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Friday, Mar 29, 2024

At Issue: Sitting on the Board of a Privately Held Firm

By Ira Rosenblatt Guest Columnist Question: I have been asked to sit on the board of a privately held corporation. What exposure do I have if I elect to accept the offer to fill the seat? Answer: So long as directors perform their duties in good faith, in a manner the director believes to be in the best interests of the corporation and its shareholders, and with the care that an ordinarily prudent person in a like position would use under similar circumstances, California Corporations Code Section 309 (a) provides that directors ” shall have no liability based upon any alleged failure to discharge ” their obligations as a director. Nevertheless, you need to be aware that if things go bad (assuming they ever do), those adversely affected usually like to have someone to blame. As a board member, you just might end up being that someone. Consequently, as you might have surmised by keeping up with current business and legal affairs, many qualified director candidates are somewhat gun shy to accept seats absent compensation sufficient to outweigh the risks. If you are still considering accepting the seat, you may want to request a written indemnification agreement obligating the corporation to secure and maintain errors and omissions insurance. Additionally, you might want to review the corporate articles to see if they contain standard provisions further limiting the liability of directors for monetary damages. However, notwithstanding the foregoing, directors are not immune from liability and will always have personal exposure for acts/omissions involving intentional misconduct, bad faith, self-dealing, reckless disregard, or an unexcused pattern of inattention amounting to an abdication of one’s duty to the corporation or its shareholders. Q: I am an investor in a sushi bar located in a Valley shopping mall. Our operator just notified me that the landlord is in negotiations to lease space in our mall to another sushi operator. When we signed our lease, the landlord shared his opinion that he didn’t like pitting tenants against each other. Can our landlord rent space in our same mall to a direct competitor? What options do we have? A: Although many readers likely empathize with you, generally speaking, a commercial landlord is free to lease its premises for any legal purpose, notwithstanding the interests of existing tenants. However, tenants are free to seek and limit a landlord’s rights in this regard by negotiating lease provisions expressly prohibiting a landlord from leasing space to a competing business (commonly referred to as an “exclusive use” or “non-competition” provisions). The nature and scope of these clauses are subject to negotiation. For example, you might have sought a broad exclusive use provision (e.g., precluding landlord from leasing space to another “restaurant”) but only been able to secure landlord’s consent to not lease to another “sushi bar restaurant.” However, these types of restrictive covenants (e.g., “exclusive use” and “non-competition” clauses) are not implied; they must be explicitly stated in the lease. Assuming your lease does not contain such a clause, you are essentially out of luck. On the other hand, if your lease does contain an expressed restrictive covenant limiting landlord’s right to lease space to another restaurant, sushi bar, or food server, your two most likely remedies include either seeking a TRO and ultimately preliminary and permanent injunction prohibiting the landlord from entering into a lease with the other sushi operator, or alternatively, suing your landlord for breach of contract and seeking monetary damages (e.g., loss of profits, loss of good will, etc.). Q: I own a manufacturing facility in Camarillo. Up until this month, we employed 55 full and part-time employees. Due to some outsourcing, our headcount recently dipped to 38. I expect it to hold pretty steady. Are my employees still entitled to FMLA leave? If so, for how long? A: Just to set this up for other readers, your question deals with the Family Medical Leave Act (“FMLA”). Employers who employ 50 or more employees must comply with FMLA, which includes accommodating non-paid medical leave for those employees dealing with serious health conditions (either personally or of a child, spouse, or parent), birth of and/or care of a child, or placement of a child with the employee for adoption or foster care. A serious health condition is any condition rendering an employee unable to perform the essential functions of his/her position. As you likely know, there is no business necessity or undue hardship defense under FMLA. In answer to your question, your company must comply with FMLA for the balance of this calendar year. Employers are subject to FMLA if they have employed 50 or more employees (part-time and full-time alike) for a minimum of 20 work weeks in the current or preceding calendar year. Consequently, even though you anticipate employing significantly less than 50 employees the balance of this year, assuming your company employed 50 or more employees last calendar year, it must comport with FMLA for the balance of this calendar year. However, you will not be obligated to comply with FMLA in 2007 if you continue to employ less than 50 employees for less than 20 work weeks in 2006. “This column contains general information and under no circumstances constitutes legal advice. This information is not provided in the context of an attorney-client relationship and nothing herein creates an attorney-client relationship. Readers should not act upon this general information without first seeking professional advice.” Ira Rosenblatt is a business and corporate lawyer and a co-founder and Director of Stone, Rosenblatt & Cha, a business law firm in Warner Center. Rosenblatt has earned Martindale-Hubbell’s highest rating (“AV”) for legal ability and ethics and is listed in Martindale-Hubbell’s National Bar Register of Preeminent Lawyers. He can be reached at [email protected].

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