New Corporations in California: Flexible Purpose and Benefit Corporations

California law now allows you more options when forming your business entity.  Instead of a standard, for profit corporation, you have two more new corporation choices: 1) the Flexible Purpose Corporation; and 2) the Benefit Corporation.

Governor Brown recently signed into law two bills that will allow California corporations to pursue “social or environmental goals” while at the same time focusing on the monetary earnings of their shareholders.  Both laws took effect on January 1, 2012.  In the past, the only option was a “for-profit corporation” (which is a standard corporation) where directors and officers had to make decisions based on what would best benefit the shareholders, even if it was at the expense of things like the environment or benefits to the public at large.

The Corporate Flexibility Act of 2011 is one of these new laws.  This Act allows for the formation of a new kind of corporation, referred to as the “Flexible Purpose Corporation.”  The directors of a Flexible Purpose Corporation choose one “special purpose,” such as providing products or jobs to an underprivileged community, and then the corporation must work to meet the goals associated with that purpose.  In its Articles of Incorporation, a Flexible Purpose Corporation must state its precise purpose and must outline the goals to be achieved.  It must also publish an annual report disclosing its progress in achieving those goals.

The second law, known as Assembly Bill 361, allows for the creation of a similar, but slightly different type of corporation, the “Benefit Corporation.”  In its Articles of Incorporation, the Benefit Corporation must describe one or more particular public benefits that would be the focus of the corporation.  Another defining element of Benefit Corporations is that in addition to listening to shareholders, the directors and officers must take the needs of the community, the environment, employees, and other groups associated with the corporation into account when making decisions.  And, in order to maintain this status, Benefit Corporations must go through periodic assessments by a third party to measure the corporation’s impact on society and the environment.

Both Flexible Purpose Corporations and Benefit Corporations are considered “hybrids” of for profit and nonprofit entities.  They are certainly “for-profit” entities, but they provide protection to directors and officers who pursue socially or environmentally beneficial objectives instead of making decisions solely based on projected corporate profits.  In the past, directors and officers would be subject to liability if unhappy shareholders saw the corporation’s purpose sway from maximizing profits, regardless of the reason.

If you already have a for profit corporation, and wish to convert to one of these new entities, you are able do to so.  An existing corporation can become either a Flexible Purpose Corporation or a Benefit Corporation, with a two-thirds’ shareholder vote.  If you have any questions about these new corporations or are interested in forming one, please contact us.

Risk of Refinancing Your Home Loan: Refi Means Recourse!

With interest rates and home values dropping, many homeowners are refinancing their mortgages.  Many banks have found that the refinancing market is a good way to keep their loan production up.  These refinancing packages can look quite attractive to homeowners as, in some instances, they can reduce their interest rate by 2% or more.  That being said, the biggest, and mostly unknown, drawback is that refinancing your home loan will likely expose you to personal liability in the event of default.

If the only debt on your home currently is the loan you used to buy it (a “purchase money mortgage”), then, at least in California, the lender cannot sue you personally in the event of default.  For instance, if you walk away from your mortgage with $300,000 still owing, and the foreclosure sale price is only $200,000, the lender must absorb that $100,000 “deficiency.”  The reason for this is that California Code of Civil Procedure §§ 580b and 580e shield homeowners from deficiency judgments if they default on their purchase money mortgage.  580b applies if your home is sold through a foreclosure sale (also known as a “trustee’s sale”); 580e applies if you short sell your home (please note that §580e is a relatively new law; short sales historically opened the borrower up to being sued personally for the deficiency).  It is important to note that this protection applies narrowly to homes…you can’t bootstrap the 580b or 580e shield by arguing you live next to the Quiznos in your 8,000 square foot commercial building.

Because 580b and 580e apply to purchase money mortgages only, if the nature of the loan changes, the protection offered by these statutes is lost.  In other words, refinancing turns your home loan from nonrecourse to recourse.  If you default on your refinanced loan, the bank can now pursue a “judicial foreclosure,” which is essentially a court supervised and administered foreclosure proceeding.  Judicial foreclosures are more time consuming and expensive for the bank, but they give the bank the ability to sue you personally for the difference between that amount you owe and the price for which the property sold (a “deficiency judgment”).  When borrowers obtain a purchase-money loan, the California Civil Code requires an initial disclosure of the details of the code, but it does not necessitate disclosure of the potential loss of that protection through refinancing.

The take home point is not that you should avoid refinancing, but simply that you should be fully advised of all of the risks prior to making the decision.  On occasion, you can negotiate with banks during the refinancing process for them to include nonrecourse language in the new financing agreement.  If you need any assistance with this complicated area of the law, please contact our law offices.

SHARING YOUR IP: THE SIMPLICITY AND BEAUTY OF THE NONDISCLOSURE AGREEMENT.

