbook: The most common mistakes in this regard are (i) failure to create an Employee Handbook in the first place, (ii) failure to update it at least once a year, and (iii) allowing an unqualified person to handle the drafting or revisions. Failure to create and maintain an Employee Handbook will give your employees (and ex-employees) a lot more leverage should a dispute break out between you.
    .

  • Insertion of a non-compete clause into an employment agreement (particularly without a severance clause): The temptation to insert a non-compete clause into an employment agreement that applies after separation of the employee from the company can be a great temptation, especially if your company is guarding valuable intellectual property.

    California courts are notoriously unfriendly to non-compete clauses, however, and including one in an employment agreement without a severance clause can result in the entire agreement being invalidated – with unpredictable results. Consult a California employment lawyer before you even consider inserting a non-compete clause into an employment agreement.

  • Inappropriate handling of employee disabilities (including pregnancy and psychiatric conditions):  Employers cannot unfairly discriminate in hiring people with disabilities. Hiring a disabled employee, however, triggers a host of legal requirements. Failure to take them seriously can result in lawsuits for astronomical damages.   

The foregoing is only the tip of the iceberg of potential California employment law violations. We have not even discussed many common violations such as failure to provide appropriate meal and break periods and requiring off-the-clock work. The services of a top-tier California employment lawyer become more and more necessary as your company grows.

Contact Us Today

If you are concerned that your company may be in violation of California employment law or if you simply need some questions answered to remain in compliance, call our office at 909-980-1040 or complete our online contact form to schedule a conference with us. We serve clients from throughout the Rancho Cucamonga area, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Issues to Resolve in a California Construction Contract: The Contractor’s Point of View

Issues to Resolve in a California Construction Contract: The Contractor’s Point of View

Construction contracts can run hundreds of pages long. Despite all of this verbiage, however, the same problems seem to arise again and again in project after project. Many of these problems are completely avoidable. The following are just a few examples of common construction project problems along with some advice on how to deal with them at the contract negotiation stage.

Scope of Work

The scope of work provisions are perhaps the most important provisions in a construction contract and arguably some of the most overlooked. Typical problems that produce conflict in this area include: (i) inadequacies or incompleteness in the owner’s design documents, only later discovered, gives rise to a need to change the scope of work, and (ii) linguistic ambiguities in the construction contract are interpreted differently by the contractor and the owner.

The way to head off these problems before they arise is to secure a warranty from the owner that his design documents are complete, coordinated with each other, and free from defects; to spend time drafting the scope of work provisions with great care and foresight. A bit of extra care at the negotiation stages of the project might save millions of dollars down the road.  

Indemnification

Contractors almost always agree to indemnify the owner against any liability to a third party that arises as a result of their work – personal injury liability, for example, as well as property damage and even intellectual property infringement. A contractor should attempt to limit its indemnification liability to those liabilities it can insure against. The subcontractor should also ask the owner to indemnify it against third-party liability caused by design defects.

Warranties and Bonds

There is no way that a construction contractor for a major project can avoid providing a myriad of warranties and bonds for its various contractual duties. The trick at the negotiation stage is to limit your liability as much as possible. A contractor should generally insist on a general warranty of one year for materials and labor and demand precise commencement and ending dates for all warranties.

A contractor should also “flow down” its risk to subcontractors as much as possible by (i)

insisting on equal warranties from subcontractors, and (ii) having major subcontractors provide their own maintenance bonds. This approach should reduce your risk to a manageable level.

Project Delays

Project delays are perhaps the greatest liability a contractor faces. Naturally, the contract should include a carefully drafted force majeure clause that eliminates the contractor’s liability for delays that are not their fault. It should also provide for very specific compensation to the contractor when the delay is the fault of the owner. Ideally, acceleration of work requirements should be the owner’s sole remedy for most contractor-caused delays.

At CKB Vienna LLP, we can help you draft construction project contracts that keep you out of court or arbitration by heading off disputes before they arise. If your dispute has already begun (or seems inevitable), we can help you win while preserving your business relationships to the extent that you require.

