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Shareholder Deadlock – How to Involuntarily Dissolve a Corporation in California

This article discusses the process by which a person may involuntarily dissolve a corporation in California due to shareholder deadlock. A California corporation can be involuntarily dissolved by court order when its shareholders are so deadlocked on important matters that the corporation can no longer conduct business. Shareholder votes usually need a majority vote (e.g. more than 50% of the voting shares) and deadlocks happen when votes for an issue are evenly split (50/50). Deadlocks can also happen, however, when a vote requires a “super-majority” vote (e.g. 75% of the voting shares). In those circumstances, a deadlock can happen even when votes for an issue are not evenly split but still do not reach the super-majority vote requirement. Involuntary dissolution is a remedy available to businesses when such deadlocks defeat the purpose for which the business was started – to benefit its shareholders.

Proceedings to dissolve a corporation can be started by any of the following:

  • 50% or more of the corporation’s directors;
  • Shareholders who hold at least one-third of: 1) The total number of outstanding shares; 2) The outstanding common shares; 3) The equity of the corporation
  • Any shareholder of a statutory close corporation
  • Any other persons authorized by the corporation’s articles of incorporation

If a person meets the above requirements, s/he may begin the process to involuntarily dissolve a corporation by filing a verified complaint in the county where the corporation has its principal executive office or, if there is no principal executive office, in Sacramento County.

Involuntary dissolution proceedings are extremely complicated and it is advisable that anyone considering dissolving a corporation in this manner consult with an attorney prior to doing so.

If you have further questions about this or any other business law matter or would like to schedule a consultation with a business attorney in Modesto or Santa Clara, California, please do not hesitate to contact us here.

Other articles regarding corporate dissolution:

RELEVANT STATUTES:

California Corporations Code Section 1800

(a) A verified complaint for involuntary dissolution of a corporation on any one or more of the grounds specified in subdivision (b) may be filed in the superior court of the proper county by any of the following persons:

(1) One-half or more of the directors in office.
(2) A shareholder or shareholders who hold shares representing not less than 33 1/3 percent of (i) the total number of outstanding shares (assuming conversion of any preferred shares convertible into common shares) or (ii) the outstanding common shares or (iii) the equity of the corporation, exclusive in each case of shares owned by persons who have personally participated in any of the transactions enumerated in paragraph (4) of subdivision (b), or any shareholder or shareholders of a close corporation.
(3) Any shareholder if the ground for dissolution is that the period for which the corporation was formed has terminated without extension thereof.
(4) Any other person expressly authorized to do so in the articles.

(b) The grounds for involuntary dissolution are that:

(1) The corporation has abandoned its business for more than one year.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) The period for which the corporation was formed has terminated without extension of such period.

(c) At any time prior to the trial of the action any shareholder or creditor may intervene therein.

(d) This section does not apply to any corporation subject to the Banking Law (Division 1 (commencing with Section 99) of the Financial Code), the Public Utilities Act (Part 1 (commencing with 201) of Division 1 of the Public Utilities Code), the Savings and Loan Association Law (Division 2 (commencing with Section 5000) of the Financial Code) or Article 14 (commencing with Section 1010) of Chapter 1 of Part 2 of Division 1 of the Insurance Code.

(e) For the purposes of this section, “shareholder” includes a beneficial owner of shares who has entered into an agreement under Section 300 or 706.

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