0 comments on “Layoffs: Intended and Unintended Consequences”

Layoffs: Intended and Unintended Consequences

Employee Layoffs

By Deborah H. Petito, Esq. and Leonard Brazil, Esq.

Layoffs based on business necessity are permissible, but problems arise when an employer does not properly implement a layoff. It is equally important to understand how layoffs may affect existing or subsequent claims raised by other employees.

 A. Follow A Two Step Process When Implementing A Layoff

  1. Demonstrate Business Necessity

Unfortunately (in a business sense), these days employers may find it far too easy to establish that a layoff is based on business necessity. The need to reorganize or to reduce the number of employees due to a downturn in business should be well substantiated by internal company documentation.  This is also true when a position is eliminated.  Employers should document why the particular position was chosen for elimination prior to the actual layoff.

  1. Layoff Selection Process

While there may exist a clear and compelling business necessity to implement a reduction in force, the employer may face liability if it does not carefully analyze which employees are to be included in a layoff. Courts have found that an employer was justified in implementing a reduction in force, but concluded that the selection of the actual employee(s) laid off was motivated by an illegal reason such as the person’s age. The employer should do the following to minimize the likelihood of such a claim:

a. Identify the list of employees being considered for a layoff (“Target Employees”) and document the business reasons why those particular individuals have been identified, such as lesser seniority, performance, relative skills of the employees and other reasonable business criteria.

b. If there are other employees in the same or similar positions who are not being laid off, the employer should document why the Target Employees are being considered for layoff while the others have not been selected.

c. If only some of the Target Employees are ultimately selected to be laid off, there should be documentation which expresses the company’s reasoning as to the selection of those actually laid off.

d. When the employer has identified those to lay off, an evaluation should be made as to whether the layoff affects a disproportionate number of employees in a “protected classification,” such as age, race, gender or other classifications which may raise the issue of discrimination, harassment or retaliation. For example, if 8 of the 10 employees laid off are over age 40, the employer must be able to clearly articulate and establish the legitimate business reasons why those particular employees were selected.  If there is a concern of being able to establish such business justification, the employer should reconsider those to be laid off.

Senior managers and executives often rely on lower level managers to select the individuals who will be laid off. Senior management should make sure they review that process and the individuals selected to avoid claims of discrimination, harassment or retaliation.  Ultimately, the decision rests with senior management and trusting lower level management, without questioning who is chosen for layoff and why, could create liability and reflect poorly on senior management.

Also, keep in mind that if you are implementing a group layoff and are presenting the employees with a release of claims in return for a severance package, the release agreement proposed to employees over age 40 must include certain information about those being laid off and those employees who will not be impacted by the layoff. Additionally, if the layoff is part of a plant closing or mass layoff, the employer may be subject to the state and/or federal Worker Adjustment Retraining Notification Act which requires advance notice to employees of such a layoff.

B. How A Layoff Or Termination May Affect Other Employee Claims

The layoff or termination of an employee may have significant and unintended negative consequences to existing or future claims filed by other employees. An employer should consider the following when deciding to terminate or lay off an employee:

a. The departing employee may be an important witness in potential or existing litigation.  If so, it is critical for the company to apprise counsel of potential terminations or layoffs when such action is first contemplated.  Such employees may be hard to later track down, their memories may fade or they may become hostile to the company.

b. If a departing employee has relevant information regarding litigation, consider obtaining a declaration under penalty of perjury to memorialize the employee’s knowledge before it becomes faded or the employee becomes hostile to the company.  If the departing employee is being offered a severance agreement, consideration should be given to tying any installment payments to the departed employee’s continued cooperation in any litigation or potential litigation.

c. Implement safeguards to ensure that the departing employee’s e-mails, to the extent potentially relevant in litigation or potential litigation, are not deleted. The company should issue an internal records hold notice to identify files and electronic documents which are not to be deleted. Such a records hold notice should be periodically reissued within the company to account for new hires while such litigation is pending or threatened.

d. Obtain from the departing employee information as to where important files or e-mails may be located. Advise the departing employee to not delete any e-mails, discard any documents or remove anything from the company’s premises.