Telephone us at 909-980-1040 or fill out our online contact form to learn how we can best assist you. We serve clients throughout the Rancho Cucamonga area, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Boilerplate Provisions in California Business Contracts: What They Mean, Why They Are Important, and How They Prevent Litigation

Boilerplate Provisions in California Business Contracts: What They Mean, Why They Are Important, and How They Prevent Litigation

Most people are at least a bit familiar with contract “boilerplate” clauses. They are the clauses that inevitably appear at the end of a contract that look suspiciously similar to clauses found at the end of other contracts that have very little else in common. The purpose of contract boilerplate clauses is not to add to the length of the contract so that the lawyer can pad his billable hours – each clause exists for a specific reason. The following are some examples:


Attorneys' fees: If a legal dispute arises, the losing party must pay the winning party’s legal fees. This raises the cost of litigation and lowers the parties’ willingness to engage in it.

  • Arbitration: All disputes must be resolved through arbitration rather than courtroom litigation. Arbitration rulings are typically non-appealable. This saves time and money but is dangerous because the losing party has no recourse to the courts.

  • Jurisdiction: This clause determines where a lawsuit can be filed (the specific county) to prevent “forum shopping” by parties seeking a home-court advantage. It is not the same as a choice of law clause (a California court can resolve a dispute under Louisiana law, for example).

  • Severability: What happens if a judge invalidates one clause of a contract (for example, California often strikes down non-compete clauses in employment agreements)? A severability clause allows the remainder of the contract to remain intact.

  • Merger: A “merger” or “entire agreement” clause asserts that the contract represents the entire agreement between the parties (at least with respect to subject matter relevant to the contract) on the date that the contract is signed. This prevents either party from asserting that a prior agreement, exchange of memos, or verbal assurance can be considered part of the agreement between the parties.

  • Force majeure: What happens if a hurricane destroys my warehouse? What happens if the product you ordered is declared illegal under local law? A force majeure clause excuses a party from performing their duties under the contract if an unforeseen event makes it impossible or highly impractical to do so.

  • Indemnity. In an indemnity clause, one party agrees to pay the costs of certain disputes asserted by third parties. In a classic example, I license software to you and a third party sues you for copyright infringement claiming that the algorithm actually belongs to him and not me.

  • Confidentiality. A confidentiality clause guarantees that neither party will disclose some or all of the information they learned during the course of negotiating or performing the contract.


The foregoing is only a sample of possible “boilerplate” clauses. It is critical to remember that you should never use a generic boilerplate clause that you find online or in another contract. Each contract is unique and should be treated as such. Your “boilerplate” should reflect your particular needs and concerns.


At CKB Vienna LLP, we can help you draft business contracts that avoid disputes and help you win disputes that have already arisen. Call us at 909-980-1040 or fill out our online contact form to learn how we can assist you. We serve clients from all over the Rancho Cucamonga area, including Alta Loma, Etiwanda, Upland, Fontana, Ontario, Chino Hills, and Claremont.

Grounds for Annulment of a Marriage in California

Grounds for Annulment of a Marriage in California

An annulment of a marriage is quite different from a divorce: it is basically a declaration that the marriage was always invalid. California allows annulments only under certain specified grounds.

Adult Conservatorships (Guardianships) in California

Adult Conservatorships (Guardianships) in California

Many adults, particularly elderly adults, cannot provide for their own needs. In some cases, it may be necessary to appoint a conservator to make decisions for the incapacitated adult. California law provides for this.

Dividing Debts During a California Divorce

Dividing Debts During a California Divorce

You have no doubt heard that when a California couple divorce, assets “get divided 50/50.” Although this is an oversimplification, it is also true that as an approximation, debts get divided 50/50 as well.

Employee Confidentiality Agreements: Drafting Tips

Employee Confidentiality Agreements: Drafting Tips

In today’s information economy, information is a kind of currency. You should protect it from theft by employees and competitors with the same vigilance that you would use to protect your cash.