When Half A Loaf May Not Suffice

Allen Matkins

Allen Matkins

Section 1900(a) is the only provision of the California General Corporation Law that authorizes action by an exactly 50% vote of shareholders.  This action, moreover, may be taken without any action on the part of a corporation's board of directors.  The action authorized is corporate suicide, or voluntary dissolution.   However, in some cases owning 50% or more of the shares may not be sufficient.

Suppose a corporation has two classes of shares that are issued and outstanding.  Shareholder A owns  100 Class A shares and Shareholder B owns 100 Class B shares.  The two classes of shares have identical rights, but only the Class A shares are entitled to elect directors.  Although Shareholder B owns one-half of the issued and outstanding shares of the corporation, it may not elect voluntary dissolution under Section 1900(a).

The reason for this is that Section 1900(a) provides that a voluntary election to wind up and dissolve may be made by the vote of "shareholders holding shares representing 50 percent or more of the voting power".   The term "voting power" is generally defined in Section 194.5 as the power to vote for the election of directors.  Thus, Shareholder A has 100% of the voting power and only Shareholder A may elect to wind up and dissolve the corporation voluntarily.

Shareholder B may not be entirely at a loss.  Section 1800(a)(2) authorizes an action to be filed for involuntary dissolution by a shareholder or shareholders holding 33 1/3 of, among other things, the total number of outstanding common shares.  In this case, however, Shareholder B will need to establish for the court that at least one of the seven grounds for involuntary dissolution set forth in Section 1800(b) exists.  

Note that in this case both Class A and Class B shares would be considered "common shares", as defined in Section 159.  See What Makes Common Stock, Common?

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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