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Involuntary Dissolution – Deadlocks & Disputes

In many cases, minority shareholders of a closely held corporation have no other choice but to seek the Court’s assistance to dissolve a corporation when a dispute or deadlock becomes so pervasive that the company cannot function as intended.

We would first attempt to resolve the dispute or deadlock outside of Court by contacting the controlling shareholder(s) to seek immediate resolution. But if we are unable to resolve the dispute, we would prepare and serve a dissolution complaint against the corporation in the superior court of your county to start the proceedings, and seek damages as appropriate.

California Corporations Code § 1800 may control the path down involuntary dissolution. § 1800(b) states: “The grounds for involuntary dissolution are that:

    • The corporation has abandoned its business for more than one year.

    • The corporation has an even number of directors who are equally divided and cannot agree as to the management of its affairs, so that its business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost, and the holders of the voting shares of the corporation are so divided into factions that they cannot elect a board consisting of an uneven number.

    • There is internal dissension and two or more factions of shareholders in the corporation are so deadlocked that its business can no longer be conducted with advantage to its shareholders or the shareholders have failed at two consecutive annual meetings at which all voting power was exercised, to elect successors to directors whose terms have expired or would have expired upon election of their successors.

    • 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.

    • In the case of any corporation with 35 or fewer shareholders (determined as provided in Section 605), liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.

    • The period for which the corporation was formed has terminated without extension of such period.”

Under California Corporations Code § 1800(b)(3), authorizing involuntary dissolution of a corporation on the ground of shareholder dissension and deadlock, shareholders may be deadlocked in a variety of situations. There may be two shareholders or two factions of shareholders, each of whom owns 50 percent of the corporation’s shares. A deadlock may occur in a close corporation even if one faction holds a majority of the shares if provision has been made for supermajority or unanimous voting on important matters. Deadlock can also develop if there are three or more warring camps, none of which will join together to form a majority coalition. Belio v. Panorama Optics, Inc. (1995, Cal App 2d Dist) 33 Cal App 4th 1096, 39 Cal Rptr 2d 737, 1995 Cal App LEXIS 308.

Each case is unique with respect to your goals of the dissolution action which will in turn control how we handle your case. Please call our offices for a confidential consultation.

(The above information does not constitute legal advice nor does the information provided create an attorney-client relationship).

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