What Rights & Duties do Shareholders in a California Corporation have?

⚖️ Rights of Shareholders

⚖️ Meetings

Meetings are typically where Shareholders convene + vote on corporate management issues.

General Meetings or annual meetings occur once a year and are where most Shareholder voting occurs (10-60 days notice required).

If none held within 15 months, a Shareholder can petition the Court to order one.

Special Meetings can be called by the Board, or the President, or the holders of at least 10% of the voting shares, or anyone else authorised by the by-laws.

The special meeting is held upon reasonable notice of the time, place and purpose to be discussed (10-60 days' notice required + purpose).

⚖️ Voting

Right to Vote: The right to vote attaches to the type of stock held by the Shareholder.

A Corporation can have 2 types of stock: common + preferred.

If the articles do not specify voting rights, both classes of stock may vote.

Usually each outstanding share is entitled to 1 vote.

Voting: Generally, Shareholders only have indirect corporate power through the right to vote to elect or remove members of the board and approve fundamental changes in the corporate structure, such as mergers, dissolutions, etc.

Who Votes?: General rule is the "record Shareholder" as of the"record date" has the right to vote.

Exceptions: Corporation re-acquires shares (which become treasury stock) before the record date ➲ The Corporation does not vote on this stock.

➲ Shareholder dies after the record date. Shareholder's executor can vote the stock.

Voting by proxy: A Shareholder may vote in person or by proxy (valid for 11 months unless the proxy says otherwise).

A proxy is a signed writing (can be electronic) authorizing another to cast a vote on behalf of the Shareholder.

A revocable proxy is an agency relationship between the shareholder and the proxy.

An irrevocable proxy can only occur when the proxy is coupled with some interest of the proxyholder (other than voting).

✅ The irrevocable proxy must be so labeled.

✅ The proxyholder's interest can relate to some other interest in the shares (e.g., a creditor or prospective purchaser under an option contract or actual purchaser after the record date) or an interest in the Corporation (e.g., performance of services or granting credit in exchange for proxy rights).

💡 Note: If there is no coupled interest, then a proxy clearly labelled as irrevocable, is actually still revocable.

Quorum: For an action to pass there must be a quorum, which is a majority of outstanding shares represented (in person or by proxy) at the meeting. Quorum is based on the number of shares, not the number of shareholders.

Majority Vote: If a quorum is present, a majority of votes cast validates the proposed Shareholder action.

Except votes regarding a fundamental change require a majority vote of all outstanding shares to validate the proposed action (A higher standard),.

Vote calculation: 2 methods are employed:

1️⃣ Straight counting: Each Shareholder casts one vote per share held.

Therefore a Shareholder with more than 50% of the shares controls the vote.

2️⃣ Cumulative voting for directors: Allows a Shareholder to multiply the numbers of shares held by the number of Directors to be elected and then cast all votes for one or more Directors.

💡 Cumulative voting is the law for all Corporations in California that are not publicly traded (there is no opt-out provision).

The rationale behind cumulative voting is that the process translates into more proportional representation of the Shareholders on the Board of Directors, giving minority Shareholders the opportunity to exert influence on management through the election of Directors who support their interests and priorities.

Unanimous written consent: Shareholders may also take action with unanimous written consent from all Shareholders.

⚖️ Inspection of Company Records

Inspection: A Shareholder has a right to inspect the corporate books (articles, resolutions, shareholder meeting minutes, etc.) upon:

✅ A showing of a proper purpose; with

✅ 5 days' written notice.

As to accounting or shareholder records or board minutes, the demand must be:

✅ Made in good faith and describe with reasonable particularity the purpose for the inspection, and the records must be directly connected to the stated purpose.

⚖️ DIvidends

Dividends: Dividends are the discretionary (at the Board's discretion) distribution of cash, property or stock that a Shareholder may receive from a Corporation.

❌ A distribution is not permitted if it would lead to insolvency or is not allowed in the articles.

Types of dividend distributions:

1️⃣ Preferred with dividend preference: Paid first to preferred with dividend preference as to stated amount, then remaining amount is paid to common stock;

2️⃣ Preferred + Participating: Paid first to preferred + participating as indicated in preferred amount, then remaining is paid to common stock which includes the preferred + participating Shareholders.

So P+P are paid preferred, and then also participate in the common stock dividend distribution.

💰💰Double Dip!

3️⃣ Preferred and cumulative: Paid first to preferred and cumulative as indicated for number of years not paid in the past, then remaining paid to common stock.

4️⃣ Cumulative if earned: Dividends cumulative only if the Corporation's total earnings for the year are more than the total amount of preferred dividends that would need to be paid out for the year.

⚖️ Proper + Improper Distributions

Which funds can be used to pay Dividends?

➲ Traditional view

1️⃣ Earned Surplus [Earnings - Losses - Distributions Previously Paid] Ok to be used for Dividends.

2️⃣ Stated Capital [Generated by issuing stock at par. value]. Never to be used for distributions. Policy: Keep in hand to pay creditors.

3️⃣ Capital Surplus [Generated by issuing any stock at a premium to par. value]. Ok to be be used for Dividends, if you inform the Shareholders.

On a no-par issuance, the Board allocates between stated and capital surplus.

➲ Modern view does not look at the funds.

It says a Corporation cannot make a distribution if it is insolvent or if the distribution would render it insolvent.

Insolvent means either:

❌ The Corporation is unable ti pay its debts as they come due; or

❌ Total assets are less than total liabilities (and liabilities include preferential liquidation rights).

⚖️ Improper Distributions ➲ Liability

Directors are jointly + severally liable for improper distributions (except where there is a Directors' Good Faith reliance defence).

