Oppressive Conduct by Majority Shareholders

[Originally published January 12, 2009 at California Corporate Lawyer]

California Corporation Code § 1800 provides several grounds for
involuntary dissolution. A court may grant involuntary dissolution
where (1) “[t]hose 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.” §1800(b(4), and (2) “liquidation is reasonably
necessary for the protection of the rights or interests of the
complaining shareholder or shareholders.” §1800(b(5). See also Bauer v. Bauer, 46 Cal.App.4th 1113, 54 Cal.Rptr.2d 377, Stuparich v. Harbor Furniture Mfg., Inc. 83 Cal.App.4th 1268, 100 Cal.Rptr.2d 313, 2000 Daily Journal D.A.R. 10,657.

Involuntary
corporate dissolution under subdivision (b)(4) requires a showing that
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 that the corporation’s property “is being misapplied or wasted by
its directors or officers.”

Bauer described the course of conduct
that satisfies the definition of the improper “squeezing out” of a
minority shareholder, thus entitling a minority shareholder to
dissolution of the corporation to protect his or her interests. The
court took its definition of a from Marsh’s California Corporation Law,
the portion quoted by the Bauer court is below:

“The term
‘squeeze-out’ is . . . generally intended to describe a situation where
the majority controlling shareholders, who are also the principal
officers of a corporation, engage in a course of conduct which is
designed to exclude a minority shareholder or shareholders both from
participation in the conduct of the corporate business and from the
economic benefits derived therefrom . . . The conduct most typically
takes the form of refusing to pay any dividends on the corporate stock,
refusing to permit the minority shareholder to have any corporate office
or position on the board of directors . . . , and the payment of large
salaries to the controlling shareholders who are the principal officers
of the corporation . . . Obviously it makes a great deal of difference
whether dividends had once been paid on a regular basis, but were
stopped; whether the minority shareholder had a job with the corporation
from which he was fired; and whether the controlling majority
shareholders increased their own officers’ salaries, after the rift
appeared and the dividends were terminated.” 2 Marsh’s California Corporation Law (3d ed. 1995) §11.46, 958-960

Adishian
Law Group, P.C. represents and advises entrepreneurs, company
co-founders, and C-Suite executives on a wide range of legal and
strategic issues, including maximizing the value of their ownership
interest.

Note: The information contained is not legal advice and
does not establish an attorney-client relationship. Our contact
information is included and we always offer a free consultation. For
more information about the MINORITY SHAREHOLDERS, OPPRESSIVE CONDUCT,
CORPORATE LAW and/or other areas of CORPORATE law, please visit
http://www.AdishianLaw.com/, contact us via email to
askalg@adishianlaw.com or call us at 415.955.0888 or 310.726.0888.
Copyright Adishian Law Group, P.C. 2009.

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Licensed since 1994

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