Originally Published in Daily Journal - April 18, 2013.
Under California law, minority shareholders owning 10 percent or more of a corporation can block a sale of assets to the controlling shareholders in dissolution proceedings. However, that rule does not apply where the court appoints a receiver to manage the assets sale.
Once dissolution proceedings commence, Corporations Code Section 2001 empowers "directors (or other persons appointed by the court pursuant to section 1805) and officers" to "sell at public or private sale, exchange, convey or otherwise dispose of all or any part of the assets of the corporation" subject to the provisions of Corporations Code Section 1001(d). (Emphasis added.)
Under Section 1001(d), if the buyer in a Section 2001(g) asset sale controls, or is under common control of, the selling corporation, at least 90 percent of voting shareholders must approve the sale's principal terms.
Sections 1001(d) and 2001(g), however, provide limited procedural protections. Where directors or "other persons appointed by the court" conduct a sale of assets, protecting minority shareholders outweighs efficiency. The same is not true, however, where receivers sell assets under court supervision.
Receivers are different
Sections 1001(d) and 2001(g) do not apply to court-supervised sales of assets by receivers. In attempting to improperly block a sale of assets, some minority shareholders contend that together these provisions mandate approval "by at least 90 percent of the voting power of the disposing corporation" for any sale by "persons appointed by the court pursuant to Section 1805" if the "acquiring corporation is in control of or under common control with the disposing corporation." They argue that Sections 1001(d) and 2001(g) apply to receivers because receivers are "persons appointed by the court." This conclusion, however, constitutes a superficial reading of these provisions and flatly ignores the limiting restriction contained in Section 2001(g) — that it only applies to "persons appointed by the court pursuant to Section 1805." (Emphasis added.)
In dissolution proceedings, courts appoint receivers pursuant to Corporations Code Section 1803 and Code of Civil Procedure Section 565 — not Corporations Code Section 1805. Sections 1803 and 565 specifically govern appointment of receivers. Conversely, Section 1805 pertains to other court-appointed persons designated to wind up a corporation, such as a court-appointed director or officer. Section 1805 is not a stand-alone statute and cannot be construed in isolation. See Banc of America Leasing & Capital, LLC v. 3 Arch Trustee Services, Inc., 180 Cal. App. 4th 1090, 1104 (2009). Instead, courts must determine whether its construction is consistent with other related provisions — i.e., in the context of all statutory provisions governing corporate dissolutions.
Section 1805 governs proceedings for winding up a corporation after involuntary dissolution proceedings commence. Involuntarily dissolution proceedings commence when a court enters a decree of dissolution after finding good cause on a petition filed by: (1) half or more of the directors; (2) 33.3 percent or more of all shareholders; or (3) anyone authorized to file a dissolution petition under the articles of incorporation. Sections 1800(a)(1)-(4), 1804. After a court enters a decree of dissolution, Section 1805 mandates that the board of directors wind up the corporation's affairs, subject to any court-imposed restrictions. However, on good cause shown, the court can appoint "other persons" to conduct the winding up. Section 1805(b).
Voluntary winding up proceedings commence upon adopting shareholders' or directors' resolution to wind up and dissolve the corporation, or upon the shareholders' filing their written consent. Section 1903. After a corporation voluntarily dissolves, Section 1904 permits certain parties to seek court supervision for dissolution. If the court assumes jurisdiction, "it may make such orders as to any and all matters concerning the winding up of the affairs of the corporation and for the protection of its shareholders and creditors as justice and equity may require." Section 1904.
Specifically, courts may appoint a receiver in involuntary or voluntary proceedings. Under Section 1803, courts may appoint a receiver to manage a corporation's business and affairs and preserve its property. Similarly, under Code of Civil Procedure Section 565, courts may appoint receivers to administer a corporation's assets and to wind up its affairs. In these situations, receivers act as an arm of the court.
Sections 2001(g) and 1001(d) do not apply to receivers and therefore do not require shareholder consent in sales by receivers.
