Do Fiduciary Duties Apply Between Equal, 50/50 Shareholders?

SealIAFiduciary duties are often described as the highest duties recognized under the law.  Their application, however, is often challenged by litigants in court.  In a recent case before Iowa’s Business Courtthe Honorable Judge John Telleen was tasked with determining whether equal, 50/50 shareholders in a corporation are charged with exercising fiduciary duties in their dealings with each other.

Judge Telleen began the June 4, 2015 opinion by explaining Iowa’s long history of applying fiduciary duties: (1) by directors and officers of a corporation to the corporation and its shareholders; (2) between a majority shareholder and a minority shareholder; (3) between joint venturers through the life of a venture and its dissolution; (4) between partners in a partnership; and (5) between shareholders in closely held corporations.  After reviewing and explaining Iowa’s well-established history of applying fiduciary duties in numerous business settings, Judge Telleen concluded, “[e]qual shareholders owe each other a fiduciary duty” (emphasis added).  In support of this holding, the court explained

[i]f equal partners, joint venturers and shareholders in closely held corporations owe each other [sic] fiduciary duties, the Court sees little reason why those same duties should not be required of equal shareholders.

Idat 13.  Based upon the holding in this June 2015 opinion, 50/50 shareholders in Iowa corporations should consider exercising caution in their dealings with one another consistent with the fiduciary duty concepts adopted and imposed upon Iowa shareholders.

Click here to learn more about the who, what, when, where, and why of fiduciary duties.

Download a copy of the June 4, 2015 Opinion.  A special thank you to Ben Weston, of Lederer, Weston, and Craig for providing a copy of the Opinion.  

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Protecting Your Trade Secret in the Court of Law

Iowa Trade Secret

Savvy business owners understand the value of protecting proprietary information; especially when the information provides a competitive advantage in the marketplace (commonly referred to as a trade secret).  What happens, however, when your business is unexpectedly defending claims in our public court system or protecting itself by filing a lawsuit in open court?  Will your business’ trade secrets be publicly exposed?  Will a competitor have access to the Court’s public records (now online statewide) and the ability to review proprietary practices, pricing, or customer lists revealed through litigation?  Fortunately, Iowa’s courts are empowered to protect your business’ trade secrets.

A recent Iowa Supreme Court opinion, filed June 26, 2015, identifies several protections that Iowa’s courts may employ to preserve trade secrets, including:

  1. Closing court proceedings to the public;
  2. Sequestering witnesses during testimony of other witnesses;
  3. Excluding parties from the courtroom when trade secrets are presented;
  4. Restricting attendance at trial; and
  5. Sealing transcripts of court proceedings.

Our high court also recognized “[i]t would be of little practical value to file a lawsuit to protect the confidentiality of a trade secret if the secret became part of the publicly available court record and was thereby lost.” In short, while our court system is open and public by design, sophisticated parties can and do protect their trade secrets in the court of law.

Click here to to learn more about whether your information may qualify as a trade secret in Iowa.
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Protecting Your Business’ Trade Secret in a Court of Law

UnknownSavvy business owners understand the value of protecting proprietary information, especially when the information provides a competitive advantage in the marketplace (commonly referred to as a trade secret).  What happens, however, when your business is unexpectedly defending claims in a public court system or protecting itself by filing a lawsuit in open court?  Will your business’ trade secrets be publicly exposed?  Will a competitor have access to the court’s public records (now online statewide) and the ability to review proprietary practices, pricing, or customer lists revealed through litigation?  Fortunately, Iowa’s courts are empowered to protect your business’ trade secrets.

A recent Iowa Supreme Court opinion, filed June 26, 2015, identifies several protections that Iowa’s courts may employ to preserve trade secrets, including:

  1. Closing court proceedings to the public;
  2. Sequestering witnesses during testimony of other witnesses;
  3. Excluding parties from the courtroom when trade secrets are presented;
  4. Restricting attendance at trial;
  5. Sealing transcripts of court proceedings.

