Calironia Court Cases - Case Law from CA - California Court

	ROMINGER LEGAL
		California Case Law & California Court Opinions - California Law
					Need Legal Help?
					Need Legal Help?
LEGAL RESEARCH CENTER
LEGAL RESEARCH CENTER			LEGAL HEADLINES - CASE LAW - LEGAL FORMS	NOT FINDING WHAT YOU NEED? -CLICK HERE

This court case was taken from the California Court's web site. Search our site for more cases - CLICK HERE

LEGAL RESEARCH

COURT REPORTERS

PRIVATE INVESTIGATORS

PROCESS SERVERS

DOCUMENT RETRIEVERS

EXPERT WITNESSES

Find a Private Investigator

Find an Expert Witness

Find a Process Server

Case Law - save on Lexis / WestLaw.

Legal News - Legal Headlines

Filed 2/17/05
CERTIFIED FOR PARTIAL PUBLICATION*

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

ERIC C. HSU et al.,

Plaintiffs
and
Appellants,

A097708, A097974, A098305
v.

SEMICONDUCTOR SYSTEMS, INC.
(Alameda County
et al.,
Super. Ct. No. H-1931194)

Defendants and Appellants.

Employee shareholders of a closely-held corporation transferred ownership of the
shares of a former employee to themselves just before a merger that significantly
increased the value of the corporate shares. The acquiring shareholders claimed they
"purchased" the shares pursuant to an employee shareholder agreement entitling them to
acquisition at book value. A jury found that any right to purchase shares at book value
pursuant to the agreement was either held by the corporation alone, not the shareholders,
or had elapsed before the alleged right was exercised.

The jury awarded the former employee $2.4 million in compensatory damages
upon concluding that no contractual right to purchase the shares had existed, and that the
transfer of shares occurred with nondisclosure of the pending merger. The jury returned
a verdict finding breach of contract, intentional interference with prospective economic
advantage, conversion, and violations of the California Corporations Code. Additionally,
a bench trial following the jury's verdict determined that the corporation's management

* Pursuant to California Rules of Court, rules 976(b) and 976.1, this opinion is certified
for publication with the exception of parts III. A., B., C., D., and F.

1

breached their fiduciary duty by withholding information from the former employee who
had remained a corporate shareholder. In addition to the compensatory damages award,
the court awarded the former employee over $2 million in costs and attorney fees.

This appeal followed, along with a cross-appeal by the prevailing former
employee who challenges an adverse summary adjudication of his punitive damages
claim and seeks remand for trial on punitive damages alone. We reject most of the
contentions on both the appeal and cross-appeal, and affirm the judgment except for
modifications in the cost award and one statutory claim.
I.
FACTS
A. Corporate
Formation.

Defendant Semiconductor Systems, Inc. (SSI) built and sold equipment used in
manufacturing computer semiconductor chips. SSI was formed in 1990 as an employee-
owned, closely-held corporation. Plaintiff Eric C. Hsu was a founder, officer, director,
and the largest shareholder of SSI, eventually holding 20 percent ownership.1 Defendants
Michael L. Parodi, Jr., Gerald E. Masterson, and Douglas K. Amis were also founders,
officers, directors, and major shareholders (collectively, management defendants).2 Hsu
was SSI's vice president of sales and marketing; Parodi was initially vice president of
engineering and succeeded to the post of president and chairman of the board of
directors; Masterson was vice president of finance, chief financial officer (CFO), and
secretary to the board; and Amis was vice president of human resources.

1
Hsu's wife, Angie L. Hsu, consented to the stock purchase and is also a plaintiff.
For convenience, Mr. Hsu alone is referred to as plaintiff because Ms. Hsu played no
active role in the events at issue.
2
SSI corporate shares were also held, in lesser amounts, by defendants Qui Van
Nguyen, Michael E. Van De Ven, John Stephens, Louie C. Fredriksz, Richard T.
Benventano, Steve G. Cruickshank, Richard K. Fey, Ronald L. Lindquist, and Melville
H. Madden (collectively, nonmanagement defendants).

2

SSI was formed through a management buyout of an existing corporation.
Management borrowed the purchase money and, in conjunction with that loan, Hsu
pledged his SSI stock as security for repayment and delivered his share certificate to the
lender. The security pledge agreement was also accompanied by a blank form
assignment of all SSI shares Hsu might acquire, to be used by the lender if SSI defaulted
on its loan. The pledge agreement provided that it would terminate upon repayment of
the loan, and promised that the share certificate and stock assignment would then be
returned to Hsu. The loan was repaid is less than two years, and the lender delivered the
share certificates and stock assignments to SSI. However, SSI did not forward those
share certificates to Hsu or the other shareholders, but retained them.
B.
Employee Stock Purchase and Shareholder Agreement.

Meanwhile, each of the shareholders had signed an "Employee Stock Purchase
and Shareholder Agreement" (Agreement) upon formation of SSI that restricted
disposition of shares.3 A shareholder could not sell his or her shares without first giving
SSI an opportunity to purchase the shares itself or, failing such an election, giving the
other shareholders an opportunity to purchase the shares. There is also a purchase right if
the employee-shareholder leaves the company, although whether that right inures to the
benefit of SSI alone, or to shareholders as well, is a point of contention. It is clear,
however, that any right to purchase shares of a departing employee is a right, not an
obligation. If the purchase right under the Agreement is not exercised, the departing
employee may keep the shares.

The right to purchase is also strictly limited in time and commences upon "the
cessation of [the share] Purchaser's employment." The corporation's right to purchase a
departing employee's shares must be exercised within 60 days of cessation of
employment or within 45 days after the corporation's receipt of the departing
shareholder's written notice of cessation of employment, whichever is later. Assuming

3
The Agreement contains different provisions for vested and unvested shares, but
vested shares alone are at issue here.

3

the shareholders have a right to purchase a departing employee's shares if the corporation
does not opt to purchase, then the corporation has seven days after termination of its
option to buy to notify the shareholders of the availability of the shares and the
shareholders have seven days from their receipt of notice to elect a purchase. Shares
purchased from a departing employee are bought at book value (the employee-
shareholder's portion of undistributed corporate profits).
C.
Hsu's departure from SSI.

Hsu left SSI in the summer of 1995. The exact date of Hsu's cessation of
employment, which triggered the time-restricted right to buy Hsu's shares, is disputed.
Defendants maintain that Hsu's cessation of employment coincided with his August 24,
1995 notice of resignation. Plaintiff Hsu maintains that his cessation of employment
occurred when he left the company on July 28, 1995 for a so-called "leave of absence"
that was, in reality, a termination.

At trial, Hsu testified that he was offered an executive position at KLA
Instruments Corporation (KLA) in Taiwan, and advised Parodi and Amis, SSI's president
and vice president of human resources, of his decision to accept the position over lunch
on June 29, 1995. Hsu told the SSI executives that he would like to take a leave of
absence, rather than to resign immediately, to blunt the impact of his departure for the
company's benefit. Hsu also wanted leisure time with his family before relocating to
Taiwan. However, Hsu testified at trial that he clearly told the SSI executives that he
would not return to SSI after his leave of absence. Amis's journal entry for June 29,
1995 is corroborative, though more equivocal than Hsu's testimony. Amis wrote that
Hsu informed SSI that Hsu "wants to take a L.O.A. and probably will not return to the
company." Parodi conceded at trial that SSI management's expectation was that Hsu
"would not return from the leave of absence."

The testimony of Hsu and Parodi is consistent in establishing that Parodi asked
Hsu not to announce his leave of absence until after an important industry conference in
mid-July 1995. Hsu agreed to limit his announcement to a few people, and told only
CFO Masterson, certain SSI sales personnel, and a couple customer contacts before the

4

July 1995 conference. One of those SSI sales personnel, defendant Fey, corroborated the
fact that Hsu announced to some members of the SSI sales staff before the July 1995
conference that Hsu was "leaving the company." Fey understood that Hsu "would not be
returning as an employee."

