In Ielmini v. Patterson Frozen Foods, Inc., No. F073377, 2018 WL 4348020 (Cal. Ct. App. Sept. 12, 2018), review denied (Dec. 19, 2018), the California court of appeals addressed an issue of first impression, namely, whether and to what extent a court has discretion in deciding whether to grant a shareholder’s petition to compel an annual shareholder’s meeting, pursuant to section 600(c) of the California Corporations Code (“Code”). It then considered whether section 2000 of the Code, which stays dissolution proceedings while the corporation is in the process of buying out shareholders’ stock, also stays the requirement of annual shareholders’ meetings. As to the first question, the court held that “to the extent there is discretion not to order a shareholders’ meeting, it is limited to extraordinary circumstances not found here.” As to the second question, the court held that the pendency of a stock buyout does not stay the corporation’s obligation to hold annual shareholders meetings.
The case concerned a group of family-owned corporations (collectively, the “Business”). One individual, Angelo, held 50% of the shares of the Business, and the other 50% were held by a group of four family members (the “Shareholders Group”). Angelo controlled the Business’s operations, and also controlled the board of directors, in part because of his refusal to hold any annual shareholder meetings. Without such meetings, the Shareholders Group could not elect any directors to represent their interests.
The Shareholders Group petitioned the court, pursuant to section 600(c) of the Code, to compel an annual shareholder meeting. Section 600(c) provides that the court “may summarily order a [shareholders’ meeting to be held upon the application of any shareholder . . . .” The court exercised discretion in denying the petition, and did so on the grounds, among others, that the Business was in the process of buying out the Shareholders Group pursuant to Code section 2000.
On appeal, the court recognized that section 600(c) uses permissive language in that it provides that a court “may summarily order” shareholders’ meetings. However, the Court looked to a 1984 opinion by the Delaware Supreme Court, which had interpreted nearly identical language in Delaware’s sister statute. There, the Delaware court stated that shareholders’ right to have a meeting convened is “virtually absolute” and held that, once petitioners’ show that they are shareholders and that the requirement to hold annual shareholders’ meetings has not been fulfilled, a court should order such a meeting, subject only to a valid affirmative defense. Neither the Delaware court nor the Ielmini case identified what such an affirmative defense might be.
In the Ielmini case, there was no question that the Shareholders Group had made the required showing under section 600(c), and so the question became whether the pending shareholders’ buyout prohibited the court from ordering a shareholders’ meeting, pursuant to section 2000(b). The court held that it did not, pointing out that while section 2000(b) directs that dissolution actions be stayed while a buyout is in process, it is silent as to shareholders’ meetings. Moreover, the court found that nothing in section 2000 alters shareholders’ rights or financial interest in the corporation and, indeed, shareholders maintain such rights until their stock is actually purchased.
The Ielmini case makes clear that in California shareholders’ right to annual meetings will be strongly protected by the courts, absent extraordinary circumstances. It is an instructive case, not only for lawyers practicing in California, but for lawyers in other jurisdictions that have enacted similar statutes.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact John Haarlow at 312.419.6900 or email@example.com.