Subject to the provisions of subdivision (a) of Section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.

 Aye, there’s the rub . . .

That seems reasonably clear – get the right combination of signatures and you’re done.  The rub is that the statute is simply inapplicable to a great number of corporations even though they are located right here in California.

The reason is that Section 313 applies to “corporations” only and when the General Corporation Law talks about corporations, it isn’t talking about every firm that happens to be organized as a corporation.  “Corporations” under the GCL are limited to those corporations organized under the GCL or subject to the GCL pursuant to Section 102(a).   Cal. Corp. Code § 162.   Notably absent are “foreign corporations” which are corporations not formed under the laws of California.  Cal. Corp. Code §§ 167 & 171.  The statute also would apply to other forms of business entities that use officer titles but aren’t corporations.

 εὐλογώτατα μισεῖται ἡ ὀβολοστατικὴ διὰ τὸ ἀπ᾽ αὐτοῦ τοῦ νομίσματος εἶναι τὴν κτῆσιν καὶ οὐκ ἐφ᾽ ὅπερ ἐπορίσθη. μεταβολῆς γὰρ ἐγένετο χάριν,  ὁ δὲ τόκος αὐτὸ ποιεῖ πλέον （ὅθεν καὶ τοὔνομα τοῦτ᾽ εἴληφεν: ὅμοια γὰρ τὰ τικτόμενα τοῖς γεννῶσιν αὐτά ἐστιν, ὁ δὲ τόκος γίνεται νόμισμα ἐκ νομίσματος: ὥστε καὶ μάλιστα παρὰ φύσιν οὗτος τῶν χρηματισμῶν ἐστιν.  (“As this is so, usury is most reasonably hated, because its gain comes from money itself and not from that for the sake of which money was invented.  For money was brought into existence for the purpose of exchange, but interest increases the amount of the money itself  (and this is the actual origin of the Greek word: offspring resembles parent, and interest is money born of money); consequently this form of the business of getting wealth is of all forms the most contrary to nature.”)

Aristotle, Politics, Book 1, § 1258b (translated by H. Rackham).

William Blackstone, on the other hand, saw it as a necessity for modern commerce:

Thus, in the dark ages of monkish superstition and civil tyranny, when interest was laid under a total interdict, commerce was also at it’s lowest ebb . . . but when men’s minds began to be more enlarged, when true religion and real liberty revived, commerce grew again into credit; and again introduced with itself it’s inseparable companion, the doctrine of loans upon interest.

Commentaries on the Laws of England, Book II, Ch. 30.

California permits the charging of interest, but the Constitution limits the amount of interest that may be charged.  Cal. Const. Art. XV.  Not all loans, however, are subject to these constitutional rate limitations.  For example, the Constitution exempts “loans made or arranged by any person licensed as a real estate broker by the State of California and secured in whole or in part by liens on real property.”   Civil Code Section 1916.1 further explicates this exemption by providing that “a loan . . . is arranged by a person licensed as a real estate broker when the broker . . . acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging a loan for another.”

In a decision handed down this week, the California Court of Appeal considered whether a loan made by a wholly-owned subsidiary of an individual licensed as a real estate broker was within exemption.  Bock v. California Capital Loans, Inc., 2013 Cal. App. LEXIS 376 (May 14, 2013).  The borrower made two arguments – the loan was not arranged “for another” and the broker had not arranged the loan “in expectation of compensation”.  Justice Ronald B. Robie, writing for the court, rejected both of these arguments.

The late Lakers broadcaster Chick Hearn was known for coining or popularizing numerous basketball expressions, including “air ball” and  ”no harm, no foul”.   Now, the U.S. Supreme Court may soon decide whether the principle of “no harm, no foul” applies to Section 16, the other insider trading statute.

Do Section 16 Plaintiffs Suffer Injury In Fact?