C. Conclusion

While employers have valid reasons for layoffs, they often fail to review the list of laid off employees in detail and are unaware that those chosen all fall within a selected category or that individuals present specific issues that may lead to litigation.   Also, employers often fail to consider the impact that an employee’s departure may have on current litigation.  Looking at the details before implementing a layoff and documenting why specific employees have been chosen, can help employers avoid litigation.

Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about employee layoffs or terminations, please feel free to email Deborah H. Petito at DPetito@ClarkTrev.com or Leonard Brazil at LBrazil@ClarkTrev.com, or contact our office at (213) 629-5700.

Clark & Trevithick is a full service Los Angeles-based law firm that has been representing clients throughout California for 40 years. The firm’s attorneys have broad expertise which permits Clark & Trevithick to provide its clients with the comprehensive legal advice necessary to operate in today’s business environment. For more information, visit www.clarktrev.com

0 comments on “When Is An Arbitration Agreement Not An Agreement to Arbitrate?”

When Is An Arbitration Agreement Not An Agreement to Arbitrate?

Abitration agreements

By Stephen E. Hyam, Esq.

This year, the California Court of Appeal issued a published decision in Rice v. Downs concluding that a contract requiring arbitration of claims “arising out of” the agreement did not include tort claims that were based on a duty that is separate from the contractual relationship. This holding signaled a shift (some may call it a clarification) in the interpretation of arbitration clauses.

Rice and Downs were members of a limited liability company. The company’s Operating Agreement stated: “…any controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California or San Francisco, California.” Years after entering into the Operating Agreement, Rice sued Downs in Superior Court alleging that Downs committed torts based on a purported relationship that pre-existed the Operating Agreement. Relying on language in the Operating Agreement, Downs successfully compelled those claims into binding arbitration. The parties then engaged in a lengthy and expensive arbitration proceeding and the arbitrator ruled in Downs’ favor. When Downs entered judgment based on the arbitrator’s decision, Rice appealed the Court’s order compelling certain of the tort claims into arbitration. The Court of Appeal partially reversed the judgment, concluding that some of Rice’s tort claims fell outside of the operating agreement’s arbitration provision.

In evaluating whether the claims were subject to arbitration, the Court of Appeal focused on the scope of the arbitration provision, in particular, the “arising out of” language. The Court of Appeal analyzed broad and narrow arbitration provisions, holding that broad arbitration provisions use language such as “any claim arising from or related to the agreement” or arising in connection with the agreement. These broad provisions were found to encompass tort claims that “have their roots in the relationship between the parties which was created by the contract” and are included in the arbitration provision. The Court of Appeal found that narrow arbitration provisions, including those that use “arising from” or “arising out of” language only encompass disputes that relate to the interpretation and performance of the agreement. Since contract and tort claims may both be subject to arbitration, any dispute about the arbitrability of claims requires a specific evaluation to determine if they “arise out of” the agreement (and, thus, would be arbitrable).

Acknowledging that Rice’s tort claims fall within the “any controversy” language, the Court evaluated the particular claims asserted to determine if they were properly compelled into arbitration. Although the Court found that the particular phrase in the operating agreement (“any controversy…arising out of the Agreement”) was a more narrow arbitration provision, the Court of Appeal concluded that Rice’s tort claims, which were based on violations of “an independent duty or right originating outside of the agreement,” were not subject to arbitration. This analysis led to the Court vacating the judgment of certain of Rice’s claims that pre-dated and were independent of the Operating Agreement. Those claims that fell outside of the arbitration provision were ordered to be tried in Superior Court, even though they had already been litigated during the arbitration proceeding.

Rice v. Downs stands as a reminder that the terms of agreements you read, understood, and entered into years ago may be interpreted differently than you originally expected. This emphasizes the importance of a periodic review of your agreements to identify areas that may need to be revised.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about arbitration agreements, please feel free to contact Stephen E. Hyam at shyam@clarktrev.com by email or telephonically at (213) 629-5700.

