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Q.What is an involuntary corporate dissolution?
A.When two people own a corporation and have a dispute, an involuntary dissolution may result. If one of the two shareholders threatens dissolution, you will want to first review the Articles of Incorporation, Bylaws and Minutes (board of directors resolutions), as well as the provisions of any contract or agreement between the shareholders (e.g., buy-sell agreement) to determine if any special rules apply to this situation. Anything you find in the Articles, Bylaws, Resolutions, or shareholder agreements MAY modify the general corporate law applicable to deadlocks and dissolution. If you do not find anything relevant, the following default rules should apply:
- A corporation with two shareholders must have a minimum of two directors, while a corporation with three or more shareholders must have a minimum of three directors. This does not necessarily mean you are the second director (or even that the corporation has followed the law and elected two directors), but if you own 50% or more of the stock you would have had the voting power to elect yourself to the board of directors.
- California Corporations Code section 1800 et seq., entitled "Involuntary Dissolution," provides that a deadlock between an even number of directors, or equal 50% shareholders, is a ground for involuntary dissolution. Dissolving a corporation when there is a deadlock generally requires (with minor exceptions) a court decree. The Corporations Code describes the procedure, which usually starts with a verified complaint being filed by one shareholder against the other.
- Pursuant to California Corporations Code section 1803, after a complaint has been filed, the court will typically appoint a tie-breaking director to determine issues necessary to handle the corporate dissolution. However, if necessary, pursuant to California Corporations Code section 1803, the court may opt to appoint a receiver.
- If the corporation is dissolved, its assets and liabilities will be divided by the court. The shareholder opposed to the dissolution will be entitled to an appraisal of the value of his or her interest in the corporation and to compensation by the shareholder demanding dissolution.
Due to the high cost of a formal court dissolution proceeding, most squabbling shareholders in a small corporation will agree to settle informally, often leaving the corporate shell to become delinquent on franchise taxes and in turn inactive. No lawyer would go out on a limb and recommend this because of potential liability for the former directors for the past due taxes, but the fact is it happens all the time. My advice is also attempt to settle the dispute and wind up and dissolve the corporation properly by filing the required documents and paying any outstanding franchise taxes. This will provide a clean break with the past with no potential outstanding liabilities.
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