Court Of Appeal Holds Breach Of Fiduciary And Conflict Of Interest May Be Grounds For Summary Election Challenge

Section 709 of the California Corporations Code creates a summary procedure that allows any shareholder or any person who claims to have been denied the right to vote to petition the Superior Court for a determination of the validity of any election or appointment of any director.  The court may determine the person entitled to the office of director or may order a new election to be held or appointment to be made, may determine the validity, effectiveness and construction of voting agreements and voting trusts, the validity of the issuance of shares and the right of persons to vote and may direct such other relief as may be just and proper.

When trying a Section 709 case, is a court limited only to questions involving the electoral process, such as the adequacy of notice and the presence of a quorum at a board election, disputes over persons‘ rights to vote, and the validity of voting agreements, or may the court adjudicate larger issues such as breach of fiduciary duty?  In a decision handed down yesterday, the First District Court of Appeal, after reviewing the text of the statute, its statutory context, its legislative history, and the case law interpreting the statute, concluded that Section 709 permits challenges on the grounds of breach of fiduciary duty and conflict of interest.  Morrical v. Rogers, Cal. Ct. App. Case No. A137011 (Oct. 10, 2013)

Why Delaware Corporations Should Care

Delaware and other foreign corporations should have an interest in this case.  Section 709 by its terms applies to any foreign corporation if the election was held or the appointment was made in California.


Topics:  Board of Directors, Conflicts of Interest, Corporate Governance, Fiduciary Duty, Shareholder Votes, Shareholders

Published In: Business Organization Updates, Business Torts Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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