0 comments on “Tipping the Scales of Justice?”

Tipping the Scales of Justice?

By David S. Olson, Esq.

The future direction of the United States Supreme Court was a campaign issue this year because decisions of the Supreme Court affect all Americans in their personal lives and many businesses. For example, in 2015 alone, the Supreme Court handed down decisions regarding same-sex marriage, free speech rights, housing, pregnancy, and employment discrimination claims, and pollution limits, to name just a few.   One of the first things President-elect Donald Trump will do upon taking office is select someone to fill the seat left vacant by the passing of conservative Justice Antonin Scalia earlier this year.  Based on a previously posted list of 21 candidates from whom the President-elect stated he would choose, Mr. Trump will be looking primarily to individuals who have already proven themselves to be conservative judges.  As such, President Trump’s first selection should not change the political composition of the Court from the time Justice Scalia was on the bench.

Any additional picks would, however, potentially alter the Court’s liberal/conservative composition and thus future decisions for potentially years to come. For example, Justice Ruth Bader Ginsburg, appointed by Bill Clinton, is solidly liberal. She is the oldest member of the Court and turns 84 in March.  Justice Anthony Kennedy, a Reagan appointee who occasionally sides with the Court’s liberal block, is, at 80, the Court’s second oldest member. Another Clinton appointee, liberal Justice Stephen Beyer, recently turned 78, making him the third oldest member of the Court.

Trump’s list, which was released initially in May of 2016 and supplemented in September 2016, is comprised entirely of sitting judges with proven track records with the sole exception of Republican Senator Mike Lee of Utah. Senator Lee previously served as an Assistant United States Attorney and clerked for conservative Supreme Court Justice Samuel Alito, Jr., a George W. Bush appointee.  The list contains two state court judges from Michigan, and state court judges from Colorado, Utah, Minnesota, Wisconsin, Texas,  Georgia, Florida, Iowa, and Kentucky.   Also included are federal court judges from the third, sixth, eighth, tenth, and eleventh circuit courts of appeal, as well a United States Court of Appeals Judge for the Armed Services.  Three of the potential nominees clerked for Supreme Court Justice Clarence Thomas, two clerked for Justice Kennedy, one clerked for Justice Scalia, and one for Justice Alito.

History shows that Presidents can live to regret their Supreme Court appointments. President Eisenhower famously called his Supreme Court nominations (which included liberal Chief Justice Earl Warren) the “biggest damn fool mistake I ever made,” Richard Nixon unwittingly appointed the justice who went to author the seminal abortion opinion, Roe v Wade (Justice Harry Blackmun), and, more recently, Justice David Souter has turned out to be far more liberal than contemplated by President George W. Bush.  It appears, based on his published list of candidates, that President-elect Trump has already put considerable time, thought, and effort into maximizing the chance that he can avoid the same fates as Presidents Eisenhower, Nixon, and George W. Bush.  History will be the judge.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact David Olson by email at dolson@clarktrev.com or telephonically at (213) 629-5700.

0 comments on “Complying with California Sick Leave Laws – Can it get any harder?”

Complying with California Sick Leave Laws – Can it get any harder?

By Deborah H. Petito

On July 1, 2015, California’s new paid sick leave law became effective.  It applies to almost all employers and requires that employers provide at least three (3) days OR twenty-four (24) hours of paid sick leave.  In August of 2015, the Division of Labor Standards Enforcement (the California Labor Commissioner) issued an opinion stating that employers must offer 24 hours or 3 days of paid sick leave, whichever is greater, meaning an employee who normally works 10 hours in a day would be entitled to 30 hours of paid sick leave at a minimum.  Employers who implemented a policy frontloading twenty-four hours are now at risk of not being in compliance.

The trend to localize minimum wages has extended to paid sick leave benefits.  Six California cities – San Francisco, Oakland, Emeryville, Los Angeles, San Diego and Santa Monica – have implemented their own sick leave laws and they provide greater benefits than California law.  This article does not discuss all of the differences and employers are encouraged to contact their employment counsel to make sure that, in their specific circumstances, their policy(ies) are in compliance.

