California Shareholder Law Survey
Shareholder Inspection Rights
Shareholders in California close corporations have the same inspection rights as those in ordinary California corporations. See Cal. Corp. Code § 1600 (West 1990). To have standing to exercise those rights, those seeking inspection must hold at least 5% in the aggregate or 1% individually of the outstanding shares of the corporation and have filed the requisite paperwork with the Securities and Exchange Commission. Id. § 1600(a). Shareholders who meet these requirements may “inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand.” Id. Furthermore, any shareholder is entitled to inspect and copy the record of shareholders, accounting books and records and minutes of the board, committees thereof and shareholders’ meetings after a written demand on the corporation stating a proper purpose related to the shareholder’s interest as a shareholder. Id. §§ 1600(c), 1601.
A shareholder whose demand is not timely complied with may file a complaint and move the court to issue an order postponing any scheduled shareholders’ meeting for a period that is as long as the time the corporation delayed in complying with the inspection demand. Id. § 1600(b). A court may also enforce a properly demanded inspection by imposing any “just conditions” on the inspection, appointing an inspector or accountant upon a showing of good cause or awarding expenses to reimburse the shareholder for the costs incurred in enforcing his or her rights. Id. § 1603(a).
Furthermore, directors of the corporation have the “absolute right” to examine and copy “all books, records and documents of every kind” as well as to inspect the property owned by the corporation. Id. § 1602.
California law does not provide a cause of action specifically for the “oppression” of minority shareholders in close corporations. However, it does provide for involuntary dissolution of a corporation for a number of reasons including that a controlling interest has 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.” Id. § 1800(b)(4). Any shareholder in a close corporation may petition the court for dissolution on this ground. Id. § 1800(a)(2). Additionally, where a corporation has 35 or fewer shareholders and at least one third of the outstanding shares desire dissolution, a corporation may be dissolved if “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder or shareholders.” Id. § 1800(b)(5).
When suit is sought under section 1800(b)(4), the focus of whether dissolution is available is not based on shareholder oppression or the expectations of the minority interest as in many jurisdictions, but rather only on the narrow grounds enumerated in the statute. Bauer v. Bauer, 54 Cal. Rptr.2d 377, 381-82 (Cal. Ct. App. 1996). Section 1800(b)(4) does provide a remedy for traditional “squeeze out” tactics employed to deny minority shareholders the benefits of their investment, however, the cause of action is premised on the actions of the majority interest rather than the expectations of the minority. See id. However, the more liberal language in section 1800(b)(5) allows the court to dissolve a corporation of 35 or fewer shareholders where necessary to protect the interests of the complaining shareholders; however, this remedy is not automatic and the aggrieved shareholders must persuade the court that such a “drastic remedy” is appropriate. Id. at 383-84. Furthermore, majority shareholders in close corporations owe fiduciary duties to the minority interest. See Neubauer v. Goldfarb, 133 Cal. Rptr.2d 218, 225 (Cal. Ct. App. 2003); Stephenson v. Drever, 947 P.2d 1307-8 (Cal. 1997).
Shareholder Derivative Suits
Shareholders in California close corporations may bring derivative suits on behalf of the corporation for wrongs against the corporation. See § 800. In order to have standing to bring a derivative suit, a plaintiff must have been a shareholder at the time the cause of action arose or received the shares by operation of law from someone who held them at that time. § 800(b)(1). However, the court may in its discretion allow a suit to continue if the plaintiff does not meet the standing requirement if there is strong evidence supporting the claim, no other similar action is pending or likely to be instituted, the plaintiff acquired his or her shares before the facts supporting the claim were made public, the defendant will receive a benefit resulting from his breach of duty unless the suit is instituted, and neither the corporation or complaining shareholder will be unjustly enriched by the requested relief. Id. Additionally, the plaintiff must allege in his or her complaint the actions taken to obtain relief from the corporation or the reasons why no such actions were taken. Id. § 800(b)(2).
Within thirty days of service of the complaint, the defendant or the corporation itself may move for a court order requiring the plaintiff to post a bond as security if there is no reasonable possibility the suit will benefit the corporation or if the defendant, if other than the corporation, did not participate in the transaction that is the subject of the suit. § 800(c). The maximum amount of the bond is $50,000 and the suit must be dismissed if a bond is ordered by the court and the plaintiff does not comply. § 800(e).
Although there is no direct shareholder recovery in a derivative suit on behalf of the corporation, a successful plaintiff may recover expenses for attorneys’ fees if the suit substantially benefits a distinct class of shareholders “among whom the costs of litigation can be fairly spread to prevent the unjust enrichment of class members at the expense of the successful litigant.” Cziraki v. Thunder Cats, Inc., 3 Cal. Rptr.3d 419, 423 (Cal. Ct. App. 2003).