Hsu testified that he made a general announcement to his sales and marketing
department on July 13, 1995, the last day of the industry conference, that he was taking a
leave of absence, at the completion of which he would not return to SSI but would
instead work at KLA. Hsu completed a form request for leave of absence covering the
period from July 28, 1995 to September 30, 1995, using dates Hsu said SSI's Amis told
him to use. Hsu testified that he told SSI's human resources department, when
completing the form, that he was taking a month's leave of absence and then would start
work at KLA. Hsu's salary and medical insurance were terminated at the start of his
leave of absence.

Hsu physically left SSI on Friday, July 28, 1995. Hsu testified that he packed and
removed his personal belongings and returned his security badge. Hsu had planned to
start work at KLA in September, after time off from work, but instead started at KLA on
the following Monday, July 31, 1995. Hsu initially worked for KLA in the San Francisco
Bay Area, and then split time between California and Taiwan.

The journal entries of SSI management following Hsu's physical departure
indicate that management understood that Eric Hsu was not returning. Amis, the vice
president of human resources, may have begun efforts to replace Hsu as vice president of
sales and marketing. Amis's journal entry on his task list for August 17, 1995 states:
"Search of VP sales." On that same day, CFO Masterson's task list includes the notation:
"Get Eric off Records."

On August 24, 1995, Hsu faxed notice of resignation to SSI's management,
Parodi, Masterson, and Amis. Hsu wrote: "This memo is to inform you regarding my
resignation, from the position of Vice President of Sales and Marketing at Semiconductor
Systems Inc. start this date." Hsu testified that he sent the letter because he had told SSI
that he was taking a month's leave of absence beginning July 28, 1995, and was writing

5

about a month later "to have closure." SSI replied to Hsu on August 24, 1995, accepting
his resignation "effective this date."
D.
Failed negotiations to purchase Hsu's SSI corporate shares.

When Hsu provided his notice of resignation on August 24, 1995, he also wrote to
SSI management saying that he wanted to sell his SSI stock back to the company and
requesting corporate financial documents to assess any purchase proposal. Hsu was not
aware of any purchase rights under the Agreement. Hsu testified that SSI had previously
purchased shares of departing employee-shareholders at what Hsu believed were freely
negotiated prices. Hsu intended to keep his shares if he and SSI could not agree on a
price.

SSI initially expressed no interest in purchasing Hsu's stock, and told him he
should keep his shares. However, SSI agreed to get back to Hsu with a proposal, and did
so on September 28, 1995. SSI's proposal did not invoke the Agreement, and offered a
price below the Agreement's formula book value. SSI represented the book value of
Hsu's shares at $1.86 million, and offered a maximum of $750,000 based on a liquidation
value. As of this time, SSI had not made any mention of the Agreement, or its provisions
for purchasing a departing employee-shareholder's stock.

In October 1995, Hsu told SSI's CFO Masterson that Hsu could not accept the
proposal without supporting financial documentation as to the value of the shares, which
Masterson agreed to provide. Hsu also told Masterson that Hsu intended to seek outside
advice on valuing his shares. Shortly after Hsu's conversation with Masterson, SSI
increased its offer to $1.8 million on October 27, 1995. In SSI's written offer, Masterson
said he calculated the figure under the Agreement's "purchase price formula," but the
amount would have to be paid over four years and payment was subject to approval by
SSI's bank. This was SSI's first mention of the Agreement since Hsu's departure from
the company.

Hsu and Masterson both testified that SSI was not attempting to invoke its rights
under the Agreement at this time and that the parties were continuing their negotiations
outside the Agreement. In fact, Masterson conceded at trial that any right that SSI had to

6

purchase Hsu's shares under the Agreement had lapsed. SSI's right under the Agreement
to buy Hsu's shares expired by October 23, 1995, at the latest, even assuming that Hsu
ceased employment upon his written resignation on August 24, 1995, and not the earlier
date of the designated leave of absence. Hsu did not accept SSI's October 27, 1995 offer,
and continued to insist on reviewing the company's financial documents.
E.
SSI negotiates a merger with another company.

Meanwhile, SSI was exploring various financing alternatives to sustain growth. In
late September 1995, FSI International, Inc. (FSI) expressed interest in the possibility of a
financial transaction with SSI. On October 10, 1995, SSI hired an investment banking
firm to evaluate its financing alternatives. FSI executives toured SSI facilities, and SSI
and FSI signed a nondisclosure agreement for sharing corporate information, on
November 1, 1995. SSI management (Parodi, Masterson, and Amis) toured FSI facilities
on November 16 and 17, 1995, as discussions continued. The possibility of a merger was
under consideration by November 1995. Draft merger agreements were circulated
between SSI and FSI beginning in mid-December 1995, and SSI approved the merger on
February 4, 1996. The merger agreement was signed February 5, 1996, and the
transaction closed in April 1996. SSI shareholders realized a multi-million dollar profit.
F.
SSI shareholders acquire Hsu's shares.

Parodi, Masterson, and Amis of SSI did not disclose to Hsu their discussions with
FSI leading to the merger. In late October 1995, after FSI expressed an interest in
discussing financial arrangements with SSI, SSI took a different approach in dealing with
Hsu. Previously, SSI had proposed purchasing Hsu's shares outside the Agreement, at
negotiated terms.

SSI now tried for a shareholder purchase under the Agreement. On October 30,
1995, SSI notified its shareholders (except Hsu) that limitations imposed by the
company's bank could restrict SSI from purchasing Hsu's shares, and offered the
shareholders an opportunity to buy Hsu's shares at book value. Parodi and Masterson
informed the shareholders that SSI was investigating financial partnerships, and that
investment representatives valued the company higher than its book value. In fact,

7

written materials provided to the shareholders went so far as to say that the market value
of Hsu's shares "far exceeds" the book value, and that a merger or other event "leading to
at least partial liquidity" could occur in the next 12 months.

The shareholders were asked to make their purchase elections by November 3,
1995. The shareholders returned elections to purchase Hsu's shares dated between
October 30 and November 3, 1995. Assuming the shareholders had a right to purchase a
departing employee's shares (a disputed point), elections through November 3, 1995
would be timely only if Hsu ceased employment upon his written resignation on
August 24, 1995, and not the earlier date of the designated leave of absence.

Masterson of SSI wrote to Hsu on November 3, 1995, stating that the shareholders
were exercising their purported right under the Agreement to purchase Hsu's shares at
book value, which Masterson said was $1.8 million--the same price offered by
Masterson in his October 27, 1995 letter. Masterson asked Hsu to specify his payment
instructions, and indicated a desire to close the transaction by November 20, 1995. Hsu
telephoned Masterson on November 14, 1995, and again the next day, and advised
Masterson that Hsu was still awaiting financial documentation supporting Masterson's
proposal. Masterson did not mention his recent invocation of the Agreement, and Hsu
believed discussions were still open as to the sale of his shares. Masterson and Hsu
agreed to discuss the matter further by telephone on November 21, 1995. Instead of a
telephone call continuing discussions, Masterson sent a letter to Hsu on November 21,
1995, stating that SSI shareholders were exercising their right to purchase Hsu's shares
under the Agreement, and enclosing an SSI company check for $1,803,847. The letter
was delivered on the same day that SSI delivered a "term sheet" to FSI proposing a
merger valued at $57 million.

Hsu did not believe that there was any difference between SSI's October 27, 1995
offer and the shareholders' November 1995 stated elections to buy. Hsu thought he was
still negotiating with the company through Masterson. Before receiving SSI's latest letter
and check, Hsu replied to SSI on November 22, 1995, that he was agreeable to SSI's
October 1995 proposal to use book value in valuing the stock but said he wanted an audit

8

to ascertain that value. Upon receiving SSI's check, Hsu immediately objected that no
agreement had been reached to sell his shares. Hsu said that Masterson's letter and check
were "invalid." Hsu did not cash the check.

