Legal Blogs

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?

  1. Purchase of “Moving Parties” Shares

Demand for Shareholder Buyouts Under California Corporations Code Section 2000

B&C Named To “Best Law Firms” in US

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.

  1. Purchase Price

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).

Demand for Shareholder Buyouts Under California Corporations Code Section 2000

Legal Leaders – Top Rated Lawyers

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].

  1. 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.

  1. 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.

  1. 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).

  1. 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).

Getting Legal Help

Brown & Charbonneau, LLP’s award-winning trial attorneys represent large and small companies as well as individuals in cases involving all forms of business disputes and general business and corporate matters.  If you are involved in a business dispute, or would like to learn about your rights and how to protect your business, we can provide you with the information you need. Contact us or call today at 714.505.3000 to schedule a consultation and learn more about how we can help you.

For the latest legal news, follow Brown & Charbonneau, LLP on Twitter and join us on FacebookInstagram, and LinkedIn.

Brown & Charbonneau, LLP is a top-rated business litigation, corporate, real estate and family law firm in Irvine, California. We are honored to be named by Best’s Lawyers® as one of the Top Law Firms in the US, including the specialty area of commercial litigation. As an AV-rated law firm, we are proud of our 10.0 Superb Client Rating from Avvo. Our top-reviewed Southern California attorneys have also earned specializations from the State Bar of California, as Certified Trial Specialists, and are included amongst the elite attorneys to be named Super Lawyers®.

Should you have any other issues involving any of the below areas of practice, please feel free to contact us.

Our website is full of valuable information and resources.  Our goal is to provide as much information as possible to assist all our clients in making fully informed decisions.  Just click any area of interest.

Brown & Charbonneau, LLP publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.bc-llp.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.