            One of the most exciting things about developing a new idea or business model is sharing your inspiration with others.  Sharing your idea and the way it is implemented, will probably be necessary to turn your idea into a profitable business.  After all, you will have to contract with employees, contractors, and vendors to develop and produce your idea; and, you will have to market your idea to consumers in order to get paid!  While these disclosures can feel like a moment of triumph, particularly when others validate the importance and uniqueness of your ingenuity, but it is fraught with same danger and fear felt by every entrepreneur:  How do I prevent the party with whom I share my idea from stealing it!?

            This is a real and serious concern.  Unfortunately, the risk of someone stealing your idea cannot be completely eliminated.  What you can do, however, is take steps to impose legal penalties for those who steal your ideas, and to preserve your ability to file a patent application or claim trade secret protection.  All of these goals can be accomplished in large part thanks to the nondisclosure agreement.  A nondisclosure agreement is intended to contractually bind the recipient of your information to keep such information secret.  If the recipient feels plucky enough to steal your secrets anyway, you have legal remedies available to you because of the agreement.  You can sue the purloiner for liquidated damages (a pre-agreed amount of money) or possibly enjoin him or her from disclosing the idea further.

            The other function a nondisclosure agreement performs is that it preserves your intellectual property rights.  For instance, if you wish to apply for patent, one of the elements you must show is that the invention is “new.”  If you disclosed the invention more than a year prior to filing the application and did not protect that disclosure with a nondisclosure agreement, you are in danger of losing your ability to patent the invention.  The reason is because your year-old disclosure has made the invention not “new”.  If you used a nondisclosure agreement, however, you should be able to preserve the newness element.  Similarly, for trade secrets, the nondisclosure agreement preserves your ability to enforce trade secret rights.  The law will not assist you to protect your trade secret if you do not care enough to keep it secret yourself. 

            The nondisclosure agreement does come with some limitations, however.  It cannot protect you if your idea is already something that is commonly known and/or available to the public.  It also may not protect you against the unscrupulous person who believes in the “efficient breach” theory.  In other words, if the recipient of your information decides that the amount they will profit from stealing your idea will outweigh all the costs of breaching the agreement, you have yourself a very serious problem.  The best advice I can give is that while you should always use a nondisclosure agreement in these situations, you should do your best to share your profitable information with people you trust.  If you have any more questions, please contact the Law Offices of Aaron Stewart in Chico, California.

Stolen and Infringing Domain Names: The Law of Cybersquatting

As most business owners know, it takes consistent effort to protect the trademark from being infringed by other individuals and businesses.  While trademark law can afford you a set of rules and a mechanism through which to enforce your rights, the impetus is always on you, as the trademark owner, to defend what is yours.  This can be especially difficult in an online word considering (1) the relative anonymity the Internet can afford, and (2) the ease with which domain names can be purchased and registered.

Cybersquatting and cyberpiracy are buzzwords that are becoming more well-known in our day to day lives as business people.  The term cybersquatting originated from the situation where a person or business who knowingly and in bad faith reserves a domain name consisting of the trademark or name of a company with the intent of selling the right to that domain name back to the legitimate owner.”  

The Anticybersquatting Consumer Protection Act, now embodied in 15 USC §1125, is a federal law that took effect in 1999.  This domain name protection law is intended to give trademark and service mark owners a new way to fight cybersquatters.

For example, Nintendo of America Inc. was awarded $560,000 and a recovered 48 Internet domain names in a domain infringement suit in October of 2000.  It was one of the first massive domain name lawsuits that resulted from the 1999 Act.  The Court awarded the company statutory damages ranging from $2,000 to $30,000 per name for 48 names—for a total award of $560,000.  

The major drawback to using the ACPA to enforce your rights, is that you must sue in federal court to do so.  Even with a successful outcome, the process to get there can cost you a lot of time and money.  Fortunately, the Internet Corporation of Assigned Names and Numbers (ICANN) has established a cheaper, faster, and more user-friendly way to enforce your rights in a domain name.  ICANN is a not for profit public benefit corporation that is responsible for administering and overseeing all Internet domain name registrars and their underlying policies.

If someone has taken a domain name similar to your domain name, trademark, or trade name, you may be able to use ICANN’s Uniform Domain-Name Dispute-Resolution Policy (UDRP) to request a binding Administrative Proceeding.  Such a proceeding is initiated by filing a complaint online, and following through with the administrative procedures provided by the UDRP.  If you prevail, the only remedy is transfer of the infringing domain name to you; monetary damages are not allowed under the UDRP’s Administrative Proceeding.

If you think that someone has registered a domain name that may infringe on your trademark or service mark, please contact our law offices to determine if you would be able to file an ACPA or UDRP action to acquire the domain name or avert the domain name registrant from future use of the domain name.