After tendering the check to Hsu, SSI transferred ownership of Hsu's shares to the
remaining shareholders over Hsu's prior objection without his knowledge. Under the
Agreement, any transfer between shareholders was supposed to be accomplished by the
departing employee's voluntary acceptance of the formula purchase price and delivery of
his or her share certificates. Rather than obtaining Hsu's endorsement of his stock
certificate as required by the Agreement, SSI used a blank form stock assignment signed
by Hsu in a previous, unrelated transaction. As noted earlier, Hsu had pledged his SSI
stock as security for repayment of a loan at the time of SSI's corporate formation. The
security pledge agreement was accompanied by a blank form assignment of all SSI shares
Hsu might acquire, to be used by the lender if SSI defaulted on its loan. The pledge
agreement terminated years earlier upon repayment of the loan, and the stock assignment
should have been returned to Hsu but was retained by SSI. It was that stock assignment
document, executed by Hsu for the distinct purpose of securing a loan, that SSI used to
transfer ownership of Hsu's shares to the remaining shareholders.

SSI never told Hsu that it had transferred ownership of his shares to the other
shareholders. On December 21, 1995, SSI wrote to Hsu agreeing to an audit and
consideration of a price adjustment of its $1.8 million book value calculation, but without
indicating that the shares had already been transferred. Hsu told SSI that he would not
accept their proffered check for the purchase of his shares until the audit was complete.
The audit was being arranged when, in February 1996, SSI publicly announced a merger
with FSI. Hsu testified at trial that no agreement to sell his shares had ever been reached.
II.
TRIAL PROCEEDINGS

Hsu sued SSI and the individual defendant shareholders in October 1996 for
breach of contract, breach of fiduciary duty, violation of the California Corporations

9

Code, and related claims. On cross-motions for summary adjudication on multiple issues
in November 1998, the court found that defendants' reliance upon the advice of counsel
negated plaintiff Hsu's punitive damages claim.

Jury trial commenced in September 2000. In October 2000, the jury returned a
verdict in plaintiff Hsu's favor on all submitted claims: breach of contract, intentional
interference with prospective economic advantage, conversion, and Corporations Code
violations. The jury found that defendant SSI breached the Agreement either because the
individual shareholder defendants had no right to purchase Hsu's shares or because the
shareholders' right to purchase had expired before the elections to buy were submitted.
The jury also found that the management defendants (Parodi, Masterson, and Amis)
intentionally interfered with Hsu's prospective economic advantage, and that all
defendants wrongfully converted Hsu's shares. Finally, the jury found SSI and the
management defendants liable for buying stock through means of negligent
misrepresentation in violation of Corporations Code section 25401, among other
Corporations Code violations by SSI and certain management defendants. The jury
assessed damages for the contract and torts claims at $2.418 million, plus an additional
sum later struck by the trial court for intentional interference with prospective economic
advantage. The damages award appears founded upon the testimony of plaintiff Hsu's
damages expert that the merger value of Hsu's shares was $4.218 million and he received
only $1.8 million, for a difference of $2.418 million.4

In January 2001, the court held a bench trial on Hsu's equitable claims. After a
tentative statement of decision and objections, the court issued its final statement of
decision in November 2001. The court concluded that the management defendants
(Parodi, Masterson, and Amis) breached fiduciary duties owed Hsu as a shareholder.

The court found that Hsu ceased employment with SSI on July 28, 1995, the date
he started his purported leave of absence, but remained a shareholder until November 22,

4
The parties stipulated that Hsu eventually cashed SSI's tendered and refused $1.8
million check, without waiving his objections.

10

1995, when SSI unilaterally transferred ownership of Hsu's shares. The court found that
any right vested in the shareholders to buy Hsu's shares lapsed before the elections to buy
were made. The management defendants' transfer of Hsu's shares in violation of the
Agreement, and their failure to disclose material information to Hsu, breached fiduciary
duties owed Hsu as a shareholder.

In January 2002, posttrial motions for a new trial or judgment notwithstanding the
verdict were denied, with the exception of an adjustment to the damages awarded for
intentional interference with prospective economic advantage noted earlier. An amended
and final judgment was entered on March 8, 2002. In addition to the $2.418 million
compensatory damages award, the court also awarded Hsu over $1 million in
prejudgment interest and approximately $2.3 million in costs and attorney fees. The
parties timely appealed.
III.
DISCUSSION
A.
Breach of Contract and Breach of Fiduciary Duty.

The jury found that defendant SSI's transfer of plaintiff Hsu's shares to the
remaining shareholders breached its shareholder Agreement with plaintiff Hsu either
because the remaining shareholders had no right to purchase Hsu's shares under the
Agreement, or because the time to exercise any right to purchase expired before the
elections were made. In holding the management defendants liable for breach of
fiduciary duty, the trial court similarly found that the transfer of Hsu's shares violated the
Agreement. The court concluded that any right vested in the shareholders to buy Hsu's
shares lapsed before the elections to buy were made. The management defendants thus
breached their fiduciary duty by participating in the unauthorized transfer of Hsu's
shares.

11

1.
Substantial evidence supports the finding that Hsu ceased
employment on July 28, 1995, the date of his so-called "leave of
absence."

As described in detail above, the right to purchase a departing shareholder-
employee's shares under the Agreement is strictly limited in time and commences upon
"the cessation of [the share] Purchaser's employment." The date of Hsu's cessation of
employment, triggering the time-restricted right to buy Hsu's shares, was disputed at
trial. Defendants maintained that Hsu's cessation of employment coincided with his
August 24, 1995 notice of resignation. Plaintiff Hsu maintained that his cessation of
employment occurred when he left the company on July 28, 1995, for a "leave of
absence" that was actually the end of his employment at SSI.

The date of Hsu's cessation of employment is critical. Any shareholder right to
purchase Hsu's shares had to be exercised within 74 days of Hsu's cessation of
employment. The shareholders returned elections to purchase Hsu's shares dated
between October 30 and November 3, 1995. Elections made on those dates would be
timely only if Hsu ceased employment upon his written resignation on August 24, 1995,
and not the earlier date of the designated leave of absence.5

On appeal, defendants argue that the date of Hsu's cessation of employment is a
question of law, and the proper answer to the question is that Hsu ceased employment
upon his formal resignation. As Hsu rightly observes, defendants' argument is an attempt
to recast a factual question into a legal one. There was never any dispute as to the legal
significance of the term cessation of employment. The question at trial was whether
Hsu's employment ceased at the time of his so-called leave of absence, or at the time of
his later written notice of resignation. This question is a factual one, resolved by judge
and jury in Hsu's favor.

5
Plaintiff Hsu argues that the elections to buy are falsely dated and were not
actually submitted until after November 6, 1995, and were thus untimely even if Hsu's
notice of resignation is the operative date. We need not address this alternative ground
for sustaining the breach of contract finding.

12

While the evidence as to the date of Hsu's cessation of employment was sharply
disputed, there is substantial evidence supporting the fact finders' determinations. In
reviewing whether a judgment is supported by substantial evidence, "we consider all of
the evidence in the light most favorable to the prevailing party, giving it the benefit of
every reasonable inference, and resolving conflicts in favor of the judgment. We do not
reweigh the evidence. `Our authority begins and ends with a determination as to whether,
on the entire record, there is any substantial evidence, contradicted or uncontradicted, in
support of the judgment.' " (McMahon v. Albany Unified School Dist. (2002) 104
Cal.App.4th 1275, 1282, italics in original.)

Here, Hsu testified that he physically left SSI on July 28, 1995, with a clear
understanding between himself and SSI that Hsu would not return as an employee. His
so-called "leave of absence" was never intended by the parties as a true leave of absence
in which the employment relationship would have been suspended, rather than
terminated. His departure was initially called a leave of absence for the company's
benefit, according to Hsu, to lessen the impact of the loss of a key executive. That Hsu's
departure would have an adverse impact on the company's standing was corroborated by
defendant Parodi, SSI's president, who admitted that Parodi asked Hsu not to announce
his leave of absence until after an industry conference in mid-July 1995.

Another defendant, Fey, further corroborated Hsu's testimony that Hsu told SSI
that he would not return after his designated leave of absence. Fey testified that Hsu
announced to SSI salespersons before that July 1995 conference that Hsu was "leaving
the company." Fey understood that Hsu "would not be returning as an employee."