This fragmentation of paid sick leave rules and regulations  at the local level has made compliance more difficult for employers, particularly those with employees who work in multiple cities.  In Oakland, employers were required to comply by March 2, 2015.  In Emeryville the effective date was July 2, 2015; in Los Angeles and San Diego the effective dates were in July of 2016; and San Francisco and Santa Monica are effective in 2017.  It does not matter that the employer does not have a facility in the city.  The standard is whether the employer has employees who work in the city.  With the exception of San Francisco, employers must comply with the local paid sick leave laws if any employees work in those cities at least two hours in a week.  Employees who drive and deliver product, make sales calls or even those who work from home and live in one of these cities must receive the required paid sick leave benefits.

This creates several issues for employers beyond making sure that employees working in those cities are receiving the required sick leave benefits because the amounts of sick leave required and the rules surrounding how the employer provides the sick leave benefits are different.  It may be possible to give a certain class of employees, e.g. drivers, greater paid sick leave benefits because they work in these cities, but in some cases defining the group of employees who might be entitled to greater benefits may be difficult  and employers face a decision of having various policies or giving all employees greater paid sick leave benefits to avoid an administrative nightmare.

The major difference between the state and local laws is how an employer provides paid sick leave benefits.  Under California law, an employer may use the frontload method by providing all of the sick leave at the beginning of each year or use the accrual method, allowing employees to accrue sick leave at the rate of not less than one hour for every thirty hours worked.  If the employer uses the accrual method, they can cap sick leave at six day or 48 hours each year, which means an employee does not earn any additional sick leave until he or she has taken some sick leave.  Not all cities allow frontloading.  Each of the cities are consistent in allowing employers to use the accrual method and provide one hour of sick leave for each thirty hours that the employee works.  Two of the cities – San Diego and Oakland, do not provide a frontload method.  Logically, one would think that if an employer frontloaded the required sick leave, an employer would be in compliance, however, the Oakland City Attorney has opined that use of the frontload method “may risk” a violation of Oakland’s law.  Most employers chose the frontload method for administrative efficiency.  However, those employers will have to revise their policies if they have employees in cities that do not allow employers to use that frontload method.

There are also several other major differences between the requirements of these cities.  The use increments vary.  California law states an employer cannot require an employee to use sick leave in increments larger than 2 hours and two of the cities, while Oakland and San Francisco have reduced the increment to one hour.  Sick leave under California law and these local laws allows sick leave to be used for family members but the definition of family member differs and Oakland allows employees to use sick leave to care for a service dog.  Certain of the cities have different sick leave caps depending on the employer’s size.  The cities also each have their own posters/bulletins that must be posted.  While the California law does not have a provision allowing an employee to sue their employer for violation of the sick leave law, each of the cities allows an employee to do so and certain cities have penalties for violations.

As varying regulations are imposed by more and more local governmental entities, employers are severely challenged to stay abreast of the new laws, how they differ from state law and how to comply with them.

Thank you for joining us on CIarkTalk!  We look forward to seeing you again on this forum.  Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  If you have any questions about the new Los Angeles City Ordinance or sick leave in California, please feel free to contact Deborah Petito at dpetito@clartktrev.com or Leonard Brazil at lbrazil@clarktrev.com by email at or telephonically by calling the author at (213)629-5700.


0 comments on ““Don’t Do The Crime, If You Can’t Do The Time”: How Our Criminal Justice System Works”

“Don’t Do The Crime, If You Can’t Do The Time”: How Our Criminal Justice System Works

Eric Dobberteen and Alisa Edelson were invited to publish two chapters concerning the American criminal justice system as part of a third volume series on the Anglo-American Legal system published by LexisNexis and BDÜ Fachverlag Berlin.  This publication explores various fields of law from the American, British, German and Austrian perspectives.