In 2009/2010, a private investment fund, Bulldog Investors General Partnership, engaged in various open-market trades in the shares of common stock of another fund.  Bulldog admits that it violated Section 16(b) of the Securities Exchange Act of 1934 but sought dismissal of the ensuing suit by a private plaintiff, Deborah Donoghue.   Bulldog argued that because Donoghue had suffered no injury in fact, she had no standing to claim a foul.  The U.S. District Court agreed with Donoghue and the Second Circuit Court of Appeals agreed with the lower court.  Bulldog sought one last bite by filing a petition for writ of certiorari to the U.S. Supreme Court.  Bulldog Investors General Partnership v. Donoghue, Case No. 12-818.

Can Violation Of A Statute Alone Constitute Injury In Fact?

According to the Supreme Court’s docket, the briefs have been distributed for tomorrow’s conference.  As the Supreme Court Rules make clear, obtaining certiorari is by no means assured:

Review on a writ of certiorari is not a matter of right, but of judicial discretion.  A petition for a writ of certiorari will be granted only for compelling reasons.

Nonetheless, Bulldog’s petition resurrects an important question that the Supreme Court ducked last year when it dismissed its writ of certiorari in Edwards v. First Am. Fin. Corp., 610 F.3d 514 (9th Cir. 2010), cert. granted, 131 S. Ct. 3022 (2011), dismissed as improvidently granted, 132 S. Ct. 2536 (2012): just how far can Congress go in creating injury in fact by simply enacting a statute?  Or, as Chief Justice John Roberts commented during oral arguments in Edwards:

 You said violation of a statute is injury in fact.  I would have thought that would be called injury in law.

In some ways, Bulldog’s petition presents a purer legal question for the court.  In Edwards, the plaintiff had purchased insurance from the defendant and the alleged statuory violation was in connection with that purchase.  When a plaintiff brings a Section 16 claim, there is no privity and the statutory violation is not incident to any transaction between the plaintiff and the defendant.  Remarkably, a Section 16 plaintiff is not required to be a security holder of the issuer at the time of the alleged violation.   Gollust v. Mendell, 501 U.S. 115, 123 (1991).

Why is injury in fact so important?  Without injury in fact, a plaintiff does not possess the standing required by the U.S. Constitution for a case to be heard in federal court.

• Any transaction during the previous fiscal year involving an amount in excess of $40,000 to which the corporation or its parent or subsidiary was a party and in which any director or officer of the corporation or of a subsidiary or (if known to the corporation or its parent or subsidiary) any holder of more than 10% of the outstanding voting shares of the corporation had a direct or indirect material interest.   The report need not describe (i) compensation of officers and directors; or (ii) any transaction approved by the shareholders.
• The amount and circumstances of any indemnification or advances aggregating more than $10,000 paid during the fiscal year to any officer or director of the corporation pursuant to Section 317.  No report is required if the indemnification is approved by the shareholders under Section 317(e)(2).

Cal. Corp. Code § 1501(b). 

As noted yesterday, Section 1501 applies to any foreign corporation that has its principal executive offices in California or that customarily holds its board meetings in California.  Cal. Corp. Code § 1501(g).  The application of the statute to foreign corporations makes the references to Section 317 appear to be misplaced.  However, Section 2115 provides that Section 317 is applicable to a foreign corporation “to the exclusion of the law of the jurisdiction in which it is incorporated”.  Thus, in many (but not all) cases, Section 317 will apply to a foreign corporation, at least as far as California is concerned.  This does leave a bit of a lacuna with respect to foreign corporations that are not subject to Section 2115. 

What about reporting companies?  These additional requirements apply only if the corporation is either (i) not subject to Section 13 of the Securities Exchange Act of 1934; or (ii) exempted from those requirements by Section 12(g)(2).

A Latter Day A la Recherche du Temps Perdu?

Earlier this month, Commissioner Luis A. Aguilar gave the following remarks on the SEC’s proposed rules governing cross-border, securities-based swap activities:

The proposed release is over 1,000 pages, contains over 2,000 footnotes, and requests comments on more than 630 questions with many subparts.  Although the questions posed are many, they are intended to be balanced and fair to solicit views from all sides.  This is a welcome approach, because it contributes to a healthy debate and dialogue that is vital to the Commission’s processes.