Additional evidence of Hsu's termination of employment in July 1995 is the fact
that his salary and medical insurance were terminated at that time. Also, the journal
entries of SSI management following Hsu's physical departure and before his notice of
resignation suggest that SSI understood that Eric Hsu was not returning from his "leave
of absence." Amis, the vice president of human resources, seems to have begun efforts to
replace Hsu as vice president of sales and marketing. Amis's journal entry on his task list

13

for August 17, 1995 states: "Search of VP sales." On that same day, CFO Masterson's
task list includes the notation: "Get Eric off Records."

There is contradictory evidence, the strongest of which is Hsu's own August 24,
1995 memorandum of resignation: "This memo is to inform you regarding my
resignation, from the position of Vice President of Sales and Marketing at Semiconductor
Systems Inc. start this date." (Italics added.) SSI replied to Hsu on August 24, 1995,
accepting his resignation "effective this date." However, it is not our place to reweigh
the evidence. " `Our authority begins and ends with a determination as to whether, on the
entire record, there is any substantial evidence, contradicted or uncontradicted, in
support of the judgment.' " (McMahon v. Albany Unified School Dist., supra, 104
Cal.App.4th at p. 1282, italics altered.)

The finding by judge and jury that SSI breached the Agreement by transferring
Hsu's shares to the remaining employee-shareholders is supported by substantial
evidence. Liability was thus properly imposed upon SSI for breach of contract, and upon
the management defendants for breach of fiduciary duty in participating in that
unauthorized transfer of a shareholder's stock. We need not address defendants'
challenge to the verdict's other basis for finding breach of contract: that the corporate
shareholders, as opposed to SSI itself, did not have a right to purchase Hsu's vested
shares under the Agreement. Even assuming such a right existed, the right expired before
it was exercised.

2..
Resolution of factual inconsistencies was for the fact finder at
trial.

Defendants argue that Hsu's testimony that he ceased employment upon his so-
called leave of absence on July 28, 1995, is not credible, or that at least we should
disregard Hsu's trial testimony to the extent that it is inconsistent with his deposition
testimony. At trial, Hsu testified that he informed SSI executives over lunch on June 29,
1995, that his departure was for the purpose of taking a position at KLA. Hsu also said
that he told others at SSI that he was taking a job with KLA before going on his leave of
absence. Hsu was impeached at trial with his deposition testimony that he did not tell

14

anyone at SSI that he had accepted a position with KLA until his letter of resignation on
August 24, 1995. Defendants also note that Hsu used the date that SSI accepted his
resignation as the operative date under the Agreement when responding to a contention
interrogatory posed three years before trial, and suggest that this evidence is conclusive.

Hsu's pretrial deposition testimony and interrogatory response are not conclusive.
Factual inconsistencies are for the trier of fact to resolve, including inconsistencies in the
testimony of a particular witness. (Beck v. Weather-Vane Corp. (1960) 185 Cal.App.2d
688, 693, disapproved on other grounds in Liodas v. Sahadi (1977) 19 Cal.3d 278, 287,
fn. 3.) Defendants' observation that a party generally may not reverse prior testimony in
opposing a motion for summary judgment is irrelevant to the situation here, where there
was a trial. (Thompson v. Williams (1989) 211 Cal.App.3d 566, 573.) Interrogatory
answers and deposition testimony are not conclusive at trial, but may be contradicted or
explained. (Mason v. Marriage & Family Center (1991) 228 Cal.App.3d 537, 546; Beck,
supra, at pp. 693-694; Weil & Brown, Cal. Practice Guide: Civil Procedure Before trial
(The Rutter Group 1997) � 8:1247.) Where trial and deposition testimony conflicts, it is
for the trier of fact to "determine where the truth lies." (Beck, supra, at p. 694.)
3.
Whether a "leave of absence" is a true suspension of the
employment relationship, or a termination, is a matter for the fact
finder at trial.

It is also not conclusive, contrary to defendants' assertions on appeal, that a "leave
of absence" is commonly understood as a suspension, not a cessation, of employment.
Defendants rely upon our observation in an unemployment compensation case that "a
`leave of absence,' taken by an employee, is not a termination of the employment: it
preserves the employer-employee relationship in a state of suspense." (Lewis v.
Unemployment Ins. Appeals Bd. (1976) 56 Cal.App.3d 729, 739.) However, we also
observed that a change in an employment relationship may not be "a true `leave of
absence,' even if the parties call it one." (Id. at p. 741.) A genuine leave of absence is
one in which the employer and employee "contemplate a continuity of the employment

15

status." (Id. at p. 742.) Here, there was substantial evidence that Hsu and SSI did not
contemplate a continuity of his employment status, but a termination.

Defendants argue that the Agreement is undermined if Hsu's leave of absence is
found to be a cessation of employment because such a finding compromises purchase
rights and thus thwarts the Agreement's objective of maintaining SSI as a closely-held
corporation entitled to preferential tax treatment. The Agreement, however, safeguards
against any uncertainty in applying the cessation of employment standard to a purported
leave of absence. SSI may exercise its right to purchase a departing employee-
shareholder's stock within 60 days of cessation of employment, but such period shall in
no event expire sooner than 45 days after SSI's receipt of written notice of cessation of
employment. Accordingly, there is no danger that purchase rights would lapse because
SSI failed to comprehend that an employee's so-called leave of absence was, in fact, a
termination. Regardless of when the cessation of employment occurs, SSI has 45 days
from notice of cessation of employment to exercise its purchase right. SSI, and its
shareholders, failed to act within the periods of time commenced with Hsu's cessation of
employment and his notice of cessation of employment.
4.
The special verdict form was not flawed in permitting a finding of
breach of contract without specification of the exact act of breach.

Defendants criticize the special verdict form because it permitted the jury to find a
breach of contract either because the shareholders had no right to buy Hsu's shares, or
because the time to exercise the right expired, without requiring juror unanimity as to
precisely which of the two acts constituted the breach of contract. The verdict form was
proper. As this court has previously found, "at least nine of twelve civil jurors must
concur that each element of a cause of action has been proved by a preponderance of the
evidence, but, faced with multiple or alternative acts which could support an element of a
cause of action, nine jurors need not concur on which act is proved." (Valentine v. Baxter
Healthcare Corp. (1999) 68 Cal.App.4th 1467, 1486, citing Stoner v. Williams (1996) 46
Cal.App.4th 986, 1486.) Here, polling of the jury established that 12 civil jurors found

16

that SSI breached the contract. The jurors were not required to concur on which of the
two acts supporting that element was proved.
5.
The trial court did not abuse its discretion in admitting evidence of
indemnification.

In the February 1996 merger contract, SSI shareholders agreed to indemnify FSI
for any claim arising out of transactions with former shareholders in the year predating
the contract, and established an escrow fund with their corporate shares to secure the
indemnification. Hsu was threatening litigation and the indemnification provision
protected FSI from Hsu's claim that SSI and its shareholders had misappropriated his
stock.

The trial court admitted evidence of the indemnification provision over
defendants' objections that the evidence was irrelevant and unduly prejudicial. (Evid.
Code, � 352.) The court found the fact of indemnification relevant to showing the
interest and bias of the testifying defendant shareholders. Defendants renew on appeal
their challenge to the admission of indemnification evidence.

We conclude that the indemnification evidence was relevant and sufficiently
probative to outweigh any prejudice from its admission. "Evidence tending to show a
witness has some motive, bias, or interest that might induce false testimony has long been
a permissible form of impeachment." (People v. Mickle (1991) 54 Cal.3d 140, 168.) The
individual defendants' agreement to be responsible for FSI's liability on "any claim,
action, dispute or loss" by Hsu gave them a substantial interest in succeeding in the
litigation.

Defendants argue that their interest in the litigation was manifest because they
faced personal liability for a judgment against them, thus making the indemnification
evidence cumulative at best. Defendants insist that the escrow and indemnity provisions
did not give them any interest they did not have already. That assertion is disproved by
the terms of the merger contract. Under the indemnification provision, each individual
defendant faced financial loss if SSI or any shareholder were found culpable. The
individual defendants indemnified FSI against claims or losses arising out of securities

17

transactions "made between or among [SSI] and/or its shareholders and former
shareholders." Each defendant thus had an interest in protecting SSI and the other
individual defendants from liability, apart from his interest in protecting himself
personally from an adverse judgment.