Shareholders are personally liable only if they knew the distribution was improper when they received it.

⚖️ Preemptive Rights: The right to subscribe to new stock issues for cash such that your existing shareholding is not diluted

The right of an existing Shareholder to maintain her percentage of ownership in a Corporation when there is a new issuance of stock for cash (or its equivalent, like a check).

❌ Not applicable: If the new issuance is not for cash.

Modernly, [Opt-in rule] unless the articles of incorporation provide otherwise, a Shareholder does not have preemptive rights.

Does “new issuance” include the re-issue of treasury stock?

Split Authority: No clear majority.

⚖️ Shareholder Agreements

⚖️ Voting Agreements

Often seen in closely-held Corporations.

Voting "Pooling" Trust: (valid for 10 year maximum).

✅ The time limit has been eliminated in many states due to the Revised Model Business Corporation Act (RMBCA).

Occurs when Shareholders:

1️⃣ Agree in writing to transfer their shares to a trustee who votes and distributes dividends in accordance with the voting trust;

2️⃣ Copy is provided to the Corporation;

3️⃣ Legal title to the shares is transferred to the voting trustee;

4️⃣ Original Shareholders receive trust certificates and retain all Shareholder rights except for voting.

Voting Agreement: A written agreement where the parties agree to vote their shares as agreed.

In some states Voting Agreements are specifically enforceable (if so, there is no need for a Voting "Pooling" Trust; in other states this is not the case and a Voting Trust is required.

Management Agreement: Occurs where the Shareholders agree to manage the Corporation in an agreed-upon way as set forth in the articles or by-laws (valid for ten years).

⚖️ Restrictions on Stock Transfers

Generally upheld if reasonable.

For example: A right of first refusal, but absolute restraints are not reasonable.

A 3rd party will only be bound:

✅ If the restriction is conspicuously noted; or

✅ The 3rd party had knowledge.

⚖️ Shareholder Suits

Direct: A Shareholder may bring a suit for breach of fiduciary duty owed to the shareholder (not the Corporation itself).

Derivative: A Shareholder may bring a derivative suit on behalf of the Corporation for harm done to the Corporation.

The Corporation receives the recovery, if any, and the Shareholder is entitled to reimbursement for the expenses of litigation.

The Shareholder bringing the suit must:

1️⃣ Own stock at the time the claim arose and throughout the suit;

If not owned directly, Ok to have gotten the stock by "operation of law", that is, inheritance/divorce.

2️⃣ Adequate representation of the Corporation's interest;

3️⃣ Make a Written Demand on Directors to bring suit or redress the injury and the demand is rejected.

Corporation has 90 days to respond unless waiting that long would cause irreparable injury.

The demand requirement used to be excused if doing so would be futile (still the case in many other states), but it is required modernly.

Futility would be evidenced where the majority of the Director's will be the Defendants in the suit.

4️⃣ Join the Corporation as a Defendant (technicality).

✅ Settlement or Dismissal of a Derivative Suit only possible with Court approval.

The Court may give notice to Shareholders to get their input on whether to dismiss or settle.

Corporation can move to dismiss on the basis that independent investigation (b y independent directors or Court-appointed panel of 1 or more independent persons) showed the suit was not in the Corporation's bets interest (e.g., low chance of success or expense would exceed recovery).

In ruling on the motion, the Court will look to see if those recommending the dismissal are independent, and if so, dismiss.

In some states, the Court will also make an independent assessment of whether dismissal is in the Corporation's best interest.

⚖️ Shareholder Duties

⚖️ Shareholder's Duties to other Shareholders

In a Close Corporation, especially controlling Shareholders should not oppress minority Shareholders, e.g.., by selling control to people who loot the Corporation (without reasonable investigation of the buyer).

If there's oppression, a harmed minority Shareholder can sue the controlling Shareholder who oppressed them.

Courts let minority Shareholders sue in these situations, because a minority Shareholder in a Closely-held Corporation has no exit.

There is no market for the stock of a Closely-held Corporation.

⚖️ Close Corporation

Shareholders can eliminate the Board and run the Corporation directly in a Close Corporation, which is a Corporation with:

✅ A small number of Shareholders; and

✅ Stock is not publicly traded.

How is this done? Either

1️⃣ In the Articles or By-laws [approved by all Shareholders]; or

2️⃣ By unanimous written Shareholder agreement.

Either way, the agreement should be conspicuously noted on the front and back of the stock certificates.

In this "Extremely Rare" situation: The Shareholders are running the Corporation, and therefore owe the Director Duties of Care, Loyalty, Disclosure to the Corporation.

⚖️ Dissenter Appraisal Rights

A dissenting Shareholder to [any of the following: Merger or Consolidation, Transfer of substantially all assets not in the ordinary course of business, or transfer of shares in a share exchange, or an Amendment of the Articles that effectuates a reverse stock-split] may exercise their right to force the Corporation to buy them out at fair value.

❌ Right not available if the stock is listed on a national exchange; or has

❌ 2,000 or more Shareholders.

✅ So, in effect, the right of appraisal exists in Closely-held Corporations.

💡 The right may exist even without dissenting at an actual Shareholder Meeting - as in the case of a short-form merger.

To perfect the right:

1️⃣ Before Shareholder vote, file written notice of objection + intent to demand payment;

2️⃣ Abstain or vote against the proposed change; and

3️⃣ After the vote, within time set by Corporation, make written demand to be bought out and deposit stock with the Corporation.

If the Shareholder and the Corporation cannot agree on a fair value, the Court may appoint an appraiser.

This is the Shareholders' only remedy for these fundamental changes (absent fraud).


This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.