Emphasis added.

One example is Section 1501(a) which requires the board to cause an annual report to be sent to shareholders.  This report must include a balance sheet as of year end and an income statement and statement of cash flows for the year.  The statute doesn’t require that the statements be audited, but if an independent accountant has issued a report, then that report must be sent along as well.  If there is no report, then the report must include a certificate of an authorized officer that the statements were prepared without audit from the books and records of the corporation.  If the corporation has fewer than 100 holders of record (determined in accordance with Section 605), the financial statements need not be prepared in conformity with generally accepted accounting principles if the statements reasonably set forth the assets and liabilities and income and expense of the corporation and disclose the accounting basis used in their preparation.

The report must be sent not later than 120 days after the close of the fiscal year and must be sent at least 15 days (or, if sent by third class mail, 35 days) prior to the annual meeting of shareholders held during the following fiscal year.  Cal. Corp. § 1501(a)(1) & (2).

This requirement applies to domestic corporations, a term that embraces any corporation formed under the laws of California.  Cal. Corp. § 1501(g).  Thus, it includes corporations not formed under the General Corporation Law. See Cal. Corp. Code § 167.  However, a corporation with less than 100 holders of record (determined in accordance with Section 605) may include a bylaw provision that waives the annual report requirement.

The statute also applies to any foreign corporation if the corporation has its principal executive offices in California or it customarily holds meetings of its board in California.  Cal. Corp. § 1501(g).

Publicly traded companies are not exempted per se from this requirement.  However, corporations with an outstanding class of securities registered under Section 12 of the Securities and Exchange Act of 1934 will satisfy the annual report requirement if they comply with Rule 14a-16 (17 C.F.R. § 240.14a-16).  Cal. Corp. § 1501(a)(4).  [Note that this statute purports to include future amendments and this may give rise to a constitutional problem, see Why Incorporation May Be Unconstitutional.]

Here is a flow-chart describing the application of the statute.  This is probably a good time to remind readers that this blog does not provide legal advice.  There are other requirements in Section 1501 (including possible quarterly reporting requirements) that are not covered in today’s post.  Moreover, there are other nuances that I’ve not mentioned.

In explaining the title of her site, Professor Anderson points out that  ”Sub rosa means in secret and, translated literally, sub rosa means under the rose”.  The term “sub rosa” can be found  in numerous California opinions.  See, e.g., People v. Gilmore, 239 Cal.App.2d 125, 130 (1965) (“for surely it is within the realm of common knowledge and common sense that uniformed or otherwise known policemen are unable to penetrate the sub rosa world of the narcotics peddler.”).

My favorite literary mention of meeting under the rose, is Horace’s famous fifth ode which begins:

Quis multa gracilis te puer in rosa
perfusus liquidis urget odoribus
grato, Pyrrha, sub antro?

John Milton provided this translation “rendred almost word for word without rhyme according to the Latin measure, as near as the language will permit”:

What slender Youth bedew’d with liquid odours
Courts thee on Roses in some pleasant Cave . . .

What’s so clever about Horace’s poem is that word order actually follows the meaning.  Thus, the “you” (te in Latin) is positionally embraced by the slender youth (gracilis puer) in the middle of the many roses (multa rosa).   Then in the third line, Pyrrha (the woman being addressed) is positioned within the pleasing grotto (grato antro). 

After the twilight there will be a dawn

The good news is that the legislature recently enacted and Governor Jerry Brown signed AB 113.  This bill appropriates $1.6 million to the Secretary of State’s office.  The appropriation requires that these additional moneys be used for “costs associated with reducing the processing time for business filings”.   According to the bill analysis, the backlog will be attacked using overtime and temporary staffing.  The bill also requires the Secretary of State to report back to the Legislative Budget Committee on her progress in reducing the backlog. 

The other good news is that the bill takes effect immediately pursuant to Article IV, Section 12(e) of the California Constitution.

