Court Rules Share Repurchase Is Not Subject To CGCL Limitations

Allen Matkins
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Allen Matkins

Chapter 5 of the California General Corporation Law imposes certain limitations on a corporation's distributions to its shareholders.  Section 166 of the Corporations Code defines "distribution to its shareholders" to include the purchase or redemption of shares.  In a recent decision, U.S. District Court Judge Troy L. Nunley considered whether the limitations of Chapter 5 applied to a corporation's repurchase of shares pursuant to Corporations Code Section 2000.

The case arose when Ms. Clark, a 50% shareholder, filed a certificate of election to wind up and dissolve.  Section 2000 allows the corporation or, if it does not elect to purchase, the holders of 50% or more of the voting power of the corporation to avoid the dissolution of the corporation by purchasing for cash the shares owned by the plaintiffs or by the shareholders so initiating the proceeding at their fair value.  Ms. Clark argued that Chapter 5 applied to the corporation's purchase of her shares.

Judge Nunley ruled that Chapter 5 did not apply to the repurchase.  Why?  Section 508 provides: "This chapter [5] does not apply in connection with any proceeding for winding up and dissolution under Chapter 18 [involuntary dissolution] or 19 [voluntary dissolution]".  This doesn't resolve the question completely because Section 2000 is located in Chapter 20 and not Chapter 18 or 19.  Judge Nunley reasoned, however, that because Ms. Clark's petition to dissolve was filed under Section 1900, the statutory exception applied.  The case is Clark v. S&J Adver., Inc., 2019 U.S. Dist. LEXIS 198725.

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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