November 2018

Want to Skip the Line? Then Section 709!

By Tyler McQuillan

Bremer Whyte Brown & O’Meara

The thought of defending a lawsuit in court that was filed but one week prior likely sounds unsavory to most attorneys, or at the very least to most corporate clients. Conversely, an expedient hearing date probably sounds great to an aggrieved shareholder who thinks they or their directorship picks got shorthanded. California provides for this very possibility through Corporations Code section 709. 

            Section 709 provides that within five days of “any shareholder or … any person who claims to have been denied the right to vote” for a director may have the superior court “try and determine the validity of any election or appointment of any director.” This applies to domestic corporations, and even foreign corporations (i) with a principal office in the state and (ii) holding the subject election or having the subject appointment been made in the state. And, absent good cause shown, this is all meant to happen within five days of a plaintiff filing a complaint.

            The matters which may be addressed through a Section 709 action are wide-ranging.  Though viewed as a summary proceeding, the Court of Appeal has ruled that Section 709 may be utilized to contest complex and substantive allegations of corporate of directorial misconduct.  (See Morrical v. Rogers (2013) 220 Cal.App.4th 438.)  The court’s remedial powers are equally broad, and elections and transactions occurring thereafter can both be unwound.

            Similarly, standing is not-so-narrowly drawn either. As noted, “any person who claims to have been denied the right to vote” can bring the action. In one case, standing was recognized for individuals who were not even shareholders (as defined under the Corporations Code). In Haah v. Kim (2009) 175 Cal.App.4th 45, two individuals who were parties to an executed, albeit unperformed, subscription agreement were round to have standing under Section 709. While the court’s ruling is arguably narrower than exclaimed by critics,[1] the potentially wide basis for standing remains unsettling.

            Defensive strategies are still available. A defendant corporation or nominee may utilize the standard range of procedural tools such as challenging jurisdictional issues, seeking removal to federal court, demurring to the complaint, etc. This can provide a potential exit from the shortly noticed litigation and buy precious time to prepare for what is to come.

Section 709 can prove a useful tool for those counseling corporate constituents aggrieved by an election or nomination of controlling directors. The expedient and summary nature of the proceeding can offer a cost-effective alternative to prolonged litigation. The threat presented by this equitable claim also emphasizes the need for corporate practitioners to ensure corporate governance matters are kept in line and handled by the book.

 
 

[1] This is admittedly the second post I have written employing a barely passable pun involving lines in the title.  Get excited for what is to come folks.

[2] The court specifically states “we conclude that the phrase ‘any person who claims to have been denied the right to vote’ includes those who have entered into agreements to take shares in the corporation … but who have not yet been issued those shares.”  Whether this would (or should) apply to persons less firmly entitled to corporate ownership is uncertain.