We are not dismissive of potential prejudice from the introduction of
indemnification evidence. However, it is the province of the trial court to weigh the
probative value of evidence against its potential undue prejudice. A trial court's
evidentiary rulings must be upheld unless the trial court abused its discretion by
exceeding the bounds of reason. (People ex rel. Lockyer v. Sun Pacific Farming Co.
(2000) 77 Cal.App.4th 619, 639-640.) No abuse of discretion is shown on this record.
6.
Hsu did not waive his right to contest the timeliness of the
shareholders' election to buy his shares.

Defendant shareholders maintain that they tendered performance under the
Agreement to Hsu by stating their election to buy his stock and delivering a check, and
that Hsu waived objections as to the timeliness of that election by contesting the amount
of the tender alone. Defendants say the trial court erred in refusing jury instructions on
this waiver theory, and in rejecting the waiver defense in the bench trial on breach of
fiduciary duty.

The trial court did not err. Defendants' waiver theory is based upon a
questionable characterization of the facts and a misapplication of legal principles. The
tender of performance defendants rely upon is Masterson's November 3, 1995 letter in
which he states that the shareholders are exercising their right under the Agreement to
purchase Hsu's stock, and the subsequent November 22, 1995 delivery of a check for
$1.8 million. Contrary to defendants' characterization of the evidence, Hsu's objections
to Masterson's letter and check were not confined to the amount tendered. Upon
receiving SSI's check, Hsu immediately objected that no agreement had been reached to
sell his shares and denounced Masterson's documents as "invalid." While Hsu did agree
on a pricing formula to be used in an audit of SSI's books, it is not clear from defendants'

18

citations to the record that the parties agreed to be bound by the results of that audit
without further review and negotiation.

Even assuming that Hsu's only stated objection to the shareholders' tender of
performance under the Agreement was to the price, Hsu did not waive his right to contest
the shareholders' fundamental lack of any contractual right to demand his shares.
Defendants rely upon waiver principles enunciated in two code sections, Code of Civil
Procedure section 2076 (section 2076) and Civil Code section 1501 (section 1501).
Section 2076 provides: "The person to whom a tender is made must, at the time, specify
any objection he may have to the money, instrument, or property, or he must be deemed
to have waived it; and if the objection be to the amount of money, the terms of the
instrument, or the amount or kind of property, he must specify the amount, terms, or kind
which he requires, or be precluded from objecting afterwards." Section 1501 similarly
provides: "All objections to the mode of an offer of performance, which the creditor has
an opportunity to state at the time to the person making the offer, and which could then
be obviated by him, are waived by the creditor, if not then stated."

These code sections must be read together, and section 1501 qualifies section 2076
by requiring a specification of objections to a defect in tender only to the extent that the
defect can be obviated. (Allen v. Chatfield (1916) 172 Cal. 60, 69; Sanguansak v. Myers
(1986) 178 Cal.App.3d 110, 115.) " `The rationale of the requirement of specific
objection is that the offeror should be permitted to remedy any defects in his tender; the
offeree is therefore not allowed to remain silent at the time of the tender and later surprise
the offeror with hidden objections.' " (Riverside Fence Co. v. Novak (1969) 273
Cal.App.2d 656, 662.) Sections 2076 and 1501 "are primarily intended to protect
debtors/offerors who perform or tender performance in good faith from harm by
creditors/offerees who refuse to accept or intentionally fail to demand proper tender."
(Sanguansak, supra, at pp. 116-117.) Sections 2076 and 1501 do not create a contractual
right where none exists, but simply prevent an offeree from evading contractual
obligations by exploiting minor noncompliance in the offeror's mode of tender that was
capable of correction.

19

An offeror's inability to perform according to the contract cannot be corrected and
is not waived by the offeree's failure to specify an objection on that ground. (Allen v.
Chatfield, supra, 172 Cal. at pp. 68-69; Civ. Code, � 1495.) Here, defendant
shareholders were unable to perform because any right they had to buy Hsu's shares
expired before they tendered performance. The shareholders could not have cured the
defect in their tender, and thus Hsu was not required to advise them of that defect.

Defendants acknowledge that the waiver rules do not apply where the offeror is
unable to perform, but argue that defendant shareholders were able to perform under the
Agreement because they had $1.8 million, and proffered the money to Hsu. The ability
to perform, however, means more than financial liquidity. The ability to perform
includes legal ability to perform. (Allen v. Chatfield, supra, 172 Cal. at pp. 68-69.) The
offeror must be entitled to reciprocal performance upon the offeree's tender of
performance. (See Civ. Code, � 1487 ["An offer of performance must be made by the
debtor, or by some person on his behalf and with his assent."].) Were it otherwise, a third
party outside SSI could demand that Hsu sell his shares upon the bare presentation of an
amount equal to the shares' book value. The trial court properly rejected defendants'
waiver defense.

20

7.
The trial court's findings support imposition of liability upon the
management defendants for breach of fiduciary duty.

In a bench trial following the first phase jury trial, the court concluded that the
management defendants (Parodi, Masterson, and Amis) breached fiduciary duties owed
Hsu as a shareholder. The court found that Hsu ceased employment with SSI on July 28,
1995, the date he started his purported leave of absence, but remained a shareholder until
November 22, 1995, when SSI unilaterally transferred ownership of Hsu's shares. The
court found that any right vested in the shareholders to buy Hsu's shares lapsed before
the elections to buy were made. The management defendants' unilateral transfer of Hsu's
shares in violation of the Agreement, and their failure to disclose material information
concerning SSI, breached fiduciary duties owed Hsu as a shareholder.

Defendants contend that the trial court failed to make necessary findings in its
statement of decision to support the imposition of liability for breach of fiduciary duty,
and that the management defendants' transgressions amounted to no more than "breach
of a procedural term in an ambiguous Shareholder Agreement" that were not tortious.
The management defendants understate both the comprehensiveness of the court's
statement of decision, and the culpability of their conduct.

The court's statement of decision adequately states the basis for its determination
that the management defendants breached their fiduciary duties. The court found that the
management defendants "breached their fiduciary duty to Mr. Hsu by participating in the
transfer of all of Mr. Hsu's shares of SSI stock in violation of the Shareholder
Agreement," and accomplished the transfer by wrongful means. The court observed that
"Mr. Masterson never asked Mr. Hsu to transfer his shares as required by the Shareholder
Agreement and never asked Mr. Hsu to sign over the transfer, but rather used a document
that was never intended by any of the parties when the corporation was formed to be used
in such a manner--the assignment separate from certificate . . .--to unilaterally transfer
Mr. Hsu's shares, which happened to be in the custody of SSI in a fiduciary basis, to
himself, to Mr. Amis, to Mr. Parodi, and to the other individual defendants without any
notice to Mr. Hsu or any consent requested from Mr. Hsu or any disclosure to Mr. Hsu of

21

what had taken place." The court further found that the management defendants
breached their fiduciary duty "to disclose to Mr. Hsu relevant, material information
concerning the corporation (SSI) prior to the time that they acquired Mr. Hsu's shares."

These findings sufficiently support the court's determination that the management
defendants breached their fiduciary duties. We find unpersuasive defendants' argument
that the court's detailed recitation of the means by which Hsu's shares were transferred
supports the court's damages assessment alone, and not liability. While the passage is
located within a general discussion of damages, the finding is not confined to damages.
Nor do we find any ambiguity in the court's finding that the management defendants
failed to disclose material information concerning SSI before acquiring Hsu's shares in
November 1995. The nature of the undisclosed information is plainly the merger
discussions between SSI and FSI, and need not have been further identified as such.

