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Volume XI, Number 205

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What Happens When The Corporation Can't Legally Pay Dissenting Shares?

Chapter 5 of the California General Corporation Law limits when a California corporation may make a distribution to its shareholders.   Because Section 166 of the Corporations Code defines "distribution to its shareholders" so as to include a share repurchase, any payment to the holder of dissenting shares are subject to the limitations of Chapter 5.  Directors who approve a payment that is contrary to Chapter 5 (and a shareholder who receives the payment) may be liable under Sections 316 and 506.   If a shareholder has a right to payment for dissenting shares under Chapter 13 but payment is not permitted under Chapter 5, what's to be done?

Sections 1303 (requiring payment when the corporation and the shareholder agree) and 1305 (providing for entry of judgment in dissenters' rights action) are both expressly subject to Section 1306, which provides:

To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5.

Section 1306, however, does not remove all issues, however, because it makes no reference to California's Uniform Voidable Transactions Act (Cal. Civ. Code §§ 3439 et seq.   Because the UVTA imposes different limitations, it is at least theoretically possible that a payment for dissenting shares will meet the conditions in Chapter 5 but not the UVTA.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 202
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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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