First, Section 2001(g) applies only to those "other persons" appointed by the court pursuant to Section 1805. Had the Legislature intended to extend 2001(g) to receivers appointed under Sections 1803 and 565, it could have. Instead, Section 2001(g) specifically limits itself to persons appointed "pursuant to Section 1805." This limitation cannot be ignored and must be construed as intentionally excluding receivers. See Salem v. Superior Court, 211 Cal. App. 3d 595, 600 (1989). Applying Section 2001(g) to receivers would blatantly rewrite the statute to read "persons appointed by the court pursuant to Section 1805 and Corporations Code section 1803 and Code of Civil Procedure section 565." Such revision is not permissible. Courts may not rewrite statutes or insert words under the guise of interpretation. Richardson v. City of San Diego, 193 Cal. App. 2d 648, 651 (1961).
Second, Section 1805(b)'s "other persons" does not refer to receivers. Courts appoint "other persons" besides receivers to wind up a corporation's affairs. Courts appoint third-party liquidators to wind up corporations and sell their assets. See CD Investment Co. v. California Ins. Guarantee Assn., 84 Cal. App. 4th 1410, 1416 (2000); Caminetti v. Pacific Mut. Life Ins. Co., 22 Cal. 2d 344, 371 (1943). Courts also appoint directors or officers to wind up the corporation's affairs. See Section 1806(f); Gold v. Gold, 114 Cal. App. 4th 791, 797 (2003); In re O'Brien Machinery, Inc., 224 Cal. App. 2d 563, 571 (1964). Section 1805(b)'s last sentence further suggests that the section refers to directors or officers: "The directors or such other persons may, subject to any restrictions imposed by the court, exercise all their powers through the executive officers without any order of court." Receivers, however, typically do not exercise power through executive officers.
The difference between receivers and Section 1805's "other persons" is not a mere technicality. While directors or officers appointed to liquidate the corporation remain simple fiduciaries, receivers are officers or representatives of the court, appointed to manage property involved litigation. Cal. Rule of Court 3.1179(a)(3); Security Pacific National Bank v. Geernaert, 199 Cal. App. 3d 1425, 1431-32 (1988). A receiver is the hand of the court to aid it in preserving and managing property for the benefit of its true owners. Cal. Rule of Court 3.1179(a)(2); Stewart v. State, 272 Cal. App. 2d 345, 350 (1969).
Third, California law specifically permits receivers to liquidate assets without shareholder consent. Code of Civil Procedure Section 565.8 expressly permits that "receiver[s] may, pursuant to an order of the court, sell real or personal property in the receiver's possession." Likewise, Code of Civil Procedure Sections 701.50 et seq. identifies the procedures for selling real or personal property at a public auction.
Fourth, public policy requires that receivers be permitted to sell assets without shareholder consent. Section 1805(b) exists to prevent "freezing out" minority shareholders. 2-15 Ballantine and Sterling California Corporation Laws, Section 322. However, where a supervising court reviews and confirms the assets' purchase price, minority shareholder interests are adequately protected from a "freeze out." Further, precluding a mere 10 percent minority shareholder from blocking a sale of assets permits efficient, productive winding up proceedings. Likewise, sale at public auction permits competitive bidding. If a majority-shareholder-controlled entity bids highest at auction, all shareholders and creditors benefit from increased funds in the receivership estate. Conversely, precluding majority shareholders from bidding removes competition that would drive up the price.
Thus, California law does not allow minority shareholders to block a sale of assets to the controlling shareholders in dissolution proceedings where the court appoints a receiver to manage the assets sale. Receivers are not like "other persons" — they do not need shareholder consent.
Robert S. McWhorter is a partner and co-chair of the Financial Services and Bankruptcy Practice Group at Nossaman LLP in Sacramento. He can be reached at email@example.com.
Katie E. Briscoe is an associate at Nossaman LLP in Sacramento. She can be reached at firstname.lastname@example.org.
Scott Sackett is the president of Fiduciary Management Technologies in Sacramento. Mr. Sackett has served in roles as receiver and disbursing agent in insolvency and class action matters.