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CALIFORNIA CORPORATE & SECURITIES LAW

Dismissal Of Involuntary Dissolution Action Pulls The Plug On Corporate Buy Out

Sometimes, shareholders are divided on whether a corporation should live or die.  In these cases, the California Corporations Code provides an option that allows for the continued existence of a corporation.  In any action for involuntary dissolution, or in any proceeding for voluntary dissolution initiated by the vote of shareholders representing only 50% of the voting power, the corporation or, if it does not elect to purchase, the holders of 50% or more of the voting power of the corporation 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 at their fair value.  Cal. Corp. Code § 2000(a).

What happens, however, when a proceeding for involuntary dissolution is commenced but later dismissed?  Do the opponents of dissolution still have the right to compel a buy out? Section 581(c) of the California Code of Civil Procedure grants plaintiffs an essentially unfettered right to dismiss a complaint, or any cause of action in a complaint, or as to any defendant(s), with or without prejudice prior to the actual commencement of trial (there are some exceptions to this, but I won’t digress on them).

In Kennedy v. Kennedy, 2015 Cal. App. LEXIS 329 (April 20, 2015), the Court of Appeal held that upon dismissal with prejudice of an involuntary dissolution cause of action, there was no dissolution to be avoided, and hence no right to compel a buy out.  The opinion, penned by Presiding Justice Paul Turner, includes the following puzzling observation:

One final note is in order concerning the dismissal of the involuntary dissolution cause of action. No party has asserted that Drake is pursuing a derivative claim against defendants. Dismissal of a derivative claim requires court approval. (Whitten v. Dabney (1915) 171 Cal. 621, 630–632 [154 P. 312]; see Westwood Temple v. Emanuel Center (1950) 98 Cal.App.2d 755, 762 [221 P.2d 146].)  No party has asserted that court approval was necessary in this case for Drake to dismiss  his involuntary dissolution cause of action. Any contention in that regard has been forfeited. (Tiernan v. Trustees of Cal. State University & Colleges (1982) 33 Cal.3d 211, 216, fn. 4 [188 Cal. Rptr. 115, 655 P.2d 317]; Johnston v. Board of Supervisors (1947) 31 Cal.2d 66, 70 [187 P.2d 686], disapproved on another point in Bailey v. County of Los Angeles (1956) 46 Cal.2d 132, 139 [293 P.2d 449].)

I’m perplexed because I’m not sure why the Court believed that a derivative complaint for dissolution was a possibility.  A derivative claim is a claim brought by or in the right of the corporation.  Cal. Corp. Code § 800.  Section 1800(a) of the Corporations Code specifies who may file a complaint for involuntary dissolution.  The corporation is not among the categories of potential plaintiffs. While it is possible that the grounds for dissolution under Section 1800(b) might also provide grounds for a derivative claim, that derivative claim would be a separate cause of action.  It is the dismissal of the complaint for involuntary dissolution, not other types of claims, that negates the buy out right.

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