Business Litigation

Majority shareholders in a California close corporation owe fiduciary duties to the minority and cannot use their control to benefit themselves at the minority's expense. Conduct that commonly gives rise to claims includes withholding distributions while the controlling owners draw excessive compensation, dilutive financings designed to reduce the minority's stake, and denying the statutory right to inspect corporate books and records. Depending on the injury, claims may be brought directly by the shareholder or derivatively on behalf of the corporation. Available relief ranges from damages and an accounting to the structural remedy of court-ordered dissolution under Corporations Code section 1800, which in practice usually resolves into a buyout.

A corporation or LLC generally shields its owners from personal liability for the entity's debts. That shield is not absolute. A court may disregard the entity ("pierce the corporate veil") where there is such a unity of interest between the owner and the entity that they no longer have separate identities, and where treating the obligation as the entity's alone would produce an inequitable result. Courts look at factors such as commingling of funds, inadequate capitalization, disregard of corporate formalities, and use of entity assets for personal purposes. Separately, certain liabilities attach regardless of entity form: general partners are personally liable for partnership obligations, an individual is always liable for their own tortious conduct, personal guaranties bind the guarantor directly, and some statutes impose individual liability on owners and managers (for example, Labor Code section 558.1 for certain wage violations).

A written contract carries a four-year limitations period (Code of Civil Procedure section 337); an oral contract, two years (section 339). The period generally runs from the date of breach, though delayed-discovery principles can postpone accrual in limited circumstances, and installment or continuing obligations may give rise to separate accrual dates. Because limitations defenses are often dispositive, the accrual analysis is worth careful attention early in any contract dispute.

Section 1800 allows certain shareholders – generally those holding at least one-third of outstanding shares, with broader standing in some circumstances – to petition the court to wind up and dissolve the corporation. The enumerated grounds include deadlock among directors or shareholders, internal dissension that makes the business impracticable, abandonment of the business, fraud or persistent mismanagement and waste of corporate assets, and conduct by those in control that is persistently unfair or oppressive toward the minority.
In practice, a section 1800 petition rarely ends in an actual dissolution. Corporations Code section 2000 gives the corporation, or the holders of fifty percent or more of the voting shares, the right to avoid dissolution by purchasing the petitioning shareholder's stock at its "fair value." If the parties cannot agree on price, the court appoints appraisers and fixes fair value, generally measured as of the date the petition was filed.