Blog

Aug 24
Entitlement to Corporate Records

​Access to books and records is one source of dispute that we commonly see in business disputes. To what extent a person has the right to inspect books and records depends on the type of business they are involved in.

For corporate stockholders, California corporations code Section 1601 gives the baseline, minimum level of information that shareholders are entitled to access. These include the "accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board." Under common law, Courts have granted additional inspection rights when a shareholder can show that their request for inspection reasonably relates to a shareholder's interest. See, e.g., Hobbs v. Tom Reed Gold Mining Co. (1913) 164 Cal. 497, 501-502. However, courts have denied requests for inspection that are shown to be adverse to the corporation's interests: for example, burdensome to produce in the format requested by the shareholder.

See also Webster v. Bartlett Estate Company (1917) 35 Cal. App. 283, 285; and Austin v. Turrentine (1939) 30 Cal.App.2d 750, stating that in an action for accounting, the corporation is the agent and trustee of its stockholders, for their use and benefit; holding, controlling, and managing corporate property and business, and shareholders have the right to inspect its books, records, and journals. Additionally, Corporation Code § 1501 gives shareholders access to the company's annual report and its financial statements; § 1600 allows for inspection of the company's list of shareholder names, addresses and shareholdings; and § 213 grants shareholders the absolute right to inspect or obtain a copy of the corporation's bylaws. Note that § 1600 states that the right of shareholders to inspect and copy corporate books cannot be limited by articles of incorporation or bylaws.

For LLCs and partnerships, rights to inspection can often hinge on what the Operating Agreement of such company entitles members to access. Typically, LLCs and partnerships have Operating Agreements that mirror the corporations code, giving members access to books and records when requested if reasonably related to a member's interests.  

Under California LLC law, "records" is defined as "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form." California Corporations Code Section 17701.02(x). This is a very broad definition, giving members quite a bit of leeway to request information. Again, a member should show that their request is reasonably related to their membership interest.

Note that California law permits the recovery of attorney's fees for the costs of any application to enforce these inspection rights. Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, 1260.

Aug 10
Choosing a Corporate Form: Corporations, LLCs, and Partnerships

In California, the major differences between the primary three corporate forms, corporations, LLCs, and partnerships, have to do with taxes and liability.

In a partnership, at least one partner retains personal liability for the partnership’s debts.

In a corporation and LLC, shareholders are shielded (to some degree) from personal liability.

            For small businesses, an LLC typically makes the most sense for tax purposes. This is because members are shielded from personal liability, unlike in a partnership, and LLCs typically have less tax burdens than a corporation, which is subject to income taxes.

 An LLC also gives small businesses the leeway to organize the company as the owners wish by way of the Operating Agreement. California’s LLC law gives wide leeway to Operating Agreements, allowing the members to contract for virtually any clause. However, an Operating Agreement may not limit a member’s liability for breaching the duty of loyalty; receiving financial benefits to which the member is not entitled; receiving excess distributions; intentional infliction of harm on the LLC or its members; or an intentional violation of criminal law.

Because the laws for LLCs are so flexible, it is important to utilize a carefully constructed Operating Agreement that clearly lays out the responsibilities, duties, and rights of the members and managers.

             For tax purposes, LLCs are taxed just like a sole proprietorship (for a single member LLC) or a partnership (for a multiple member LLC). LLCs and partnerships benefit from pass-through taxes, meaning the business itself is not subject to income taxes. Corporations, on the other hand, can face income taxes, and in some cases double taxation (taxation on both the corporation and the stockholders). Corporations should typically be utilized by larger companies that expect a  high number of investors who will want to receive stock.
Feb 15
HOA Elections


The election rules laid out in Davis-Stirling apply to all homeowners associations, regardless of size. The Act requires that certain elections be conducted by secret balloting: elections and removals of directors, amendments to the governing documents, or the grant of exclusive use of a common area. These must be conducted by secret balance even if your governing documents state a different procedure; Davis-Stirling pre-empts governing documents. However, your governing documents may require additional topics be voted on by secret ballot. The only exception is if your governing documents state that each unit is automatically a director of the Association, no secret ballot voting is required.

Davis-Stirling further requires that each Association adopt rules that govern elections. These rules must ensure that each candidate for the board has equal access to association media for purposes related to the campaign; that the common area be available to each candidate equally for purposes realted to the campaign; specifying qualifications for the board and a nomination procedure; and specifying how to choose an inspector of elections.