Defendants seek to impose a burdensome level of specificity upon a trial court
writing a statement of decision that goes beyond statutory requirements. (Code Civ.
Proc., � 632.) A statement of decision need not include an express finding on every
controverted fact and need not respond point by point to each issue posed by the parties.
(Bauer v. Bauer (1996) 46 Cal.App.4th 1106, 1118; Golden Eagle Ins. Co. v. Foremost
Ins. Co. (1993) 20 Cal.App.4th 1372, 1379-1380.) "The court's statement of decision is
sufficient if it fairly discloses the court's determination as to the ultimate facts and
material issues in the case." (Golden Eagle Ins. Co., supra, at p. 1380.)

The trial court plainly stated its finding that the management defendants breached
their fiduciary duties, and that finding is supported by the record. As officers, directors,
and majority shareholders, the management defendants had "a fiduciary responsibility to
the minority [shareholders] and to the corporation to use their ability to control the
corporation in a fair, just, and equitable manner. Majority shareholders may not use their
power to control corporate activities to benefit themselves alone or in a manner
detrimental to the minority." (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 108.)
The management defendants acknowledge the high standard of good faith required of

22

them but insist that their misconduct did not exceed "technical breaches" of the
Shareholder Agreement common to all shareholders.

The record is to the contrary. The management defendants were in possession of
material information about the proposed SSI/FSI merger, and failed to disclose that
information to Hsu when negotiating with him for the purchase of his shares. The three
management defendants personally engaged in discussions with FSI before acquiring
Hsu's shares in November 1995. In October 1995, the management defendants advised
all shareholders, except Hsu, that SSI was pursuing "partnering possibilities" and that a
merger or other event "leading to at least partial liquidity" could occur in the next 12
months The management defendants encouraged the shareholders to buy Hsu's shares at
book value, which was far less than the market value of Hsu's shares.

The management defendants' method of accomplishing the acquisition of Hsu's
shares was also an abuse of their power to control corporate activities. Rather than
obtaining Hsu's endorsement of his stock certificate as required by the Agreement,
defendant Masterson used a blank form stock assignment signed by Hsu in a previous,
unrelated transaction. The stock assignment document, executed by Hsu for the distinct
purpose of securing a loan years earlier, was used to transfer ownership of Hsu's shares
to the management defendants and other remaining shareholders. The management
defendants then concealed the transfer from Hsu. Hsu met with Parodi, Masterson, and
Amis in December 1995, after the transfer was accomplished, and yet the three men
never told Hsu that they transferred ownership of his shares to themselves and the other
shareholders.

Defendants argue that the use of the stock assignment form was sanctioned by
SSI's attorney, and thus excusable. The evidence relied upon is Masterson's testimony
that Attorney Michael Danaher of Wilson Sonsini told Masterson that the stock
assignment could be used to transfer Hsu's shares. However, further questioning of
Masterson at trial established that it was Masterson who told Attorney Danaher that the
stock assignment "was intended for use in connection with the shareholder agreement."
This vague generalization concealed the true purpose of the stock assignment. There is

23

no evidence that Attorney Danaher, with awareness of the true purpose of the stock
assignment as security for a loan, recommended its use for the distinct purpose of
acquiring Hsu's shares. Substantial evidence supports the trial court's finding that the
management defendants breached their fiduciary duties.
B.
Conversion and Intentional Interference with Prospective Economic
Advantage.

The individual defendants contest the jury's verdict finding them liable for
conversion and intentional interference with prospective economic advantage on the
single point that if the breach of contract claim fails on appeal, so too should these tort
claims predicated upon violation of the Agreement. Having sustained the jury's verdict
of breach of contract, no issue remains on these tort claims.
C.
Corporations Code Violations.

The jury found that SSI and the management defendants (Parodi, Masterson, and
Amis) violated Corporations Code section 25401 (section 25401), and that these same
defendants (with the exception of Amis) also violated Corporations Code sections 25400,
subdivision (d) (section 25400(d)) and 25504.1 (section 25504.1). Defendants contend
that these security fraud statutes do not apply to their acquisition of stock under a
shareholders' agreement and, additionally, that SSI cannot be held liable under section
25401 because it did not itself purchase Hsu's shares. Only the latter contention has
merit.
Section
25400(d)
protects
against securities fraud by forbidding "a broker-dealer
or other person selling or offering for sale or purchasing or offering to purchase the
security, to make, for the purpose of inducing the purchase or sale of such security by
others, any statement which was, at the time and in the light of the circumstances under
which it was made, false or misleading with respect to any material fact, or which
omitted to state any material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading, and which he
knew or had reasonable ground to believe was so false or misleading."

24

Section 25401 is similar to a common law cause of action for negligent
misrepresentation, and provides: "It is unlawful for any person to offer or sell a security
in this state or buy or offer to buy a security in this state by means of any written or oral
communication which includes an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading." Any person materially
assisting in a violation of section 25401 with intent to deceive or defraud is jointly and
severally liable for securities fraud. (� 25504.1.)

Sections 25400(d) and 25401 differ from common law fraud causes of action in
not requiring proof of reliance, and reflect the Legislature's intent to ease a plaintiff's
burden of proving securities fraud. (Bowden v. Robinson (1977) 67 Cal.App.3d 705, 714-
715.) Defendants concede that a plaintiff asserting violations of these statutes need not
prove that he or she relied upon the defendants' misrepresentations, but note that a
plaintiff must still prove that the price received was affected by the misrepresentation.
Our high court has cited, with approval, comments on this point by the principal drafters
of section 25400(d): " `There is no requirement under these sections that the plaintiff
rely upon the statements or acts of the defendant or even that he be aware that the
defendant made them or engaged in them. All that is required is that the plaintiff
establish that the price which he paid or received was affected by the defendant's conduct
or statements, which would of course assume that someone acted on the basis of the
defendant's wrongful conduct. However, it is not necessary that the plaintiff prove that
he personally was influenced by such conduct.' " (Mirkin v. Wasserman (1993) 5 Cal.4th
1082, 1103.)

Defendants argue that the price Hsu received for his shares was not affected by the
misrepresentations of SSI and the management defendants because the price was fixed by
the Agreement. The misrepresentations did not "induce" the sale of Hsu's shares within
the meaning of section 25400(d), say defendants, nor was the sale completed by "means
of" a misrepresentation within the meaning of sections 25401 and 25504.1. According to
defendants, the mandatory nature of the securities transaction defeats Hsu's ability to

25

establish that their misrepresentations affected the price he received or were otherwise
material to the transaction.

There is ample authority, overlooked by the parties in their briefing, that
misrepresentations in the acquisition of stock under a shareholders' agreement at a fixed
price is not actionable under federal securities law which, like California law, requires
materiality. (E.g. Toledo Trust Co. v. Nye (6th Cir. 1978) 588 F.2d 202, 206-209
[collecting cases]; Blackett v. Clinton E. Frank, Inc. (D.C. Ill. 1974) 379 F.Supp. 941,
947-948.) The reasoning of these cases is unimpeachable: misrepresentations cannot be
material if the plaintiff is already contractually bound to sell his or her shares at an
established price. (Toledo Trust Co., supra, at p. 206.)

However, there is a critical difference between those cases and this case. Here,
Hsu was not contractually bound to sell his shares, as judge and jury found upon
substantial evidence. Any right the shareholders had to purchase Hsu's stock under the
Agreement lapsed before that right was exercised. "When a stockholder is bound to sell
his stock by a valid option agreement, whatever he knew or did not know about the
corporation is totally irrelevant to the decision to sell." (Coons v. Kidder, Peabody &
Co., Inc. (C.D.N.Y. 1982) 539 F.Supp. 1145, 1147, italics added.) But
misrepresentations are relevant if an option to buy is incorrectly exercised. (Id. at
p. 1147, fn. 1.) Hsu was thus entitled to allege and prove that defendants' acquisition of
Hsu's shares, while tendering a $1.8 million purchase price and without informing Hsu of
the FSI merger prospects, violated the Corporations Code.6

As to SSI's liability under section 25401, there is merit to defendants' argument
that SSI did not itself buy Hsu's shares and thus is outside the scope of that statute.
(Admiralty Fund v. Jones (9th Cir. 1982) 677 F.2d 1289, 1296; see Diamond Multimedia
Systems, Inc. v. Superior Court (1999) 19 Cal.4th 1036, 1056 [drafters of � 25401

6
"Sale" is broadly defined in the Corporations Code to include "every contract of
sale of, contract to sell, or disposition of, a security or interest in a security for value."
(Corp. Code, � 25017, subd. (a), italics added.)