The first of the two chapters discusses the American criminal justice system and how it begins with the commission of a crime.  In order to be convicted of a crime, the government must generally prove that a criminal act occurred and the accused acted with a “bad state of mind” in committing the crime.  For more information about the basic elements of a crime, specific types of crimes and legal defenses, please read the chapter entitled “Criminal Law In The United States”.  The second chapter discusses enforcement of the criminal laws.  For more information about how those criminal laws are enforced at various stages including the investigation, arrest, detention, prosecution, trial, post-conviction, sentencing, and appeal, please read the chapter entitled “Criminal Procedure In The United States”.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice if you need assistance in any criminal law matter.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Eric Dobberteen edobberteen@clarktrev.com orAlisa Edelson aedelson@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.




0 comments on “Will Your Exempt Employee Still Be Exempt?”

Will Your Exempt Employee Still Be Exempt?

By Deborah Petito|

In March of 2014, President Obama asked the Department of Labor to update the overtime regulations under the Fair Labor Standards Act (FLSA).  On May 17, 2016, the Department of Labor released its Final Rule (“Final Rule”) which only provides changes for the minimum salary requirements for exempt (white collar) employees.  The Final Rule revises the federal regulations related to the FLSA.  The last time overtime regulations were revised for while collar workers was in 2004.  Normally, federal laws and regulations do not impact California employees because California’s laws are generally more stringent than federal laws and regulations, however, this new rule will impact California exempt employees.

New Federal Salary Minimum for Exempt Employees

Under both California and federal law, in order to classify an employee as exempt from overtime and other wage and hour requirements, the employee must meet both a salary and duties test.  The Final Rule provides that exempt employees must earn a minimum salary of $46,467 in order to be exempt.  The new federal salary requirement is effective beginning December 1, 2016.  In California, the salary minimum for an exempt employee is two times the minimum wage which is currently $41,600 (2 x $10 x 2080 hours).  As of December 1, 2016, California exempt employees will also need to be paid a minimum of $46,467.

Under both California and federal law, employees must also meet the duties test (executive, administrative, professional) to be exempt.  The duties test for an exempt employee has always been more stringent under federal law which requires that exempt employees spend more than 80% of their time on exempt duties as compared to California which only requires that exempt employees spend more than 50% of their time on exempt duties.  The Final Rule does not affect the duties test for exempt employees.

Many California employers took a business risk that their determination of which employees were exempt would never be reviewed by the Department of Labor.  Now that the federal salary minimum will be higher, California employers may see more Department of Labor complaints which may result in a review of whether not exempt employees are actually exempt under federal law.  This article does not discuss the specific duties test for each exemption, but they are similar under federal and state law and can be found in the California wage orders or in the federal regulations.
Under the Final Rule, exempt salaries will be automatically updated every three years based upon wage growth over time.  The Department of Labor anticipates that the minimum salary will rise to $51,168 in 2020 and will post new salary levels six months prior to their effective date with the first posting on August 1, 2019.

Non-Discretionary Pay and Catch Up Provisions

The Final Rule also allows employers to pay up to 10% of the increased salary in non-discretionary bonuses, commissions or other incentive payments.  The key word is “non-discretionary.”  Employers may pay any shortfall in the salary minimum if the employee does not earn the required amount in non-discretionary income at the end of any quarter.  Any shortfall must be paid by the employer in the first pay period following the quarter (the prior 13 weeks) and can only be used to catch up the amount paid to the employee in the prior quarter.

California law does not have a catch up provision and as the California or local minimum wage rises, the minimum salary for California exempt employees may be less than 10% of the newly established federal minimum of $46,467.  For example, in Los Angeles County the minimum wage will be $10.50 as of July 1, 2016 which means that an exempt employee will need to earn $43,680 as of that date under California law in addition to meeting the duties test for the exemption.  Therefore, employers in Los Angeles County would have to either pay a minimum salary of $46, 467 or pay non-discretionary bonuses, commissions, etc. in the amount of $2,787 to meet the federal minimum salary requirements.

