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CALIFORNIA CORPORATE & SECURITIES LAW

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As a child, I was always puzzled when I saw a Grange Hall.  Was Grange a misspelling of “range”?  If not, what was a “grange”?  Only later did I learn that “grange” was derived from the Latin word, granum, meaning a seed.  The word forms part of the name of the National Grange of the Order of Patrons of Husbandry.  Organized in 1867, the Grange now describes itself as “a family, community organization with its roots in agriculture”.  The Grange is organized hierarchically with community, county or district, state and national levels.

The National Grange of the Order of Patrons of Husbandry v. The California Guild, involved a dispute over the distribution of assets of the California Grange (now known as the California Guild) after the national Grange had revoked the California Grange’s charter .  Although dating back to the mid-nineteenth century, the California Grange had not incorporated until 1946 and it had never elected to be governed by the current Nonprofit Mutual Benefit Corporation Law.

The California Grange argued that a head organization could obtain a subordinate corporation’s assets only when two conditions were met:

  • the subordinate corporation may not provide for distribution of its assets on revocation “unless and until an amendment of the articles of incorporation is filed stating that the corporation elects to be governed by” the provisions of section 7132 of the current nonprofit mutual benefit corporation law; and
  • provision for such a distribution of assets must be “expressly provided” in the articles of incorporation of the subordinate corporation.

Because there was no evidence that the California Grange had ever elected to be governed by the current law, the California Grange argued that the national Grange was not entitled to its assets upon revocation of its charter.

The Court of Appeal disagreed, reasoning:

“Corporations Code section 7132 provides for an optional provision that ‘may’ be included in the articles of incorporation of a nonprofit mutual benefit corporation to provide for the dissolution of the corporation upon revocation of its charter and, if included, the distribution of the corporation’s assets to the head organization upon dissolution of the corporation. But nothing in Corporations Code section 7132 precludes a head organization and a subordinate corporation from providing for the passage of property from the subordinate corporation to the head organization by means of other provisions — particularly other provisions (like those at issue here) that do not provide for the dissolution of the subordinate corporation, but only for the disposition of the subordinate corporation’s property.

This is a bit confusing and corporate lawyers should note that the General Corporation Law also includes a statute (Section 204) that permits the articles of incorporation to include specified provisions that “shall not be effective unless expressly provided in the articles”.  Both Section 7132 and 204 further provide that this does not “affect the enforceability, as between the parties thereto, of any lawful agreement not otherwise contrary to public policy”.

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