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Minority Shareholder Rights in California
SUMMARY - FIVE MAIN RIGHTS: (1) VOTE OR WITHOLD; (2) ANNUAL MEETINGS & REPORTS; (3) INSPECT BOOKS; (4) DERIVATIVE SUITS; (5) SUE FOR INVOLUNTARY DISSOLUTION
In California, minority shareholders three rights that protect their interests: (1) if the shareholder has voting shares, withhold the vote for the member’s of the board of directors, shareholder; (2) unless waived by the bylaws, the corporation must issue an annual report, then hold an annual shareholder meeting; (3) minority shareholders with at least five percent (5%) of the outstanding shares have the right to inspect the books and records upon five (5) days written demand; and (4) after making a written demand to the Board of Directors, minority shareholders can institute a so-called derivative lawsuit to compel the Management to take action against malfeasance or fraud; (larger shareholders of larger groups of shareholders can sue for the corporation to be dissolved.
As with any dispute, there are three main choices: (1) do nothing, live with the status quo and results; (2) negotiate to get the other party to voluntarily do something that will satisfy you; (3) sue, win and get the court to enforce, which is time consuming, difficult, costly and risky.
OVERVIEW - SEPARATE LEGAL ENTITY
A corporation is a legal entity that is enabled through state law. The basic features of a corporation is that it is a non-human being that is separate and different than its shareholders, board of directors and management. In theory, a corporation has an unlimited life span. Another key feature is that, although a corporation can commit crimes, the corporation itself cannot be imprisoned, although its board of directors and managers can be imprisoned.
The stakeholders in a corporation are: (1) the shareholders, who vote on members of the board of directors and are entitled to the residual profits of the corporation after all the debts of the corporation are paid; (2) the board of directors who oversee and direct the managers of the corporation; (3) the managers of the corporation who follow the instructions of board of directors and direct the employees to achieve the corporation’s objectives.
This blog article focuses on the rights of shareholder.
RIGHT TO VOTE
Shares in a corporation can be voting or non-voting. Non-voting means that those shares do not have any right to vote. Voting means that the shares are entitled to vote. Although, different classes of shares can have different number of votes assigned to each share, usually each share has one vote for one share.
In general, shareholders have the right to either: (a) vote in favor of electing or re-electing a member or members of the board of directors; (b) voting in favor of a proposal of the board of directors presented to the shareholders; (c) abstain from either.
That’s it. There really is no right to propose a member of board of directors or to direct the board of directors to control the managers.
In theory the shareholder has the right to abstain. However, that vote simply is not counted. The only time an abstention has any impact is when there is an insufficient number of votes for the vote to be valid.
ANNUAL MEETINGS & REPORTS
Annual reports & financial statements, before annual meeting, unless waived by bylaws
In California, almost all corporations are required to provide an annual report to each shareholder with an annual report within one hundred and twenty (120) days of the end of the most recent fiscal year. [Corporations Code section
]. If the corporation has fewer than 100 shareholders and the bylaws waive the requirement to produce any annual report, there is no obligation to provide the annual report. Where an annual report is required, the report should include a set of financial statements that include a balance sheet, a profit and loss statement and a cash flow statement. In general, the annual report must be sent 15 days before the annual shareholder meeting. If the requirement for financial statements has not been waived in the bylaws, but there are fewer than 100 shareholders, the financial statements can be presented on any reasonable basis, rather than the more formal, rigorous and costly generally acceptable accounting standards.If the corporation is either not subject to the reporting requirements of Section 13 of the Securities Exchange Act of 1934, or exempted from those reporting requirements by Section 12(g)(2) of the Securities and Exchange Act, the annual report shall also describe briefly both of the following: (1) a related party transaction valued in excess of $40,000 with an officer or director or a shareholder holding more than 10% of the shares; or (2) indemnification or advances aggregating more than ten thousand dollars ($10,000) paid to any director.
If no annual report has been timely sent, then a shareholder holding at least 5% of the shares can demand quarterly financial statements.
Annual meetings of the Shareholders and Board of Directors
California Corporations Code requires that a corporation hold a shareholder meeting at least annually, either at a set place, the corporate headquarters, or via video or teleconference. [Corporations Code section
]. Written notice of the written notice must be given not fewer than ten (10) days and not more than sixty (60) days before the meeting. [Corporations Code section
].The contents of the notice must include the following. The place, date, and hour of the meeting. [Corporations Code section
(a)]. The means which shareholders may participate. [Corporations Code section
(a)]. The names of nominees for the board of directors. [Corporations Code section
(a)].Caution, because notice can be waived.
If not annual meeting has been held for more than 60 days after it was required or for fifteen (15) months after the organization of the corporation or its last annual meeting, a shareholder can petition the superior court of the proper county may to order a meeting be held. [Corporations Code section
(c)]. If the Court orders such a meeting, the votes represented by those who actually attend the meeting or give valid proxies suffice for a quorum, regardless of any contrary provision in the articles or bylaws. [Corporations Code section
(c)]. A quorum means the minimum required votes or shareholders for the vote to be valid.
RIGHT TO INSPECT BOOKS & RECORDS ON FIVE DAYS WRITTEN NOTICE
Shareholders who hold at least 5% of outstanding shares or own shares valued at $25,000 or more in a corporation with fewer than 100 shareholders can make a written demand to inspect the books and records of the corporation. If the corporation has filed a Schedule 14A with the SEC, shareholders with only 1% of the outstanding shares have an absolute right to inspect and copy the record of shareholders within five business days of a demand.
The corporations must provide these documents within a reasonable time, typically five business days after receiving a written request. If a corporation refuses to provide access, shareholders can petition the Superior Court, which may compel disclosure and impose penalties.
DERIVATIVE LAWSUIT
Minority shareholders can also use what is called a derivative lawsuit, under California Corporations Code section
. A derivative lawsuit means that the shareholders who sue are stepping into the shoes of the corporation. Any remedy from the derivative lawsuit will be for the benefit of the corporation, not directly to the shareholders who file the lawsuit. Derivative lawsuits are usually be based upon allegations of malfeasance, such as a breach of fiduciary duty, negligence, fraud, self-dealing, mismanagement or commingling and/or wasting corporate assets.
A shareholder must first make a written demand that the Board of Directors take action on the matter. Then, If the board fails to take action to resolve the matter, or if waiting for the Board to take action will result in irreparable harm, the shareholder may proceed to file a complaint and initiate the lawsuit.
INVOLUNTARY DISSOLUTION
Who can file for dissolution
A verified complaint for involuntary dissolution may be filed by:
(a)(2)]
(a)(3)]
(a)(4)]What are the grounds for Involuntary Dissolution?
The grounds upon which an involuntary dissolution complaint may be filed are:
(b)(1)]
(b)(2)].
(b)(3)].
(b)(4)].
(b)(5)].Other Related Rules
].
(a)].
(a)].
(b)-(c)].
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