Each secret ballot vote of an Association requires an Inspector of Elections. This person can be selected by appointment of the board; election by the membership; or any other method defined in the Association’s governing documents. There may be one or three inspectors of elections. An inspector of elections should be a third party, including a volunteer poll worker with the county registrar of voters, a licensee of the California Board of Accountancy, or a notary public. An inspector of elections may be a member but may not be a director or candidate for director, or be related to a director or candidate for director. An independent third party may not be a person, business entity, or subdivision of a business entity who is currently employed or under contract to the association for any compensable services unless expressly authorized by rules of the association.

The duties of the inspector of elections are as follows:

                -determining the number of members entitled to vote.

                - determining the validity and effect of proxies.       

               -receiving, counting, and tabulating ballots.

                -hearing and determining all challenges and questions connected with the right to vote.

                -determining when the polls close.

                 -determining the result of the election.

When an election occurs, you should receive in the mail a ballot with two envelopes. One envelope will be blank; this is the inner envelope. Once you have voted, you should place your ballot in this envelope with nothing else and seal it. The second, outer envelope will have space for you to identify your address and sign your ballot. The second envelope should be addressed to the inspector of elections. Once the signed ballot is received, it is irrevocable. If more than one ballot is sent from a single voter, only the first ballot received will be counted.

There must be an open meeting to count the votes, in which members may witness the counting and tabulation of the votes. No ballots may be opened before this open meeting. The inspector of elections shall report the tabulation of votes to the board, which should be recorded in the minutes of the next meeting of the board. Within 15 days of the election, the board shall give general notice of the tabulated results of the election.
Feb 01
HOAs and the Open Meeting Act
Section 4900, et seq., of the Davis-Stirling Act is entitled the “Open Meeting Act.” It is based off of the Brown Act, which governs government officials, agencies, and boards. This act mandates open governance meetings, with notice, agenda, and minutes requirements, and strictly limits closed executive sessions.

It can be important to understand the different types of meetings that will occur in your Association. Your Association with hold annual meetings; regular member meetings; special member meetings; board meetings; executive session meetings; and emergency meetings. Each of these meetings may have different notice and quorum requirements under your governing documents or California law.

The Open Meeting Act prohibits a board from conducting any Association business for which the Board is entitled to act outside of open meetings, except in emergencies and in executive sessions. The Open Meeting Act also prohibits Boards from conducting meetings via electronic transmissions (including emails), except in an emergency when all Board members consent to the electronic meeting.

The Open Meeting Act requires the following notices to members:

                        (1) At least four days before a board meeting, the Association shall give notice of the time and place of the board meeting. If an Association’s governing documents require a longer notice period, the longer period shall be required.

                        (2) If a board meeting is an emergency meeting, the Association is not required to give notice of the time or place.

                        (3) If the board holds an executive session meeting, two days notice shall be given.

                        (4) Every notice shall contain an agenda.

Emergency board meetings can be held in the following circumstances: if there are circumstances that could not have been reasonably foreseen which require immediate attention and possible action by the board, and which of necessity make it impracticable to provide notice as required. An emergency board meeting can be called by either the President or by two other board members.

An executive session may be held to consider litigation, matters relating to the formation of contracts with third parties, discuss a payment plan, decide whether to foreclose on a lien, member discipline, personnel matters, or to meet with a member, upon the member’s request, regarding the member’s payment of assessments. Any matter discussed in executive session shall be generally noted in the minutes of the immediately following meeting open to the entire membership.

With the exception of executive session meetings, any member may attend board meetings. The board shall permit any member to speak at any meeting of the association or the board, except for meetings of the board held in executive session. A reasonable time limit for all members of the association to speak to the board or before a meeting of the association shall be established by the board.

The Open Meeting Act prohibits the board from discussing or taking action on any item at a nonemergency meeting unless the item was placed on the agenda included with the notice distributed. The board may briefly respond to statement made by members, ask questions for clarification, make brief announcements, provide reference to factual resources, request further reporting at future meetings, or direct agents to perform administrative tasks. The board may take actions not found on the agenda if an emergency situation arises; if the board determines by a 2/3rds majority that immediate action is needed on an item that arose after preparation and distribution of the agenda; or if a matter appeared on a previous agenda within the last 30 days and the matter was continued.

Boards must make minutes, proposed minutes, or a summary of minutes available to members within 30 days of the meeting.

However, the Open Meeting Act does not provide for any remedies except injunctive relief. This means that even if a board takes action without a properly noticed open meeting, the action is not automatically voided. In fact, California courts have found that the action will only be voided if the violation of open meeting rules prejudiced the complaining party.

