Business | General Counsel Law.

Unlawful Retaliation: How to reduce our exposure and protect our employees?

It is imperative for employers to be aware of the law on unlawful retaliation and its implications on their business practices and workplace. Title VII of the Civil Rights Act of 1964 declares it unlawful for an employer to discriminate against an employee because he/she opposed any unlawful employment practice or made any charge, testified or participated in an investigation of an unlawful practice. Moreover, such unlawful conduct need not require evidence of wrongdoing. An employer can be responsible for retaliation and accused of wrongdoing even if there was no discrimination, sexual harassment or other unlawful conduct. It is important that employers understand that it is never too late to implement change in their workplace. There is no time like the present to institute new practices or reorganize the way certain things are done.

In the past few years, employees have been protected under this unlawful retaliation law and it has been applied to the following situations:

Where an employee has complained about their employer’s treatment towards another individual under a different federal statute (Cracker Barrel case)
In an employer’s internal investigation, where an employee raised an issue when being asked questions by the investigator (Crawford case)

The types of claims that are brought under this law vary significantly. Therefore, it is vital that employers familiarize themselves with the suggested practices to be put in place at their workplace and the potential consequences of their failure to do so. Further, these practices are there to encourage employers to exercise heightened vigilance and promote a healthier and more productive work environment. The reality is that many employers are not mindful of the consequences that such a failure can have. It is helpful to understand what the most common mistakes are so that you, as an employer, can be aware and implement practices to avoid them.

Overall, employers should be documenting performance issues at the time that they arise. This facilitates a more efficient and prompt process for addressing the issue with the employee who raised it. This can be done in the form of reviews or other mechanisms that the employer feels are best to address a specific concern. Often times, employers are not aware of the resources that are available to them which include the Equal Employment Opportunity Commission. Such resources should be consulted if employers are uncertain about the protocol for a specific situation or even just to ensure that they are in compliance with employment laws.

At the bare minimum, employers must make sure that they have a policy implemented that prohibits unlawful retaliation (a non-retaliation policy). They should also consider engaging in and providing training on what that policy means and how it should apply in their workplace. “Claim-specific training and counseling” is a great way to do just that. Ironically, to reduce exposure, employers really just need to exercise common sense. For example, employers must never forget that “relying on instinct is not a good method for ensuring compliance” or that “ignorance of the law is no defense, it compounds liability”. Do not ignore or isolate complaints. Do not rule out some restructuring and reorganization that may be required. Pay close attention to subsequent employment actions. Think before you act and make sure a given action that you wish to take is not related to any complaint filed.

Even though this is all extremely simple and easy to employ in your workplace employers consistently make mistakes. Some of the most common mistakes that may expose the employer to liability or having a grievance filed against them include:

Failure to train managers on compliance with the basic requirements of employment laws
Failure to file a timely first party report of injury or illness of an employee
Basic documentation disasters (ex. no documentation showing the basis for an employee’s termination, padded performance reviews, mean-spirited memos, sloppy documentation that is imprecise, etc.)
Failure to follow your companies policies without good reason
Failure to investigate and conclusively confirm the factual basis for a termination

So what does this mean moving forward? Employers really need to ensure that the practices they implement in their workplace comply with the law and that they represent the positive values and moral integrity of the employer. Yes, it is that simple. Be careful and ensure that you develop your workplace based on the principles compassion and calmness and the desire to foster the commitment to the company’s core philosophy and values.

Personal Liability for Corporate Obligations – How to Avoid Piercing the Corporate Veil

When individuals form business entities, generally they choose entities that allow them to limit their personal liability, leaving only the entities’ assets vulnerable to lawsuits. For corporations and Limited Liability Companies (LLC), the business entities are separate from the corporate officers and shareholders (or LLC members), and these individuals are typically not liable for the entities’ debts. However, there are instances where individuals may be liable for corporate debts, even if the corporation, and not the individual, is the target of a lawsuit.

The recently decided case, Virginia Electric & Power Co. v. Peters, highlights the importance of taking steps to avoid the possibility of piercing the corporate veil and the resulting personal liability. In Virginia Electric & Power, Dominion Virginia Power (“Dominion”) sued Bransen Energy Inc. (“Bransen”) and obtained a $24.5 million judgment against Bransen. However, Dominion wasn’t able to collect on the judgment and brought another action to pierce Bransen’s corporate veil and impose liability on Michael Peters (“Peters”), Bransen’s owner and sole shareholder.

Peters was Bransen’s president, owner, and sole shareholder and used more than $2.66 million of Bransen’s funds for his personal benefit. Additionally, after Peters knew Bransen had breached its contract with Dominion, he and his family “used Bransen as a personal checking account,” writing checks from the account without any business connection to the company. Peters also created new companies and funded them with Bransen’s funds, even though the new companies had no connection to Bransen. The court found that Peters “used the corporate structure to avoid liability to Dominion by making corporate decisions that benefits him and not his corporation” and that Peters may be personally liable for Bransen’s debt to Dominion.

When trying to pierce the corporate veil, courts have personal jurisdiction over individuals if the individual is the “alter ego” of the corporation. When deciding whether an individual is an “alter ego” of the corporation, the court must determine whether the individual exercised “undue dominion and control over the corporation,” such that “the corporation was a device or sham used to disguise wrongs, obscure fraud, or conceal crime.” Perpetual Real Estate Servs., Inc. v. Michaelson Properties, Inc., 974 F.2d 545, 548 (4th Cir. 1992). When determining whether this undue dominion and control existed, the court may consider whether the individual observed corporate formalities, kept corporate records, paid dividends and whether there were officers and directors. Essentially, the court must determine whether the individual misused the corporate identity to disguise assets.