Iowa’s high court also recognized “[i]t would be of little practical value to file a lawsuit to protect the confidentiality of a trade secret if the secret became part of the publicly available court record and was thereby lost.” In short, while our court system is open and public by design, sophisticated parties can and do protect their trade secrets in the court of law.

Click here to learn more about whether your information may qualify as a trade secret in Iowa.

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Follow State Law or Risk Negligence Per Se Claim

Iowa Court of Appeals - Negligence Per SeNegligence is a term commonly used by lawyers and non-lawyers alike.  But what does the term mean?  In short, this one word generally describes one party’s failure to exercise reasonable care, causing damage to another.  Recently, the Iowa Court of Appeals reaffirmed prior Iowa case law and found that an apartment complex’s violation of a city code – failing to place guardrails at forty-two inches high – is evidence (not conclusive proof) of the complex’s negligence.  While such a conclusion is not surprising on its surface, it is notable that the Iowa Court of Appeals chose not to follow “most” states and further conclude the violation of a city ordinance amounts to negligence per se; essentially, certain liability.

The Iowa Court of Appeals reasoned Continue reading

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Cybersecurity and Your Business’ Board of Directors

CA recent court opinion underscores the importance for a company’s board of directors to assess cybersecurity. As we’ve explored in several prior posts, directors are charged with exercising fiduciary duties, including the duties of care, loyalty, and oversight.

It is this latter duty – the duty of oversight – that resulted in a plaintiff filing a lawsuit against against his corporation and the corporation’s board of directors for failing to exercise proper oversight that purportedly harmed the company.

The opinion provides valuable insight into steps that directors may undertake to minimize potential liability (both to the company and personally) for such claims.  For instance, the court noted the asserted claims were potentially weak because the company implemented cybersecurity measures before the first data breach.

Further, the board addressed security matters “numerous” times before the breach.  Moreover, the corporation took time to enact security policies, reviewed those policies, and even hired outside technology firms to issue recommendations on enhancing security.  Had the company not taken such proactive steps, including before the breach occurred, the outcome certainly could have been different.

While there is no one-size-fits-all approach to data and cybersecurity, given the increasing threat such issues pose to companies, a board should at the very least consider data and cybersecurity in fulfilling it’s fiduciary duties.  Such consideration may result in no action being taken, or it may result in consulting with privacy counsel, technical experts, or insurance professionals to insure against cyber-related liabilities (including costs related to forensic analysis, breach notification, business downtime, credit monitoring services, and third-party claims).

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Deleting Emails May Muddy Legals Waters

Spoliation and Deleting EmailsPurging emails has been the topic of conversation amongst political pundits over the past few weeks, but how, if at all, can cleansing emails create legal problems for your business?

One example… the Court system.

In short, Iowa law generally prohibits individuals and businesses from destroying evidence, such as emails, Continue reading

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Advantages and Disadvantages of Sole Proprietorships in Iowa

A frequent issue that entrepreneurs face – and one they should seriously consider – is whether to create a formal legal entity, such as a limited liability company (L.L.C.), or remain a “sole proprietor.”  This post briefly identifies some of the common advantages and disadvantages of operating a business in Iowa as a sole proprietor.

Sole Proprietorship

A sole proprietorship is often referred to as one of the easiest and simplest business structures to create and operate.  Sole proprietorships are run by one person and generally there is no “legal distinction” between the business and the individual owner.  As depicted in the infograph to the right, some of the advantages include:

1.  Sole proprietorships are very easy and inexpensive to create.  Indeed, unlike a limited liability company (L.L.C.) or a corporation (Inc.), a sole proprietor is not required to pay fees to the State of Iowa for filing articles of incorporation, certificates of organization, or biannual reports;

2.  A sole proprietor exercises complete control over the business and does not answer to other owners, such as shareholders in a corporation or partners in a partnership; and

3.  A sole proprietorship generally has one of the lowest tax rates of all business forms.

While carrying on business as a sole proprietor certainly has advantages, many drawbacks exist that, for some, far outweigh the advantages.  Some disadvantages include:

1.  Sole proprietors are personally liable for business debts and obligations, including any liabilities arising from a lawsuit involving the business.  As a result, if the “business” is assessed a fine or has a judgment entered against it, that fine, judgement, or other monetary obligation is, in reality, an obligation the sole proprietor may be required to pay out of personal funds; Continue reading

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Can I Force My Iowa Corporation to Buy My Stock?

