October 27, 2021

Volume XI, Number 300

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October 26, 2021

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October 25, 2021

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Dissolution And Limitations On Distributions To Shareholders

Chapter 5 of the California General Corporation Law imposes specific limitations on distributions to shareholders, as defined in Section 166.  When a corporation is wound up and dissolved, whether the dissolution is involuntary under Chapter 18 or voluntary under Chapter 19, the shareholders may receive a distribution of cash or assets.  Absent an exception, such distributions would be subject to the limitations in Chapter 5.   Section 508, however, provides that "This chapter [5] does not apply in connection with any proceeding for winding up and dissolution under Chapter 18 or 19".    Section 508 does not prohibit application of the Uniform Voidable Transactions Act.  

This exception can be explained by the fact that Section 2004 (which applies to both involuntary and voluntary dissolutions) provides for distributions to shareholders only after determining  that all the known debts and liabilities of the corporation have been paid or adequately provided for.   When this is the case, there is no need for impose the limitations on distributions in Chapter 5, which are largely intended to protect creditors.

Section 2000 of the Corporations Code provides a mechanism for shareholders to avoid an involuntary dissolution or voluntary dissolution initiated by the vote of shareholder(s) representing only 50% of the voting power (the "moving parties").   The statute allows the corporation and then the other shareholders to purchase the shares of the moving parties for cash at "fair value".   In Clark v. S&J Adver., Inc., 611 B.R. 669, 682 (2019), it was argued that the purchase of the moving parties shares constituted a distribution subject to Chapter 5.  The Bankruptcy Court, however, rejected this argument, citing Section 508.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 223
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About this Author

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

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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