26

conclude that a violator is liable only to persons with whom he or she deals]; see also
Courtney v. Waring (1987) 191 Cal.App.3d 1434, 1440 [noting drafters' conclusion that
� 25401 applies only to the actual seller].) Accordingly, we will modify the judgment to
strike the section 25401 violation against SSI. The modification has little practical effect,
as SSI remains liable for the same amount of damages under section 25504.1 for
materially assisting in the violation of section 25401.
D. Damages.

The jury awarded $2.418 million in damages for both the breach of contract and
conversion claims. Plaintiff Hsu's damages expert had testified to substantially the same
figure, which the accounting expert arrived at by using the merger value of Hsu's shares.
The accountant testified that the merger value of Hsu's shares was $4.218 million and
Hsu received only $1.8 million, for a difference of $2.418 million.7

Defendants contend that the jury's reliance upon the April 1996 merger value of
Hsu's shares is misplaced, and overcompensates Hsu for his actual injury. Yet
defendants do not dispute that the jury was properly instructed that it could consider
factors before and after the November 22, 1995 date of breach and conversion. While
defendants concede that the jury could consider the merger as an event after the breach
relevant to determining damages, they maintain that the jury went too far in its wholesale
adoption of the merger value. Defendants argue that a merger was not certain in
November 1995, and the merger valuation eventually reached included a premium for
total control of the company--a premium inapplicable to Hsu's "illiquid" 20 percent
interest.

There is substantial evidence, however, of strong merger prospects in November
1995, when defendants wrongfully seized Hsu's shares. The evidence is uncontroverted

7
Plaintiff's damages expert used figures down to the dollar, which the jury
apparently rounded out. Defendants do not challenge this minor difference in amounts.
Also, we need not address plaintiff's conditional cross-appeal request for a broader
measure of damages if this case is remanded, as no remand is warranted.

27

that a merger was under consideration at that time, and draft merger agreements were
circulated just one month after the acquisition of Hsu's shares. SSI approved the merger
in early February 1996, less than three months after taking Hsu's shares. Moreover,
defendants' claim that the merger value is excessive is belied by SSI's own
contemporaneous valuation. On November 22, 1995, the date of breach and conversion,
SSI wrote to FSI proposing a merger for $57 million, over twice the final merger value
used by the jury. It also cannot be overlooked that Hsu was entitled to keep his shares
absent a timely exercise of purchase rights under the Agreement, and would have
received the merger value for his shares but for defendants' unlawful conduct. The jury's
damages award is not excessive.
E. Costs.

The trial court awarded plaintiff Hsu $136,824.98 in costs. The award includes
$69,466.08 for expert witness fees and general photocopying expenses, which defendants
contend are not recoverable as costs. Defendants are correct. These two categories of
expenses are "not allowable as costs, except when expressly authorized by law." (Code
Civ. Proc., � 1033.5, subds. (b)(1) & (b)(3).)

Plaintiff argues that the expenses are expressly authorized by law because
contractual fee and cost provisions are enforceable, and the parties' Agreement states that
the prevailing party shall recover "all fees, costs and expenses." (Civ. Code, � 1717,
subd. (a).) Plaintiff argues that the broadly worded contractual cost provision expands
the scope of recoverable costs beyond those costs permitted by statute. Some courts have
rejected this argument outright, holding that the Legislature's intention that Civil Code
section 1717 be uniformly applied precludes litigants from adopting a definition of costs
different from the statutory definition. (E.g. Fairchild v. Park (2001) 90 Cal.App.4th
919, 928-930.) Other courts have held that litigants may contractually define costs
different from the statutory definition, although contractual costs provisions are presumed
to adopt the statutory definition absent evidence to the contrary. (E.g. Arntz Contracting
Co. v. St. Paul Fire & MarineIns. Co. (1996) 47 Cal.App.4th 464, 491-492 (Arntz).) As

28

stated in Artntz, "an undefined general contractual provision entitling the prevailing party
to `reasonable attorney's fees and costs' must be interpreted in light of Code of Civil
Procedure section 1033.5's limited definition of costs." (Id. at p. 491.) Nevertheless,
"[w]hile it is reasonable to interpret a general contractual cost provision by reference to
an established statutory definition of costs, we do not discern any legislative intent to
prevent sophisticated parties from freely choosing a broader standard authorizing
recovery of reasonable litigation charges and expenses." (Id. at p. 492; see Davis v.
KGO-T.V., Inc. (1998) 17 Cal.4th 436, 446-447, fn. 5 [the effect of a contractual
agreement for shifting litigation costs turns on the intentions of the parties].)

Plaintiff urges us to follow Arntz, and to construe the Agreement here as providing
a standard of "costs" broader than the statutory definition. But the costs award is
insupportable even if we were to do as plaintiff urges. Recovery of costs provided by
contract must be specially pleaded and proven at trial, and not awarded posttrial as was
done here. (Arntz, supra, at p. 491; First Nationwide Bank v. Mountain Cascade, Inc.
(2000) 77 Cal.App.4th 871, 878-879.) "[T]he proper interpretation of a contractual
agreement for shifting litigation costs is a question of fact that `turns upon the intentions
of the contracting parties.' " (First Nationwide Bank, supra, at p. 879.) Accordingly,
"the issue must be submitted to the trier of fact for resolution pursuant to a prejudgment
evidentiary proceeding, not a summary postjudgment motion." (Ibid.)

Nor may the disputed costs be awarded to plaintiff as an element of attorney fees
under the rationale that the expenses were disbursed by the attorneys in the course of
litigation. We disavow this court's previous adoption of that view as an unwarranted
conflation of fees and costs. (Bussey v. Affleck (1990) 225 Cal.App.3d 1162, 1167.) As
persuasively argued by our colleagues in the Third District in disagreeing with Bussey:
"In the absence of some specific provision of law otherwise, attorney fees and the
expenses of litigation, whether termed costs, disbursements, outlays, or something else,
are mutually exclusive, that is, attorney fees do not include such costs and costs do not
include attorney fees." (Ripley v. Pappadapoulas (1994) 23 Cal.App.4th 1616, 1626.)
We join other Divisions of this District in following Ripley on this point. (First

29

Nationwide Bank v. Mountain Cascade, Inc., supra, 77 Cal.App.4th at p. 878; Robert L.
Cloud & Associates, Inc. v. Mikesell (1999) 69 Cal.App.4th 1141, 1154.)

Defendants also argue that $1,530.91 spent by plaintiff to expedite preparation of
deposition transcripts is not recoverable as an item of costs. Standard transcription fees
for "necessary" depositions are recoverable, but the extra cost for expediting transcripts
may be allowed only in the exercise of the trial court's discretion. (Code Civ. Proc.,
� 1033.5, subds. (a)(3), (c)(4).) Plaintiff maintains that the trial court either found the
extra deposition fees to be necessary or exercised its discretion in allowing recovery of
these extra fees. Plaintiff notes that the court commented, at the hearing on costs: "I am
not satisfied that [the expedited transcripts] are merely convenient." However, the court
also said that the requested expedited deposition costs are "not allowed under the code
section," and proceeded to award the costs under the parties' contract which, in the
court's view, provided a more expansive definition of costs. The court erred in awarding
costs not authorized by statute. We will therefore modify the judgment to strike the
recovery of expert witness fees, general photocopying costs, and expedited deposition
transcript fees, thus reducing the costs award by $70,996.99.
F.
Cross-Appeal: Punitive Damages.
1.
The punitive damages claim and motions relating to the claim.

Plaintiff Hsu sought punitive damages under several causes of action in this case
initiated in October 1996. (Civ. Code, � 3294.) Discovery closed in April 1998. During
discovery, defendants had asserted the attorney-client privilege in refusing disclosure of
their communications with legal counsel about the Agreement. In August 1998,
defendants, through new counsel, informed Hsu that defendants now intended to claim
reliance on the advice of counsel as a defense and offered discovery of their
communications with counsel. Plaintiff rebuffed the offer, stated his opposition to
renewed discovery, and maintained that defendants could not assert a defense upon which
they previously prevented discovery.

