Typically, a minority shareholder has very limited rights regarding the operations of a company. There are a multitude of reasons why shareholders can disagree, including differing visions of strategy, financial issues or simply personality differences that can influence business valuation. Outside of an existing buy-sell agreement, the California Corporations Code provides the procedures for both an involuntary and voluntary dissolution.
In extreme circumstances, a dissenting shareholder can force the INVOLUNTARY sale of the entire business, through the guidance set forth in California Corporations Code § 1800 (Code § 1800). In less severe scenarios, shareholders who combine to own 50% or more of a company can elect to wind up and VOLUNTARILY dissolve the company under the procedures specified in California Corporations Code § 1900 (Code § 1900).
Corporations Code 2000 Alternatives
California Corporations Code § 2000 (Code § 2000) is a third alternative for corporations or 50% or more of the shareholders. Typically, the opposing parties, referred by Code § 2000 as the moving party and buying party, will have to hire three independent appraisers to determine the fair value of the subject company (as defined above). The outcome of the appraisers is then taken to the Court to confirm the fair value of the subject company.
Code § 2000 specifies that a specific, rarely used standard of value is required to value the subject company. Specifically, “The fair value shall be determined on the basis of liquidation value as of the valuation date but taking into account the possibility, if any, of the sale of the entire business as a going concern.”
It is important to note the inherent premise of value for Code § 2000 is also different from typical valuations and/or appraisals. Generally, companies are valued under the premise of “going concern”, which assumes the company will continue to operate regularly into the foreseeable future. However, valuations performed under Code § 2000 must consider both the liquidation value and the liquidation value as a going concern. The procedures taken to consider both of these premises of value are meant to allow the moving party to emulate the procedures taken under Code § 1800 and Code § 1900, while allowing the buying party the opportunity to avoid dissolution.
Conclusions About Corporations Code 2000
Once the fair value of the subject company is confirmed by the court, the buying party will be given the opportunity to buy out the dissenting shareholders at the stated amount, or to proceed with the dissolution of the company.