Shareholder Disputes FAQ

Minority shareholders in California corporations possess significant statutory and common law protections under the California Corporations Code. Section 1600 grants shareholders the right to inspect corporate books and records, including financial statements, shareholder lists, and minutes of board meetings. Shareholders owning at least 5% of shares can demand a special meeting under Section 600. All shareholders have voting rights on fundamental corporate changes such as mergers, sales of substantially all assets, and amendments to articles of incorporation.

Minority shareholders also benefit from fiduciary duties owed by directors and controlling shareholders, which prohibit self-dealing and require fair dealing in corporate transactions. In close corporations, minority shareholders have additional protections against oppressive conduct by majority shareholders, including the right to seek involuntary dissolution under Section 1800. These protections ensure that minority shareholders maintain meaningful participation in corporate governance despite their smaller ownership stake.

California courts recognize shareholder oppression as conduct by majority shareholders or directors that substantially defeats the reasonable expectations of minority shareholders or constitutes burdensome, harsh, or wrongful conduct lacking legitimate business purpose. Common examples include terminating a minority shareholder's employment to cut off their income while maintaining salaries for majority shareholders, refusing to declare dividends while paying excessive compensation to controlling shareholders, excluding minority shareholders from management when they reasonably expected participation, diluting minority interests through unfair stock issuances, and withholding material information about corporate affairs.

Under Corporations Code Section 1800, shareholders of close corporations can petition for involuntary dissolution based on oppressive conduct. Courts may alternatively order buyout remedies under Section 2000, requiring the corporation or majority shareholders to purchase the minority's shares at fair value. California courts apply both objective and subjective tests, examining whether conduct violated the minority's reasonable expectations and whether it lacked legitimate business justification.

A derivative lawsuit allows shareholders to sue on behalf of the corporation when directors fail to act against wrongdoers. California Corporations Code Sections 800-802 govern these actions. To file, a shareholder must have owned shares at the time of the wrongful conduct or acquired them by operation of law from someone who did (the contemporaneous ownership requirement). Before filing, the shareholder must make a written demand on the board of directors to take action, unless demand would be futile because the board is controlled by or interested in the alleged wrongdoing.

The complaint must allege with particularity the efforts made to obtain board action and why those efforts failed or why demand was excused. The court may require the plaintiff to post a security bond under Section 800(c) if the corporation demonstrates the action has no reasonable possibility of benefiting the corporation. If successful, any recovery goes to the corporation rather than the individual shareholder, though courts may award attorney fees to successful plaintiffs.

California directors owe shareholders duties of care, loyalty, and good faith under Corporations Code Section 309 and common law principles. The duty of care requires directors to act with the care an ordinarily prudent person in a similar position would exercise under similar circumstances, including making informed decisions based on reasonably available information. The duty of loyalty prohibits directors from placing personal interests above the corporation's interests, engaging in self-dealing transactions without proper disclosure and approval, or usurping corporate opportunities for personal gain.

Directors must also act in good faith, meaning honestly and with sincere belief that their actions benefit the corporation. The business judgment rule protects directors from liability for honest mistakes in judgment, but it does not shield decisions made with conflicts of interest, without reasonable inquiry, or in bad faith. In close corporations, controlling shareholders may also owe fiduciary duties to minority shareholders, particularly when exercising control over corporate actions that affect minority interests.

California provides several mechanisms for shareholders to compel share buybacks under specific circumstances. Under Corporations Code Section 2000, when a dissolution action is filed, the corporation or remaining shareholders may avoid dissolution by purchasing the petitioning shareholder's shares at fair value. The court will determine fair value if parties cannot agree, considering factors such as asset values, earnings history, and comparable transactions.

Shareholders agreements may include buyout provisions triggered by certain events such as death, disability, termination, or deadlock. In close corporations, oppressed minority shareholders can petition for dissolution under Section 1800, which often results in negotiated buyouts rather than actual dissolution. Dissenting shareholders in certain fundamental transactions like mergers have appraisal rights under Sections 1300-1312, requiring the corporation to purchase their shares at fair market value. Without these statutory or contractual rights, shareholders generally cannot force buybacks, as corporations have no obligation to repurchase shares from willing sellers absent prior agreement.

Fair value in California shareholder disputes is typically determined through professional business valuation, with courts considering multiple methodologies under Corporations Code Section 2000 for dissolution buyouts and Sections 1300-1312 for dissenter's rights. Common valuation approaches include the income approach (capitalizing expected future earnings or discounted cash flow analysis), the market approach (comparing to sales of similar businesses or publicly traded comparables), and the asset approach (valuing net assets adjusted to fair market value).