If the subsidiary is a corporation that is issuing common shares, Rule 260.105.22 may prove to be a handy exemption.  The rule exempts offer and sales of common shares issued by any corporation organized under the laws of a foreign country, provided the following conditions are met:

• After completion of the offering, 100% of the outstanding capital stock of the issuer is owned by a corporation, directly or indirectly, in its own name or in the name of nominees or other persons holding for the sole benefit of that corporation;
• The acquiring corporation represents that the securities are purchased for its own account for investment and not with a view to, or for sale in connection with, any distribution of the shares; and
• All of the shares are evidenced by certificates that have stamped or printed prominently on their face a legend in the form prescribed by Rule 260.141.11.

The last condition may make this exemption less attractive than others because future transfers will be subject to the limitations on transfer set forth in Rule 260.141.11.

One explanation for Laban’s chicanery might be that as paterfamilias he simply wanted Leah to be wed before her younger sister.  I’m wondering, however, whether this wasn’t an elaborate scheme on the part of Laban to avoid a legal limit on the term of personal services contracts.  Perhaps, ancient Haran had a law similar to California Labor Code Section 2855 which provides that a contract to render personal service, may not be enforced against the employee beyond seven years from the commencement of service under it.  (The statute makes an explicit exceptions for contracts of apprenticeship as provided in Chapter 4 of the Labor Code and for any employee who is a party to a contract to render personal service in the production of phonorecords in which sounds are first fixed, as defined in 17 U.S.C. Section 101.)

This brings me to Dr. Michael A. Weiner of talk radio fame.  Never heard of Dr. Weiner?  He is professionally known as Michael Savage and he is the star of the eponymous “The Michael Savage Show”.   In a ruling handed down last week, Judge Yvonne Gonzalez Rogers upheld an arbitration award in favor of Dr. Weiner and against the syndicator of his program.  Weiner v. Original Talk Radio Network,  2013 U.S. Dist. LEXIS 63083 (N. D. Cal., May 2, 2013)  Although the ruling involves the standard for judicial review of arbitration awards, one large bone of contention in the arbitration appears to have been the applicability of Labor Code Section 2855.

As one might expect, bad things can happen when an LLC fails to file a tax return or pay its taxes.  One of these bad things is that that the LLC may be suspended or forfeited. Another bad thing is that any contract entered into by that LLC may be voided by another party to the contract during the suspension or forfeiture period.  However, these misfortunes do not fall equally on all LLCs.  It turns out that only domestic LLCs and foreign LLCs qualified with the Secretary of State face the possibility of contract avoidance. Who’s been left out? Foreign LLCs that have not qualified with the Secretary of State.  Alas, “Hanc marginis exiguitas non caperet“.

The important point for today is that Assemblymember Nancy Skinner has introduced a bill, AB 1143, that is intended to remedy this inequality of affliction.  The bill has already passed through two committees without a single no vote.  This is especially important because the bill is an “urgency bill” that requires a 2/3 vote of each house.  Cal. Const. Article IV, Section 8(d).  Urgency statutes take effect immediately.

The constitution imposes two additional requirements on urgency statutes.  They must be “necessary for the immediate preservation of the public peace, health, or safety” and include a statement of facts explaining that necessity.  One can only wonder at the statement included in AB 1143:  ”In order to ensure that all entities doing business in California are treated equally under the Revenue Taxation Code, it is necessary that this act take effect immediately.”  This hardly seems to be a statement of facts.  It is a circular statement of purpose.  It seems that even the legislators can’t bring themselves to claim that there will be civil disturbances, people will fall ill, or be endangered if this bill does not become law immediately.

However, challenging a legislative declaration of urgency is no easy task.  Long ago, the California Supreme Court adopted the rule that a declaration of urgency by the legislature will not be declared invalid unless it appears clearly and affirmatively from the legislature’s statement of facts that a public necessity does not exist. Davis v. County of Los Angeles, 12 Cal. 2d 412 (1935).  Because AB 1143 includes no statement of facts, it would seem to be a good candidate for the application of the Supreme Court’s proviso.