Soon thereafter, defendants moved for summary adjudication of the punitive
damages claim on grounds that they relied on the advice of counsel in their purchase of

30

Hsu's shares, and thus did not act with fraud, oppression, or malice as would warrant
imposition of punitive damages. Plaintiff argued in opposition to the motion that he had
been denied discovery relating to the advice of counsel defense by defendants' previous
assertion of the attorney-client privilege, but plaintiff did not request a continuance to
conduct additional discovery.8 (Code Civ. Proc., � 437c, subd. (h).) The trial court
granted the motion for summary adjudication on November 12, 1998, finding that
plaintiff failed to raise a triable issue of material fact disputing defendants' reliance on
advice of counsel.

In November 1998, plaintiff moved in limine to exclude defendants' advice of
counsel evidence on the ground that defendants prevented its discovery by assertion of
the attorney-client privilege. The advice of counsel defense was proffered at trial to
refute Hsu's fraud cause of action.9 In September 1999, the court denied the motion to
exclude the evidence, but gave Hsu an opportunity to conduct additional discovery on the
matter. Hsu did so and, in September 2000, moved for leave to amend his complaint to
reinstate his punitive damages claim. Hsu argued that the additional discovery uncovered
evidence "which strongly suggest[s] that defendants did not reasonably rely on advice of
counsel." Hsu conceded that his motion was outside the scope of a statutory motion for
reconsideration, and said the circumstances presented the "unique situation" of a change
in facts warranting a revised ruling. The trial judge referred the motion to the judge who
had earlier granted defendants' motion for summary adjudication dismissing the punitive
damages claim.

In October 2000, the court heard and denied plaintiff's motion to reinstate his
punitive damages claim. The court found that it did not have jurisdiction because the

8
Plaintiff was opposed to additional discovery, and had successfully defeated
defendants' recent motion to reopen discovery.
9
The common law fraud cause of action never reached the jury. Plaintiff dismissed
the fraud cause of action against the nonmanagement defendants during trial, and the trial
court subsequently granted the three management defendants' motion for nonsuit on the
cause of action on grounds unrelated to the advice of counsel defense.

31

motion failed to satisfy statutory standards for reconsideration. (Code Civ. Proc.,
� 1008.) The court also declined to exercise any inherent power to reevaluate its
summary adjudication order because plaintiff refused defendants' August 1998 offer of
discovery, and did not ask for a continuance to pursue discovery at the time the motion
was pending.

Trial proceeded without Hsu's punitive damages claim. The jury found in favor of
Hsu on all causes of action submitted to it, and awarded Hsu compensatory damages.
Following entry of judgment, Hsu moved for a new trial limited to punitive damages.
(Code Civ. Proc., � 657.) Hsu repeated his earlier assertion that supplemental discovery
found "evidence refuting, or at least establishing a genuine issue of material fact, whether
defendants reasonably relied on the advice of their counsel in the acts that comprise this
lawsuit." The court denied plaintiff's motion for new trial.

2.
Summary adjudication was proper.

Plaintiff concedes on appeal that he "lacked evidence to rebut [defendants']
assertion of good faith reliance" made in their motion for summary adjudication.
Nevertheless, plaintiff argues that defendants' motion for summary adjudication should
have been denied because he was prevented access to discovery by defendants' privilege
claim. But plaintiff's remedy for being denied access to essential facts was to move for a
continuance to obtain necessary discovery. (Code Civ. Proc., � 437c, subd. (h).) Plaintiff
chose, instead, to stand on the state of the evidence. That evidence compelled a ruling
against him.

3.
The motion to reinstate the punitive damages claim was properly
denied.

Plaintiff mischaracterizes his motion to reinstate his punitive damages claim as a
motion to amend his complaint. In fact, plaintiff sought a reversal of the court's prior
summary adjudication ruling. The courts are currently divided on the question of
whether a trial court has jurisdiction to reconsider and change a prior ruling beyond the
power granted and circumscribed by statute. (Code Civ. Proc., � 1008.) Some courts

32

have held that the statutory standards for reconsideration are jurisdictional and exclusive.
(E.g. Garcia v. Hejmadi (1997) 58 Cal.App.4th 674, 685-691.) Other intermediate
appellate courts have held that a trial court has inherent constitutional power to
reconsider a prior ruling on its own motion. (E.g. Kerns v. CSE Ins. Group (2003) 106
Cal.App.4th 368, 391.) Still other courts have held that a trial court has inherent power to
reconsider and modify a prior ruling, whether on its own motion or that of a party. (E.g.
Scott Co. v. United States Fidelity & Guaranty Ins. Co. (2003) 107 Cal.App.4th 197,
210.)

We need not choose among these competing views on the power of a trial court to
reconsider its prior rulings. Here, the trial court denied plaintiff's motion whether stated
under statute or any inherent power to reverse prior rulings. (Code Civ. Proc., � 1008.)
As plaintiff Hsu rightly conceded in the trial court, his motion was outside the scope of a
statutory motion for reconsideration. A glaring deficiency is the motion's untimeliness,
as it came not within ten days of notice of the order, but almost two years later. (Code
Civ. Proc., � 1008, subd. (a).) Assuming the court had authority beyond the statute to
reconsider and change its ruling, the court did not abuse its discretion in denying the
motion. As the trial court observed, plaintiff could have sought a continuance of the
summary adjudication hearing to obtain additional discovery. (Code Civ. Proc., � 437c,
subd. (h).) His failure to do so evinces a lack of diligence and undermines his claim that
he was wrongly denied necessary discovery.

4.
The motion for new trial was properly denied.

Plaintiff Hsu's new trial motion was unusual. As plaintiff states on appeal, "the
limited trial that Hsu requested did not require granting a new trial. Hsu had been denied
any trial at all on punitive damages. Granting Hsu's motion thus did not involve setting
aside a jury verdict." (Italics omitted.) In fact, it appears that Hsu's motion is better
characterized as yet another motion for reconsideration of the summary adjudication
dismissing his punitive damages claim, rather than a motion for new trial. However
characterized, the court properly denied the motion.

33

Plaintiff's motion was founded on the assertion that he had been denied relevant
discovery. Plaintiff repeats on appeal that defendants "misuse[d]" the attorney-client
privilege to foreclose discovery until the eve of trial. But the trial court never found a
misuse of discovery. The court simply found that defendants had to disclose evidence
upon which they intended to rely, and thus permitted supplemental discovery after
defendants shifted litigation strategy. It was on this basis that the trial court granted
plaintiff supplemental discovery. The court expressly stated, while permitting additional
discovery, that it had not found any abuse of discovery by defendant. Moreover, the
evidence that plaintiff proffers as newly discovered evidence could have been discovered
sooner, at the time of the motion for summary adjudication, had plaintiff requested a
continuance to pursue evidence on the advice of counsel defense. The record does not
support plaintiff's assertions of a misuse of discovery, surprise, or newly discovered
evidence warranting a new trial.
IV.
DISPOSITION

The judgment is modified to strike the finding that defendant SSI violated
Corporations Code section 25401 and to reduce the costs award to $65,827.99. As
modified, the judgment is affirmed. The parties shall bear their own costs and attorney
fees incurred on the appeal and cross-appeal.

_________________________

Sepulveda, J.

We concur:

_________________________
Kay, P.J.

_________________________
Rivera, J.

34

Trial Court:
Alameda County Superior Court.

Trial Judge:
Honorable Joseph Carson.

Counsel for Plaintiffs and
Gray Cary Ware & Freidenrich, Richard I. Yankwich,
Appellants:
Stanley J. Panikowski, Barry D. Roe, Andrew P.

Valentine, Kathryn E. Karcher.

Counsel for Defendants and
Folger Levin & Kahn LLP, Michael A. Kahn, Roger B.
Appellants:
Mead, Michael F. Kelleher, Andrew J. Davis.

35