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CALIFORNIA CORPORATE & SECURITIES LAW

50% Shareholder Denied Say In Defense Of Corporation

If two shareholders each own one half of the outstanding shares of a corporation, one might expect that they would have an equal say in just about everything.  It turns out that in some circumstances they won’t.

In Coldren v. Hart, King & Coldren, Inc., Cal. Corp. Appeal No. G050202 (July 13, 2015)a shareholder sued the corporation and his coequal shareholder for involuntary dissolution, breach of written contract, wages owed (against the corporation), accounting, breach of fiduciary duty (against the other shareholder), and “appointment of a receiver and injunction” (against the corporation).  The same law firm represented both the corporation and the defendant shareholder in answering the complaint and filing a cross-complaint.  The plaintiff shareholder then moved to disqualify the law firm.  The trial court found that an actual conflict of interest existed.  While allowing the law firm to continue representing the shareholder, the court ordered the parties to meet and confer considering the selection of a neutral attorney.  If they failed to do so, the court would make the appointment.

The Fourth District Court of Appeal reversed.  In an opinion written by Justice Raymond J. Ikola, the Court of Appeal found that the plaintiff had no standing to object to the joint representation.  The plaintiff lost this argument principally for two reasons.  First, he never had an attorney-client relationship with law and second, his complaint was direct, not derivative.

The Court of Appeal also found that no actual conflict existed between the corporation and the defendant shareholder.  Here, the plaintiff’s argument came to grief on formal opinion No. 1999-153 issued by the State Bar of California Standing Committee on Professional Responsibility and Conduct, which the Court of Appeal was “on all fours with the case before us”.

 

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