Disputes among shareholders are common. While there may be shared objectives at the time a business incorporates, changes in the shareholders’ respective long and short term goals can change over time leading to disagreements. When this occurs, if the parties are not able to negotiate a satisfactory resolution, California corporations’ law provides certain legal mechanisms allowing or forcing the corporation to dissolve and liquidate. Using these mechanisms can involve a number of strategic implications. This is the first in a series of blogs that will summarize the general principles of voluntary and involuntary dissolution and statutory buy-out procedures.
To dissolve a corporation voluntarily a shareholder or shareholder group must satisfy certain ownership requirements. Shareholders with at least half of the corporation’s voting rights have broad powers while those with very small ownership interests do not have any ability to force a voluntary dissolution.
Any corporation may elect voluntarily to wind up and dissolve on the vote of shareholders holding shares representing 50 percent or more of the voting power. California Corporations Code Section 1900(a). Except in two limited situations, in most cases there is nothing the other minority shareholders can do to stop the dissolution and liquidation or limit the controlling shareholder in the process.
The first situation allows another 50 percent shareholder to avoid dissolution by purchasing the initiating shareholder’s shares, unless there are provisions in the articles of incorporation limiting this right. Specifically, if the opposing shareholder(s) holds at least 50 percent of the voting power of the corporation, the corporation or, if it does not elect to purchase, such shareholder(s) may avoid the corporation’s voluntary dissolution by purchasing for cash the shares owned by the initiating shareholder(s) at their “fair value” under California Corporations Code Section 2000. The meaning of “fair value” and the buyout process, which can be a very important component in a dissolution strategy, will be described in a future blog.
The second situation involves protecting certain minority shareholders. Opposing Shareholders holding less than 50 percent of the corporations voting power , cannot prevent a voluntary dissolution approved by a 50 percent or greater vote , but they may have the right to compel judicial supervision of the process. If a voluntary dissolution process has been properly commenced and a minority shareholder is concerned that its interests will not be protected in the winding up process, and if it holds shares representing 5 percent or more of the any class of outstanding shares (or is a shareholder(s) of any shares of a statutory close corporation), the shareholder may petition the California superior court to take jurisdiction over such proceeding. If the court assumes jurisdiction, it has broad powers to make orders concerning the winding up of the affairs of the corporation and for the protection of its shareholders and creditors as justice and equity require; but this does not include the power to stop the dissolution and liquidation.
What can an unhappy minority shareholder do? If the circumstances are right, an involuntary dissolution of the corporation could be possible. A future blog will review the requirements for an involuntary corporate dissolution proceeding under California law.