Demand for Shareholder Buyouts Under California Corporations Code Section 2000
Oftentimes, owners of corporations and businesses find themselves unable to work together anymore. What happens when they are 50/50 owners? How does the corporation move forward? How can business decisions be made? In many cases, they cannot. Usually, there are many available options. But, what happens when one of the owners (or a group representing 50%) decide to force a dissolution. What if the other 50% owners do not want to dissolve?
Purchase of “Moving Parties” Shares
Subject to any contrary provision in the articles (which may include a reference to a separate written agreement between two or more shareholders pertaining to the purchase of shares), in any suit for involuntary dissolution, or in any proceeding for voluntary dissolution initiated by the vote of shareholders representing only 50 percent of the voting power, the corporation, or, if it does not elect to purchase, the holders of 50 percent or more of the voting power of the corporation (the “purchasing parties”) may avoid the dissolution of the corporation and the appointment of any receiver by purchasing for cash the shares owned by the plaintiffs or by the shareholders so initiating the proceeding (the “moving parties”) at their fair value. Corp. Code §2000(a).
Under prior law, purchase of the shares of the parties seeking dissolution was only possible in involuntary proceedings, and had the purpose of preventing the minority from abusing its power to cause an involuntary dissolution. Under present law, the statutory buy-out right has been extended to voluntary dissolutions when the shareholders are evenly divided on the issue of whether or not to dissolve.
The fair value of the shares of the “moving parties” must be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation. Corp. Code §2000(a).
The valuation date is the date on which the proceeding for voluntary dissolution was initiated. Upon the motion of any party, however, the court may designate some other date as the valuation date for good cause shown. Corp Code §2000(f); Trahan v. Trahan (2002) 99 Cal. App. 4th 62, 76–78 [substantial evidence supported court’s confirmation of appraiser’s determination of fair value as piecemeal sale of assets, even though it did not take into account existing but uncompleted contracts; parties could have requested court to set later valuation date to allow completion of unperformed contracts].
In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties may be deducted from the amount payable to the moving party or parties, unless the ground for dissolution is that specified in Corp. Code §1800(b)(4), relating to fraud and mismanagement. Election by the corporation to purchase may be made by the approval of the outstanding shares (Corp. Code §152) excluding shares held by the moving parties. Corp. Code §2000(a).
A determination of the fair value of the shares of the corporation must include an assessment of the value, if any, of a pending derivative action and the effect of the action on the fair value of the shares. Cotton v. Expo Power Sys., Inc. (2009) 170 Cal. App. 4th 1371, 1374, 1380–1381 [derivative claim is property right that belongs to corporation and is properly viewed as asset of corporation].
Determination of Fair Value by Court
On application of the purchasing parties, the court must stay the winding up and dissolution, and proceed to ascertain and fix the fair value of the moving parties’ shares, if the purchasing parties (Corp. Code §2000(b)):
- Elect to purchase the shares owned by the moving parties;
- Are unable to agree with the moving parties on the fair market value of those shares; and
- Give bond with sufficient security to pay the estimated reasonable expenses (including attorney’s fees) of the moving parties if those expenses are recoverable under Corp. Code §2000(c) (i.e., dissolution granted because of failure of purchasing parties to make payment within time specified).
The application for court determination, in the case of involuntary proceedings, would be made to the court in which the involuntary dissolution proceeding is pending. Where dissolution has commenced voluntarily, the application is made by initiating a proceeding in the superior court of the “proper county”. Corp. Code §2000(b); Corp. Code §177 (definition of “proper county”).
The statutory provisions for purchase of the “moving parties’” shares are mandatory, but when an involuntary dissolution proceeding has been dismissed, the court is without jurisdiction to order appraisers to be appointed to ascertain the value of the plaintiff’s shares and cannot grant the relief sought by the defendant, that is, the buy-out of plaintiff’s shares. The court is also without jurisdiction to entertain further proceedings to determine the fair value of the shares when the conditions listed above are not met. Thus, the allegation that “if” the parties are unable to agree as to the purchase price, “then and in such event” court determination of the value of the shares would be sought has been held insufficient to stay proceedings for involuntary dissolution. While this narrow treatment of pleadings might no longer hold, it is probably sound practice to make a written offer to the moving parties which, when rejected, will stand as a factual allegation in the application for court determination.
Appointment of Appraisers
The court must appoint three disinterested appraisers to appraise the fair value of the shares owned by the moving parties, and must make an order referring the matter to the appraisers and setting forth the time and manner of producing evidence, if evidence is required. The award of the appraisers, or a majority of them, when confirmed by the court, will be final and conclusive on all parties. Corp. Code §2000(c); Goles v. Sawhney (2016) 5 Cal. App. 5th 1014, 1019 [code section “does not permit a lack-of-control discount when determining the fair value of a minority shareholder interest”].
The court may not postpone the appraisal, or the completion of the appraisal, until some related matter is concluded (for instance, until a pending derivative action comes to an end), because Corp. Code §2000 contemplates a summary procedure. The court is required either to obtain a complete appraisal of the fair value of the shares from the appraisers, without delay, or to conduct a hearing forthwith to resolve the matter.
The trial court has the duty, when convinced that an award of the appraisers is erroneous, to examine matters de novo and fix its own valuation. However, a trial court that is convinced that one of two highly discordant appraisal reports accurately reflects the value of the shares in question may confirm that report without reinvestigating the matter. See, Brown v. Allied Corrugated Box Co. (1979) 91 Cal. App. 3d 477, 491; but see Goles v. Sawhney (2016) 5 Cal. App. 5th 1014, 1020 [trial court confirmed three appraisal reports in their entirety and found that fair value of minority interest could be determined by averaging those three reported valuations; “There is no provision in the Corporations Code for this averaging methodology.”].
A shareholder is not entitled to an evidentiary hearing on the valuation set by the appraisers, nor is a shareholder entitled to depose the neutral appraiser.
Decree and Appeal
When the award of the appraisers is confirmed by the court, the court must enter a decree which provides in the alternative for winding up and dissolution of the corporation unless payment is made for the shares of the moving parties within the time specified by the decree. The court’s decision is appealable by any shareholder aggrieved. Corp. Code §2000(c). However, since it has been held that findings of fact need not be made by either the court or the appraisers, review of the appraisers’ or court’s award may be hampered by failure to make an adequate record in the trial court.
There is no automatic stay of the court’s decree in the event of an appeal (because Corp. Code § 2000 provides for a special proceeding, rather than a civil action, and does not expressly incorporate the Civil Code sections governing appeals in civil actions), but a reviewing court has discretion to issue a writ of supersedeas if a proper and sufficient showing is made.
If the purchasing parties do not make payment for the shares within the time specified, judgment must be entered against them and the surety or sureties on the bond provided by the purchasing parties for the amount of the expenses (including attorney’s fees) of the moving parties. Corp. Code § 2000(c). On the other hand, if the moving parties resist all efforts of the purchasing parties to purchase the former’s shares, including the appointment of appraisers to determine the value of the shares, the court may properly award the purchasing parties one-half of the appraisers’ fees as prevailing parties under Code Civ. Proc. §1032(a)(4).
Payment and Transfer
If the purchasing parties desire to prevent the winding up and dissolution, they must pay to the moving parties the value of their shares, as ascertained and decreed, within the time specified or, in case of appeal, as fixed on appeal. On receiving payment or tender, the moving parties must transfer their shares to the purchasing parties. Corp. Code §2000(d).
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