Jan 18
Pre-litigation Dispute Resolution with your HOA

If you are in a dispute with your HOA, your first step should be to pursue internal dispute resolution, or “IDR.” California law requires that each Association provide members a fair, reasonable, and expeditious dispute resolution process at no cost to the member, in which each side can explain their positions. Either the Association or a member can request IDR in writing. The Association’s procedure must provide for prompt deadlines, and if a member requests the procedure, the Association is required to participate. If the parties meet and come to a resolution, the parties can sign a written resolution, which is legally binding and judicially enforceable as long as it does not conflict with law or the governing documents.

If your Association does not otherwise provide for an internal dispute resolution process, California law calls for a default meet and confer procedure under which one party requests to meet and confer over a dispute. A member may refuse a request to meet and confer. An association may not refuse a request to meet and confer. The board must designate a director to meet and confer, wherein the parties meet promptly at a mutually convenient time and place, explain their positions to each other, and confer in good faith in an effort to resolve the dispute.

If the IDR process is not successful, typically one or both parties will request alternative dispute resolution (“ADR”) by serving the other party with a “Request for Resolution.” A party who receives a request for resolution has 30 days to respond. ADR includes mediation, arbitration, conciliation, and other nonjudicial procedures involving a neutral party to assist the parties to resolve their conflict. Once a request for resolution has been accepted, the parties have 90 days to complete the ADR, unless the parties agree to a longer period of time by written stipulation.

In fact, California law requires that in some instances HOAs and homeowners use ADR before filing a lawsuit. If you are filing a lawsuit for an amount of money under $50,000, or only for declaratory relief – meaning you only want the court to issue an order for the HOA to do something or stop doing something – California law requires that you request mediation or IDR with your HOA before filing your lawsuit.

If you are suing your HOA for more than $50,000, you do not need to ask for ADR before filing your lawsuit.

It is recommended that if your HOA requests ADR, you agree. This is because, when the court is later deciding motions for fees and costs, the court may consider whether the parties agreed to attend ADR before the lawsuit. If the court finds that it was unreasonable for you not to attend ADR, it could rule against you for fees and costs, award you less fees and costs than you might otherwise get, or award the HOA more fees and costs than the HOA might otherwise get, as the case may be.

Additionally, the high cost of litigation means that the parties should endeavor to resolve their issues outside of court whenever possible. Enlisting the help of someone outside the community, like a neutral mediator, can often assist the parties in coming to an amicable resolution.

Jan 07
What to Know if You are in a Conflict with Your HOA

Homeowners get into conflicts with their HOAs for a variety of reasons: the homeowner feels the HOA is not being transparent with financial documents, the HOA denies the homeowner’s request to modify the homeowner’s property, the HOA fines the homeowner for an alleged violation, and so on.

If you are in a conflict with your HOA, there are two main sources to consult when evaluating your position: your HOA governing documents, and the California law governing HOAs, the Davis-Stirling Act.

            -Governing Documents-

When you purchased your property, your deed was recorded with the HOA documents. The HOA governing documents should have been provided to you with disclosures; however, if you no longer have a copy of the governing documents, all you have to do is go to the county recorder and pull the records for your home.

HOA governing documents typically have three parts: the declaration, the articles of incorporation, and the by-laws. Because these documents sometimes conflict, there is an order of authority in the documents. If there is a conflict between the declaration and any other document, the declaration governs. If there is a conflict between the articles of incorporation and the by-laws, the by-laws govern. If there is a conflict between the by-laws and any other rules and regulations, the by-laws govern.

The governing documents are essentially a contract between you and your HOA. The governing documents of your HOA are permitted to be more restrictive than California law, but cannot be less restrictive. The governing documents will tell you things like how many board members there should be; how elections work; how to amend the governing documents; and probably include rules about modifications to your home and to the common areas.

If you are contacting an attorney about a conflict with your HOA, the attorney will certainly want to see the declaration, articles of incorporation, by-laws, and any other rules and regulations adopted by your HOA.

-California law-

California’s Davis-Stirling Act governs HOAs. It provides a baseline for HOA governing documents and also covers any area which is not addressed by your governing documents.

Because Davis-Stirling provides a baseline, that means your governing documents may be more restrictive than California law. However, the governing documents cannot be less restrictive than California law. Davis-Stirling is frequently updated by the California legislature, while HOA governing documents are infrequently updated due to the laborious process to amend governing documents. Thus, there are likely provisions of your governing documents that are preempted by the provisions of Davis-Stirling.