Employers also need to be mindful of city ordinances regulating the pay of employees in specific cities.  Los Angeles, Santa Monica, San Francisco and San Jose have already established separate minimum wages for their cities and this trend will continue.  Thus an increased burden is placed on employers to keep track of what local governments are doing in cities where employers maintain their businesses or where employees perform work in those cities.

Highly Compensated Employees 

Under federal law, a highly compensated employee is exempt if they earn a minimum salary, have primarily office or non-manual duties and “customarily and regularly” perform at least one of the duties of the applicable exemption.  The Final Rule raises the minimum salary for highly compensated employees from $100,000 to $134,004.  California does not have a similar provision so any exempt employee would need to meet all requirements of the duties test to be exempt.

Steps California Employers Should Take

All employers should make sure that their exempt employees are paid the highest applicable minimum salary (federal, California or local) as of December 1, 2016.  If employees classified as exempt do not meet the salary test, employers can do one of the following:

  1. Increase the salary of the employee to maintain their exempt status (assuming they also meet the duties test); or
  1. Reclassify the exempt employee as non-exempt and have that employee record their hours worked, including their meal breaks each day.  In this case, you need to pay the employee overtime for all hours worked over 8 in a day or 40 in a week.  The overtime requirements are also contained in the California Wage orders.   (The Wage Orders can be found on the California Division of Labor Standards Enforcement website – dlse.ca.gov.)

If you need assistance in determining whether or not an employee is exempt or whether they are being paid appropriately, please contact Deborah Petito or Leonard Brazil in the Clark & Trevithick Labor and Employment Department.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice if you need assistance in determining whether or not an employee is exempt or whether they are being paid appropriately.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Debbie Petito dpetito@clarktrev.com orLeonard Brazil lbrazil@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.

0 comments on “Crowdfunding: Is it for Everyone?”

Crowdfunding: Is it for Everyone?

By Rajnish Puri |

Regulation Crowdfunding issued under the Securities Act of 1933 (Securities Act), became effective on May 16, 2016, six months after the Securities and Exchange Commission (SEC) published the final rules relating to Section 4(a)(6) of the Securities Act.  The regulation provides guidance to startups and small businesses on how to raise money from smaller investors via the Internet.  But, is raising capital through a crowdfunding mechanism for everyone?  This article briefly examines the background for the regulation, provides an overview of the key rules, and makes certain practical observations about the effectiveness of the crowdfunding process.

The term “crowdfunding” is designed to allow (and encourage) “crowds” to “fund” businesses with relatively low dollar investments.  Broadly speaking, federal and state securities laws, make it unlawful for persons to sell securities unless sold pursuant to a registration statement effective under the Securities Act or under one of the several exemptions authorized under the Securities Act.  To facilitate raising capital for startups and small businesses using the Internet and social media platforms, and to provide individual (including non-accredited) investors an opportunity to invest in those entities, Congress established a regulatory framework for crowdfunding by enacting the Jumpstart Our Business Act (JOBS Act) on April 5, 2012.  The legislation was codified in Section 4(a)(6) of the Securities Act, with Regulation Crowdfunding providing guidance on the finer aspects.  When sold in compliance with Section 4(a)(6) and Regulation Crowdfunding, the securities qualify as an exempt transaction (Crowdfunding Exemption) obviating the need for a registration statement.

Who Is Eligible?  Only companies organized under the laws of a state or territory of United States are permitted to raise capital using the Crowdfunding Exemption, so long as they are not subject to the reporting requirements of the Securities Exchange Act of 1934.  Foreign companies, investment companies, companies with no specific business plans and companies that have failed to comply with the reporting requirements of Regulation Crowdfunding during the two-year period immediately prior to the crowdfunding offering, are not authorized to avail themselves of the Crowdfunding Exemption.

