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When 1% Is Tantamount To 33 1/3%

Section 1800 of the California Corporations Code authorizes the filing of a verified complaint for the involuntary dissolution of a corporation for certain specified causes.  As might be expected, the statute does not confer standing on just anyone.  Section 1800(a) lists four categories of persons who may sue for involuntary dissolution, including a shareholder or shareholders who hold shares representing not less than than 33 1/3% of: (1) the total number of outstanding shares (assuming conversion of any preferred shares convertible into common shares); (2) the outstanding common shares; or (3) the equity of the corporation.  

In a corporation with a single class of shares , it would seem that a shareholder owning 1% of the outstanding shares would be out of luck.  However, Section 1800(a)(2) bestows standing on any shareholder if the corporation is a statutory close corporation. 

Even if the corporation does not meet the definition of a "close corporation", a 1% shareholder may find that it actually owns 100% of the outstanding shares for purposes of this statute.  The reason is that the statute excludes in each case shares owned by persons who have "personally participated" in any of the transactions "enumerated" [sic] in Section 1800(b)(4).  Subdivision (b) of Section 1800 lists six grounds for a complaint for involuntary dissolution.  Section 1800(b)(4) provides:

"Those in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers."

A 1% shareholder may also have standing under two other provisions.  Section 1800(a)(3) confers standing on any shareholder if the grounds for dissolution is that the period for which the corporation was formed has ended without extension.  Finally, Section 1800(a)(4) confers standing on any person expressly authorized to do so in the articles of incorporation.  

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 154

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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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