What Happens When The Corporation Can't Legally Pay Dissenting Shares?

Allen Matkins

Allen Matkins

Chapter 5 of the California General Corporation Law limits when a California corporation may make a distribution to its shareholders.   Because Section 166 of the Corporations Code defines "distribution to its shareholders" so as to include a share repurchase, any payment to the holder of dissenting shares are subject to the limitations of Chapter 5.  Directors who approve a payment that is contrary to Chapter 5 (and a shareholder who receives the payment) may be liable under Sections 316 and 506.   When this happens, what's to be done?

Sections 1303 (requiring payment when the corporation and the shareholder agree) and 1305 (providing for entry of judgment in dissenters' rights action) are both expressly subject to Section 1306, which provides:

To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5.

Section 1306, however, does not remove all issues, however, because it makes no reference to California's Uniform Voidable Transactions Act (Cal. Civ. Code §§ 3439 et seq.   Because the UFTA imposes different limitations, it is at least theoretically possible that a payment for dissenting shares will meet the conditions in Chapter 5 but not the UFTA.

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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