Rules for the Issuer. The Crowdfunding Exemption caps the amount an issuer may raise in a 12-month period to $1 million using crowdfunding offerings.  (Note: Crowdfunding offerings are not integrated with other types of offerings – for example, a Regulation D offering – and an issuer is free to raise capital independent of the Crowdfunding Exemption so long as it complies with the requirements of the other exemption.)  The offering must be transacted using only one intermediary online-platform that must be registered with the SEC.  For each offering, issuers must file Form C with the SEC using EDGAR, the SEC’s electronic filing system.  The disclosures accompanying Form C include, among other things, the filing of the company’s reviewed or audited financial statements (depending on the size of the offering), a description and discussion of the business, information about officers, directors and owners of 20% or more of the company, and related party transactions.  If there are any material changes or updates to the information included in the original Form C, issuers are required to file amendments using appropriate forms prescribed for such purposes.  The rules also require that, after a crowdfunding offering has been completed, issuers file financial statements with the SEC and post the statements and other disclosures on the issuer’s website on an annual basis.

Limitations for Investors. Individual investors are subject to certain limitations with respect to their investments in a crowdfunding offering.  Securities acquired may not be resold for a one year period.  The amount an individual may invest during a 12-month period in all crowdfunding offerings is limited by the individual’s annual income and net worth (without taking into account the value of the individual’s primary residence).  If either the annual income or the net worth of an individual is less than $100,000, the maximum amount that can be invested is the greater of (a) $2,000, or (b) the lesser of 5% of the individual’s annual income or net worth.  If the annual income and the net worth are equal to or greater that $100,000, the maximum amount that can be invested is 10% of the lesser of the individual’s annual income or net worth, subject to an annual limit of $100,000 for all crowdfunding offerings.

Costs versus Benefits.  Because Regulation Crowdfunding went into effect only about a week ago, there isn’t enough data out there, as yet, to accurately determine its impact on the business community or perform a thorough cost-benefit analysis of the legislation.  As a preliminary observation, however, it appears that the costs and administrative burdens of compliance associated with the regulation seem to outweigh the benefits.  For starters, the SEC estimates the preparation and filing of Form C to take about 100 hours, with about 25% of that time being attributed to outside professionals.  Adding to the preparation and filing costs is the compensation an issuer would pay an intermediary for the listing as well as the accountants’ fee for the preparation of reviewed and audited financials – a practice not prevalent among early stage companies.  Apart from the costs, by posting the  financial statements and other material disclosures about the business on its website, a startup or a small business might be at a disadvantage by making the information available to the competition.  Of course there are protections that can be built to secure the data, but, those, too, carry a cost.  With the ability to invest as little as $2,000,  arguably, the number of shareholders in a crowdfunded business might exceed a manageable figure which could add to the administrative burdens of management dealing with shareholder matters – be it information dissemination or simply seeking shareholder approvals for governance issues.  Depending on the size of the proposed offering, alternative exemptions available under the securities laws might be more attractive to the issuers.  By contrast, businesses less willing to work with, or facing difficulty in successfully raising capital through, traditional channels of funding, utilizing the Crowdfunding Exemption could be desirable, so long as they are willing to comply.

Hope you found the above discussion helpful.  In my upcoming posts, I plan to share with the readers practical knowledge and trends on a variety of corporate finance topics applicable to early stage and established businesses.  Stay tuned for another conversation on ClarkTalk!!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.   If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at rpuri@clarktrev.com or telephonically by calling the author at (213) 341-1322.


0 comments on “Is VC Funding Right for Your Business?”

Is VC Funding Right for Your Business?

Accepting venture capital funding is one of the biggest decisions many entrepreneurs face during the infancy of their start-ups.  Over the next few weeks, TechInsurance Blog will explore how new tech businesses secure the capital they need to get started.  In  TechInsurance Blog’s most recent post, Clark & Trevithick’s Peter Hogan talks about what VCs are looking for in return for their investment.  Here’s what Peter has to say: http://www.techinsurance.com/blog/business-tips/is-vc-funding-right-for-your-business/

Following your review, if you have any questions for Peter, please feel free to contact him at (310) 629-5700 or via email at phogan@clarktrev.com

0 comments on “Dangerous Liaisons – Be Careful When Transferring Assets”

Dangerous Liaisons – Be Careful When Transferring Assets

By Leslie R. Horowitz |

Clients often ask how to protect their assets.  Some refer to this as “asset protection,” a term that connotes the hiding of assets. Sometimes the request is based on a genuine concern for preservation of assets for family and retirement purposes, and sometimes based on a genuine concern that creditors from business transactions will be unrelenting in attempting to recoup potential losses.  Either way, depending upon the purpose and timing of the transfer, any transfer of assets that is not well thought out and carefully planned may be undone by third party creditors, bankruptcy trustees, assignees for the benefit of creditors and State or Federal Court appointed receivers.