Minority Shareholder Force Sale of Stock

Minority shareholders seeking to exit an Iowa corporation frequently ask, “can I force my closely-held Iowa corporation to purchase my stock.”  A great question, but one that is frequently met with a variety of answers.  On January 21, 2014, the Delaware Supreme Court published an opinion on this very topic.  And while the case applies Delaware law (not Iowa law) and each case is factually unique, the opinion illustrates how other courts, including Iowa courts, may decide a similar case involving a shareholder seeking to force their corporation to purchase stock.  The FULL OPINION can be read here.

In short, the Delaware Supreme Court applied Delaware law and held that “[u]nder common law, the directors of a closely held corporation have no general fiduciary duty to repurchase the stock of a minority stockholder.”  The court went on to find, Continue reading

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Iowa Legislation Signed into Law in 2014 (so far…)

New Iowa Corporate Laws Signed in 2014

Our readers frequently inquire about what new legislation Iowa’s legislature is passing and Iowa’s Governor, Terry E. Branstad, is signing into law.  While the 2014 legislative session has not yet adjourned for the year, a list of all legislation signed into law in 2014 is provided below along with links to the legislation.  Notably, for our readers here at CorporateDispute.com, on March 26, 2014 and as referenced below, Governor Branstad signed Senate File (“SF”) 2200 into law.  As we will more fully address in future posts, SF2200 revises an Iowa corporation’s duties to provide shareholders with important financial information as well as amends Iowa’s existing law governing voting trusts and shareholder agreements.

As of April 13, 2014, Iowa Governor, Terry E. Branstad, has signed the following bills into law:

Signed on March 7, 2014

House File 2131: an Act modifying applicable to the recording of a mortgage or deed of trust executed by a transmitting utility.

House File 2172: an Act providing for the use of an electronic filing and notice system by the Public Employment Relations Board.

House File 2216: an Act concerning the definition of off-road utility vehicle for purposes of regulation by the Department of Natural Resources. Continue reading

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Showing Shareholders the Money in Iowa Corporations

Iowa Corporate Law

Are Iowa corporations required to disclose financial information to shareholders?

Iowa law requires Iowa corporations to provide certain financial information to their shareholders.  In particular, Iowa Code Section 490.1620 mandates Iowa corporations provide their shareholders with “annual financial statements.”  As you may suspect, “annual financial statements” should include a balance sheet, an income statement, and a statement of changes in shareholder equity, if any.  Further, if financial statements are prepared for the corporation on the basis of generally accepted accounting principles (GAAP), the annual financial statements provided to shareholders must also be prepared on that basis.

When must an Iowa corporation’s financial statements be provided to shareholders?  

Iowa law clearly states the corporation must send the annual financial statements to each shareholder within 120 days after the close of each fiscal year.  See Iowa Code Section 490.1620 (2014).  If the corporation, however, is a public corporation, additional requirements may apply under the United States Securities and Exchange Commission.

What if an Iowa corporation fails to provide annual financial statements to shareholders as required by Iowa law?

If an Iowa corporation fails to provide annual financial statements as required by Iowa law, the aggrieved shareholder(s) may choose to request relief from an Iowa court, including seeking a court order compelling the corporation to produce the required statements, and perhaps, damages if they can be established.

Annual financial statements are just a few of the corporate records a shareholder may access and review.  To learn more about the records a shareholder may review, you may want to review these posts: here and here.  Finally, Continue reading

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