In close corporation disputes, California courts generally do not apply minority or marketability discounts when valuing minority interests for buyout purposes, recognizing that such discounts could reward oppressive conduct. The valuation date is typically the date of filing the dissolution petition or, for dissenter's rights, the day before the corporate action was announced. Parties usually retain competing valuation experts, and courts may appoint independent appraisers. Factors considered include historical earnings, growth prospects, industry conditions, asset values, comparable transactions, and risk factors specific to the business.

California Corporations Code Section 1600 grants shareholders an absolute right to inspect certain corporate records, while inspection of others requires demonstrating a proper purpose. Records available on demand include articles of incorporation, bylaws, shareholder meeting minutes, and annual financial statements. For records such as accounting books, board meeting minutes, and shareholder lists, the shareholder must submit a written demand stating a purpose reasonably related to the shareholder's interest.

Proper purposes include investigating potential mismanagement, valuing shares for sale, communicating with other shareholders about corporate matters, and evaluating investment decisions. The corporation has ten business days to respond and may deny access only if it establishes the demand was not for a proper purpose. If denied, shareholders can petition the court under Section 1603 for an order compelling inspection, and prevailing shareholders recover attorney fees. Corporations cannot use confidentiality concerns to completely deny access but may impose reasonable limitations on copying or dissemination of sensitive information.

California shareholders have multiple avenues to challenge unfair mergers under the Corporations Code. Dissenting shareholders may exercise appraisal rights under Sections 1300-1312, demanding the corporation purchase their shares at fair market value rather than accepting merger consideration. To preserve appraisal rights, shareholders must vote against the merger and make written demand for payment within statutory deadlines. Shareholders may also bring breach of fiduciary duty claims if directors or controlling shareholders approved the merger through self-dealing, inadequate process, or in bad faith.

Courts apply enhanced scrutiny when controlling shareholders stand on both sides of a merger transaction, requiring entire fairness in terms of both fair dealing (process) and fair price. Shareholders can seek injunctive relief before the merger closes or damages afterward. Class actions may be appropriate when shareholders share common claims. The business judgment rule protects director decisions made with proper care and independence, but conflicts of interest or failure to obtain fair value can overcome this protection. Challenges must typically be brought promptly, as courts disfavor claims brought after excessive delay.

California provides comprehensive remedies for director fiduciary breaches, available through direct or derivative actions depending on whether harm was to individual shareholders or the corporation. Compensatory damages measure actual losses caused by the breach, including lost corporate opportunities, diminished share value, and transaction losses. Disgorgement requires breaching directors to surrender profits gained through disloyal conduct, even if the corporation suffered no quantifiable loss. Rescission can unwind improper transactions, returning parties to their pre-transaction positions.

Constructive trust imposes equitable ownership on assets improperly obtained. Courts may order an accounting to trace misappropriated funds or determine amounts owed. Injunctive relief can prevent imminent breaches or halt ongoing harmful conduct. In egregious cases involving fraud, malice, or oppression, punitive damages may be awarded under Civil Code Section 3294. Removal of directors may be ordered in extreme cases. Prevailing plaintiffs in derivative actions may recover attorney fees. The two-year statute of limitations under Code of Civil Procedure Section 339 applies, though discovery rules can extend this period when breaches were concealed.

Well-drafted shareholder agreements provide essential protections for minority shareholders beyond statutory rights. Voting agreements can require supermajority approval for significant decisions, giving minority shareholders veto power over mergers, asset sales, or changes in business direction. Board representation provisions guarantee minority shareholders seats on the board of directors regardless of share ownership percentage. Buy-sell provisions establish predetermined mechanisms for share transfers, including right of first refusal, tag-along rights (allowing minorities to participate in sales by majority), and drag-along rights with fair pricing protections.

Dividend policies can mandate minimum distributions, preventing majority shareholders from retaining all profits. Anti-dilution provisions protect against unfair stock issuances that would reduce minority ownership percentages. Information rights may expand access beyond statutory minimums. Dispute resolution clauses can require mediation or arbitration, avoiding costly litigation. Employment agreements for shareholder-employees can provide job security and compensation guarantees. California Corporations Code Section 186 specifically authorizes close corporations to adopt provisions restricting director discretion and protecting minority shareholders. These contractual protections are enforceable and should be negotiated before investment.