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Close Corporation Or Simply A Closely Held Corporation?Close Corporation Or Simply A Closely Held Corporation?

A corporation may have a single shareholder or tens of thousands of shareholders.  The former is often referred to as a "closely held corporation".  The California Corporations Code does not use or define the term "closely held corporation" although the term can be found in some other California code sections (e.g., Probate Code §§ 2401 & 2351; Rev. & Tax. Code § 6248; Ins. Code § 10113.3; and Health & Safety Code § 1771.8).

The California General Corporation Law does define the confusingly similar term "close corporation" as:

"a corporation, including a close social purpose corporation, whose articles contain, in addition to the provisions required by Section 202, a provision that all of the corporation’s issued shares of all classes shall be held of record by not more than a specified number of persons, not exceeding 35, and a statement, 'This corporation is a close corporation.'"

Cal. Corp. Code § 158(a).  

The confounding of these two terms was the recent subject of an opinion by retired Superior Court Judge Kim Dunning (sitting by assignment) in Abregov v. Lawrence, 2020 Cal. App. Unpub. LEXIS 1826.  The case arose when the board of directors and majority shareholders of a closely held corporation amended the corporation's articles to increase the number of authorized shares from one million to 15 million and then issued additional shares to themselves.  Unhappy with this apparent dilution, the plaintiffs sued, alleging that the amendment violated a shareholders' agreement that required unanimous shareholder approval of amendments to the articles of incorporation.

In an unpublished decision, the Court of Appeal found that "BNRG [the corporation], whose shares of stock are not publicly traded, bears all the characteristics of a closely held corporation.  Other than the fact BNRG has fewer than 35 shareholders, it has none of the requisites of a statutory close corporation."  Accordingly, the Court concluded that "the amendment to the articles of incorporation to increase the number of authorized shares of stock, which was approved by the board and holders of a majority shares of stock, was valid". 

Although Rule 8.1115(a) of the California Rules of Court forbids courts and parties from citing or relying on unpublished opinions (except as specified by rule 8.1115(b)), the opinion does serve as a reminder that a "closely held corporation" is not necessarily tantamount to a "close corporation".  In fact, the opinion mentions that the corporation's attorney was subject to a malpractice claim that was settled.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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