Uniform Voidable Transactions Act

The area of law which governs asset transfers is known as the Uniform Voidable Transactions Act (“UVTA”), which was adopted into law by California commencing January 1, 2016.  Previously, the law governing voidable transfers was referred to as the Uniform Fraudulent Transfer Act and, before that, the Uniform Fraudulent Conveyance Act. The name change is relevant, because of the frequent misconception that common law fraud was being committed with regard to the transfer of assets.  Indeed, the elements of fraud are not required under the UVTA or its predecessors to recover transferred assets.

Transfer to Hinder, Delay or Defraud

The UVTA states that a transaction is voidable under two sets of circumstances.  The first circumstance is when the purpose of the transfer is to hinder, delay or defraud creditors.  This is called “actual fraud” and is judged by a subjective standard.  There are eleven “badges of fraud” that determine actual intent which are set forth in the statute as follows:  (1) Whether the transfer or obligation was to an insider; (2) Whether the debtor retained possession or control of the property transferred after the transfer; (3) Whether the transfer or obligation was disclosed or concealed; (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) Whether the transfer was of substantially all of the debtor’s assets; (6) Whether the debtor absconded; (7) Whether the debtor removed or concealed assets; (8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.  The more “badges” that a court finds applicable to a transaction, the more likely it is to be determined to be voidable.

If the purpose of the transfer is to hinder, delay or defraud creditors, such a transfer tends to occur in situations such as when a party has a lawsuit against him/her, sets up a new legal entity, such as a corporation or limited liability company and transfers personal or real property into the new legal entity, thus attempting to transfer legal ownership to another party. Some parties attempt to transfer assets directly to their children for similar purposes.  Some parties attempt to transfer assets into a trust, seemingly for estate planning purposes, however many such circumstance may be interpreted to fall within the definition of hinder, delay or defraud creditors. The statute of limitations is generally four years.

Transfer for Less than Reasonable Value

The second kind of voidable transfer occurs when a party makes a transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either (1) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (2) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.  This is generally called “constructive fraud” and is judged on an objective standard.  Similar to “actual fraud,” parties may sell personal or real property to a friend or family member for less than the value of the asset (intending to recover it later), thus preserving value for him or herself.  The statute of limitations is generally four years from the date of the transfer.

Protections are Available

There are methods available to protect a person’s assets.  For business purposes, corporations or limited liability companies may be formed to own assets, such as income producing real property.  If such a legal entity holds assets, generally, neither the shareholder of a corporation nor a member of a limited liability company is liable for the debts of the entity.  If a shareholder or member owns interests in other legal entities, the legal entities are not liable for the debts of the other legal entities.  So, if a bankruptcy is needed for one, it will not affect the assets of the other.

Trusts are a useful and valuable tool for family estate planning purposes, but, in California, a trust does not protect the settlors from their own creditors.  Some trusts may protect assets of from future creditors.

Keep in mind, the new entity, either a trust or a corporation/limited liability company, may be set up to protect assets as long as the “purpose” is not to hinder, delay or defraud creditors and does not render the transferor insolvent at the time of the transfer.  The same rules under the UTVA apply. Again, the statute of limitations is four years, but may be seven years from the transfer if actual fraud can be proven. Should the applicable statute of limitations expire, otherwise voidable transfers of assets may be protected from future creditors.

There are no sure fire ways to protect assets, but consulting with a lawyer for business and family estate planning in advance could avoid future problems.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other asset protection issue.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Leslie R. Horowitz by email  lhorowitz@clarktrev.comat or telephonically by calling the author at (213) 629-5700.