Once the corporate veil is pierced, a business owner may be personally liable for debts of the corporation. The possibility of piercing the corporate veil is a particular concern for closely held businesses. Business owners should understand the concept of piercing the corporate veil to minimize their own risk by structuring and operating their business entities in an appropriate manner. Below are a few practical tips for business owners to utilize to create the best possibility of avoiding personal liability:

Observe Corporate Formalities – If your business has a board of directors (or managers) hold regular meetings and document and keep the minutes of those meetings. Additionally, business owners should have governing documents for their entities, such as operating agreements and bylaws.
Keep Separate Records and Bank Accounts – It is important that business owners treat the entities as truly separate, especially when it comes to the entities’ assets. Don’t commingle funds or borrow from the company to pay personal expenses. Contribute all business profits into and pay all business expenses from the entity’s bank account and keep business financial records separate from personal financial records.
Operate at Arms-Length – When engaging in transactions that may appear inappropriate to unrelated parties, take care to follow proper protocol. For example, if you plan to contribute personal assets to the entity as a capital contribution, document the transfer. If you own multiple entities that provide services to the other, have contracts in place governing those relationships. When in doubt about whether a transaction is appropriate, err on the side of caution.

A court’s decision to pierce the corporate veil is decided on a case-by-case basis and generally results from a combination of factors with an added element of injustice. Unfortunately, there is no guarantee that a business owner will avoid personal liability for business debts, but there are ways to conduct your business now to put yourself in the best position later, in the event a legal situation arises. The most important thing to remember when conducting a business is to maintain and document the level of separation between entity and owner and always treat the entity as distinct.

Call General Counsel PC Today

Attorneys at General Counsel PC are specialized in business law and have experience working with business owners across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William. If you’re currently facing a legal issue that’s putting your business at risk or you’re looking for legal advice on the strength of your business protections, General Counsel PC has the expertise you need. For more information about how you can ensure your business is protected, call General Counsel PC at 703-556-0411 today.

Minority Shareholder Rights in Virginia

In Virginia, a court may order that a corporation be dissolved by its shareholders if the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent. While Virginia law does not specify what conduct by majority shareholders constitutes oppression, courts have begun taking a much more expansive view as to what such conduct entails and are showing increasing support for minority shareholders.

Generally speaking, Virginia courts have defined oppression as “conduct that departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.”[1] Many recent court opinions have highlighted that a finding of oppression does not require “imminent” disaster or a finding of fraudulent conduct; however, it does “contemplate a continuous course of conduct and includes a lack of probity in corporate affairs to the prejudice of some of its shareholders.”[2] In the past, courts have been hesitant to find in favor of the minority shareholder by ordering a drastic measure like dissolution of the corporate entity. Now, minority shareholders are increasingly advocating for their rights by bringing suit against majority shareholders in closely held corporations.

In a recent landmark opinion, Colgate et al v. The Disthene Group, Inc., an action was brought by minority shareholders (owning 42 percent of a closely held corporation), alleging that the majority shareholders engaged in a pattern of oppressive and fraudulent conduct that was designed to disadvantage them and waste corporate assets.[3] In their request for relief they demanded that the corporation be dissolved. The majority shareholders relied on the “business judgment rule” to justify their actions. The business judgment rule essentially shields directors from actions taken or not taken, by protecting good-faith business judgments from being second-guessed in court. However, this rule doesn’t apply when the director fails to engage in informed decision-making or makes a decision in the best interests of the director, as an individual, rather than of the corporation.

Not only did the judge in Colgate rule in favor of the minority shareholders, but the judge also specifically noted that non-voting shareholders have the right to be treated fairly by the corporate officers and directors. The judge explained that courts are becoming increasingly intolerant of shareholder oppression and discussed facts indicating that the officers and directors had breached their duties. The judge found that officers and directors breached their duties by: reducing dividends in retaliation for minority shareholders filing a lawsuit; misrepresenting the value of stock when negotiating with minority shareholders who were selling shares back to the company; increasing compensation for majority shareholders; misusing and wasting corporate assets; favoring interests of family members at the expense of minority shareholders; and refusing to allow inspection of corporate books and records. The judge ultimately ordered the dissolution of the closely held corporation because of this oppression of minority shareholders and waste of corporate assets.

As evidenced by Colgate, the consequences of oppressing minority shareholders can be disastrous (and in the aforementioned case, 77 million dollars disastrous!). The type of conduct discussed above can support claims of breach of fiduciary duty, conversion, conspiracy to breach fiduciary duties, and conspiracy to convert – which, if ruled against the majority, can be fatal (literally) for the corporation. While dissolution is generally considered an extreme result, the risk is now even more real for business owners. This case sheds light on the duties of controlling shareholders and the fact that minority shareholders’ rights are being recognized (and protected). Before Colgate, majority shareholders at many companies in Virginia got away with putting their interests ahead of minority shareholders. This case is a critical turning point for business litigation by making the bold statement that controlling shareholders cannot disguise their actions under the business judgment rule and that they can, and will, be held accountable for their actions.

The facts of every case are unique and the oppressive practices cited here are not the only ways majority shareholders may oppress minority shareholders. Additionally, dissolution is not the only remedy available to oppressed shareholders. Attorneys at General Counsel PC have represented businesses of all sizes for over 10 years. Our attorneys have years of experience providing legal counsel and education to business owners across Virginia to help ensure that business owners are aware of the possible risks and can implement practices to mitigate their exposure to liability. For more information about how you can ensure your business is protected, call General Counsel PC at 703-556-0411 today.

[1] Giannotti v. Hamway, 387 S.E.2d 725, 730 (Va. 1990)

[2] Id.

[3] Colgate et al v. The Disthene Group, Inc., 85 Va. Cir. 286 (2012)