Where To Incorporate?
California, Nevada, or Delaware?

By Hubert Lenczowski
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The question often arises of where California-based businesses should incorporate, and whether there is an advantage to incorporating in Nevada or Delaware.

A corporation operating exclusively in California will pay the same California taxes based on income regardless of where it is incorporated. Additionally, California law will govern important aspects of the corporation's activities even if it is incorporated in Nevada or Delaware.

Although Nevada and Delaware have features that are considered beneficial, such as Delaware law being advantageous to management and majority shareholders, and Nevada not having a corporate level income tax, both Nevada and Delaware have a tax on authorized capital so that there is a risk of receiving a large tax bill for the unsuspecting business owner that authorizes many shares of stock. In addition, a business located in California that is incorporated in Delaware will pay both California and Delaware corporate income taxes.

Venture Capitalists Holding Fewer Than One-Third of a Corporation's Shares May Force It to Dissolve

By Gordon Endow
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Idealab, a Pasadena-based start-up incubator, sold shares of its Series D preferred stock to several venture capitalists for several hundred million dollars. Ultimately, many of those shareholders became disenchanted with Idealab's management and filed a lawsuit to involuntarily dissolve the company.

Since 1947 under California law, minority shareholders holding at least one-third of the outstanding shares (calculated by assuming conversion of any preferred shares convertible into common shares) could generally petition a court to involuntarily dissolve the corporation. Shareholders holding at least one-third of the outstanding common shares could also do so. In 1977, the California Legislature enacted the General Corporations Law which, among other things, expanded the authority to initiate the involuntary dissolution of a corporation. Thus, for example, Section 1800 of the Corporations Code permits persons authorized in the corporation's articles of incorporation to initiate involuntary dissolution proceedings.

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Landlords Beware - Solvent Tenant May File Bankruptcy Solely To Limit Landlord's Damages

By Phillip K. Wang
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The Third Circuit held that a tenant filed its bankruptcy petition in good faith even though the tenant had the ability to pay all its creditors in bankruptcy and the primary purpose of the petition was to “cap” the landlord’s claim. In re PPI Enterprises, (U.S.) Inc. , 324 F.3d 197 (3rd. Cir. 2003). The “claim cap” under Section 502(b)(6) of the Bankruptcy Code limits a landlord’s damages resulting from the termination of a real property lease to the rent reserved under the lease for the greater of (1) one year or (2) fifteen percent, not to exceed three years, of the remaining term. The PPI court’s only inquiry in evaluating the debtor’s good faith was to determine whether the debtor sought to abuse the bankruptcy law by employing it for an unintended purpose. Because the “claim cap” was designed to compensate a landlord for its loss while not permitting a claim so large as to prevent other general unsecured creditors from recovering a dividend from the estate, the PPI court held that the debtor used the “claim cap” for its intended purpose and that the debtor had filed its petition in good faith. While the Ninth Circuit has not yet addressed this issue, the Northern District of California concurs with this decision. In re Chameleon Systems, 306 B.R. 666 (Bankr. N.D. Cal. 2004).

Because lease renegotiations often take place against the backdrop of a threatened tenant bankruptcy, it is important to understand the bankruptcy outcome as a baseline for those renegotiations.

New Construction Has Developer Carry Liability For 10 Years

By Hubert Lenczowski
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With property prices rising, many people are engaged in building houses or remodeling them to the extent that the property is considered new construction. In California, a developer has liability for 10 years from the end of construction for construction defects. Individuals considering such construction projects should consider forming a limited liability entity to protect them from uninsured construction-related liabilities or they should also consider complying with SB800, as a statutory system of disclosure which limits their liability.

FDA Registration Required For Food Chain Businesses

By Hubert Lenczowski
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In 2002, federal law was enacted entitled "the Bio terrorism Preparedness and Response Act." This law requires that all owners of facilities, whether domestic or foreign, that manufacture, process, pack, or store food or drink for human or animal consumption in the United States must register with the Food & Drug Administration. This law requires registration of prior notice with each shipment within particular time periods depending on kind of transportation. Please contact us if you have any questions regarding registration or compliance with these laws and regulations.

Adrift In Foreign Wonderland: How A Poorly Drafted International Arbitration Clause Can Get You In Trouble

By Bruce Boyd
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The very recent case of China National Metal Products Import/Export Company v. Apex Digital, Inc. (August 16, 2004) 04 C.D.O.S. 7450 (9th Cir. Ct. of Appeals) demonstrates the troubles a company can encounter when it uses an ambiguous international arbitration clause in its contracting documents.

This case involved Apex, a U.S. importer of electronic equipment and China National, a Chinese manufacturer and exporter of DVD players. The parties entered into a series of written purchase orders for the DVD players. Each of the purchase contracts contained the following arbitration provision:

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Advertising May Allow Out-of State Businesses to Be Sued in California for Violating its Unfair Competition Law

By Gordon Endow
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Hotels, casinos, restaurants, and other businesses in the hospitality industry routinely advertise outside the state in which they are located. However, using newspaper and magazine ads, toll-free numbers, interactive web sites, and billboards in California may subject an out-of-state business to suit in a California court.

The California Supreme Court agreed this summer to review the intermediate Court of Appeal's holding in Snowney v. Harrah's Entertainment, Inc. The lower appellate court had held that Harrah's Las Vegas, Inc. and related companies-which had no property or operations in California-were subject to suit there for alleged unfair business practices, false advertising, breach of contract, and unjust enrichment arising out of their advertising for their Nevada properties.

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Gordon & Rees LLP, with offices in five California cities as well as Portland, Las Vegas and Houston, has opened its ninth and newest office in Phoenix, Arizona. The move into Arizona initially is to address needs and opportunities in Hospitality, Health Care and Long Term Care, Real Estate and Environmental, but it is anticipated that all of the firm's practice groups will be represented in the near future. The new Phoenix office is located at 2375 E. Camelback Road, Fifth Floor. (602)265-4700.