Corporate Governance: Shareholders Have Nearly Absolute Right to Have Annual Meetings
A recent decision by the California Court of Appeals has held that shareholders have a nearly absolute right to have annual shareholders meetings. See Ielmini v. Patterson Frozen Foods, Inc., Case No. F073377, F074088 (Cal. App. 5th Dist. 2018) (unpublished). San Diego corporations are owned by their shareholders and governed by their respective boards of directors. The members of the board of directors are elected by the shareholders. Among the various “corporate formalities” that are required to keep a California corporation in good standing legally is holding annual shareholder meetings. See Cal. Corp. Code, § 600(b) (“An annual meeting of shareholders shall be held for the election of directors …”). An experienced San Diego corporate attorney can help ensure that your corporation meets its annual obligation and stays in good standing.
The main purpose of shareholder meetings is to elect the members for the board. However, shareholder meetings can have other purposes, too, such as amending corporate bylaws, and approving various stock-related matters such as approving the issuance of new stock, etc.
The Ielmini case involved a closely held family business of which one member of the family held 50% of the stock and four other family members held the remainder. The dominant shareholder controlled the board of directors and had refused to call and/or hold shareholder meetings for several years. As such, the four other shareholders were unable to elect directors that might better represent their interests.
Under the California Corporations Code, there is a procedure set out in Section 600(c) whereby shareholders can file a petition with the court to compel the holding of a shareholders meeting. Pursuant to the provision, the four minority shareholders filed a petition asking that a shareholders meeting be held.
Surprisingly, the trial court said “no.” This was despite the fact that the right to have an annual shareholders meeting is nearly absolute and is mandated by California law and despite clear law and public policies that prohibit directors and/or shareholders from subverting the corporate requirements to retain power. As one California court stated: “Certainly no directors of a corporation, whatever their number, may perpetuate themselves in office by refusing to call an election.” Burnett v. Banks, 130 Cal. App. 2d 631 (Cal. App. 1st Dist. 1955). The Ilemini trial court refused to order a shareholders meeting because the corporation was in the process of buying out shareholders’ stock. Since that process was nearly complete, the trial court determined that the shareholders meeting was unnecessary.
The Court of Appeals reversed and ordered the shareholders meeting. The court of appeals noted that Section 600(c) does allow a trial court some discretion to deny a petition for a shareholders meeting, but the Ilemini case was not an example for which the petition should have been denied. Even if the corporation was in the process of buying back shares and potentially undergoing dissolution, that was not sufficient justification for avoiding the obligation to hold an annual shareholders meeting.
Contact San Diego Corporate Law
If you would like more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides a full panoply of legal services for San Diego and California businesses. Mr. Leonard can provide advice and counsel on starting up a new business, with respect to forming a new corporate entity, assist with corporate formalities, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.