Opinion
F073377 F074088
09-12-2018
CHRISTIAN IELMINI, as Trustee, etc. et al., Plaintiffs and Appellants, v. PATTERSON FROZEN FOODS, INC. et al., Defendants and Respondents.
Damrell, Nelson, Schrimp, Pallios, Pacher & Silva, Angela Schrimp de la Vergne, Kathy L. Monday, Maria Fatima Gioletti and Kirin V. Virk for Plaintiffs and Appellants. Frank T. Zumwalt, Samual E. Getrich and Stephanie Hamilton Borchers for Defendants and Respondents.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 2017357)
OPINION
APPEAL from a judgment of the Superior Court of Stanislaus County. Timothy W. Salter, Judge. Damrell, Nelson, Schrimp, Pallios, Pacher & Silva, Angela Schrimp de la Vergne, Kathy L. Monday, Maria Fatima Gioletti and Kirin V. Virk for Plaintiffs and Appellants. Frank T. Zumwalt, Samual E. Getrich and Stephanie Hamilton Borchers for Defendants and Respondents.
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INTRODUCTION
Cousins John and Angelo Ielmini had equal, 50 percent ownership and control of several agricultural entities, including Patterson Frozen Foods, Inc., Valley Frozen Foods, Inc., and Del Puerto Farms, Inc. (collectively the Ielmini Entities). John was 14 years older than Angelo and, as he advanced in age, he delegated more responsibilities for the management of the Ielmini Entities to Angelo.
Most of the individuals involved are members of the Ielmini family and share the same last name. First names are used to prevent confusion. No disrespect is intended.
John passed away in July 2010, and his half of the shares of the Ielmini Entities passed to John's four children, Christian, Anne, Jane and Thomas, in equal shares of 12.5 percent each. Despite equal ownership of shares by John's children and Angelo, Angelo retained and perpetuated his control of the board of the directors of each of the Ielmini Entities by refusing to hold any annual shareholders' meetings after John's death. Without shareholder elections, John's children have been unable to elect any corporate directors that would represent their collective interests.
Appellants Christian, Anne, Jane and Thomas, both individually and as trustees of their individual trusts, brought an action seeking the superior court to compel holding annual shareholders' meetings for the Ielmini Entities under Corporations Code section 600, subdivision (c). The superior court denied the request, reasoning that it might interfere with a pending action by Angelo to purchase appellants' shares, and that the result of any election would be futile. Upon review, we reverse and remand the action with instruction for the superior court to summarily order annual shareholders' meetings.
All further statutory references are to the Corporations Code unless otherwise stated.
FACTUAL BACKGROUND
The Ielmini Entities, Dissolution, and Buyout of Shares
Patterson Frozen Foods, Inc. (PFF) was founded by brothers Alfonso and Mario Ielmini in 1946 for the purpose of farming and processing fresh produce. At his death, Alfonso passed his 50 percent interest in PFF to his son John and, likewise, Mario passed his 50 percent interest to his son Angelo. At John's death, his shares were equally divided between appellants. As of 2013, PFF owned over 1,400 acres of land in and around Patterson, California, five single family residences and over 400 acres of walnut trees.
Del Puerto Farms, Inc. (DPF) was formed around 1977 and farms several hundred acres of nuts and row crops on land owned by PFF and other related entities. Valley Frozen Foods, Inc. (VFF) was formed in 1989 to facilitate the wholesale of PFF products. As with PFF, Angelo and appellants each own 50 percent of the outstanding stock of DPF and VFF.
Upon John's death in 2010, appellants allege that Angelo assumed near total management and control of the Ielmini Entities, and perpetuated control by refusing to hold annual shareholders' meetings. In light of John's death, Angelo remained as a director or manager of Ielmini Entities. In addition, appellants allege that Angelo identifies his daughters and Susan Scheuber as officers of the Ielmini Entities, despite not being elected by a vote of the shareholders.
On August 31, 2012, appellants brought a civil action against Angelo and his daughters, individually and as officers and directors of the Ielmini Entities, raising claims of breach of fiduciary duties of care and loyalty, claiming misuse and misappropriation of corporate assets, seeking removal of Angelo and his daughters as directors, and requesting dissolution and accounting. Appellants alleged that Angelo used his position to withhold information and prevent the inspection of corporate records in an attempt to conceal the misuse and misappropriation of funds.
In an attempt to avoid dissolution of the Ielmini Entities, on February 5, 2014, the Ielmini Entities moved during the pending dissolution proceeding to assert the right to buyout of appellants' shares under section 2000. On May 2, 2014, the superior court stayed the dissolution proceeding in accordance with section 2000, subdivision (b), to provide the parties time to ascertain and fix the fair value of appellants' shares. In the stay order, the court required the Ielmini Entities to post a bond in the amount of $150,000 to ensure payment of appellants' reasonable expenses in the event that the purchase of the shares was not completed within the time specified by the court.
Despite the passage of over four years since the buyout application of appellants' shares, the parties have not presented information regarding the status of the litigation. For the sake of argument, we will assume that the buyout proceeding remains pending.
Action to Compel Shareholders' Meetings
On September 9, 2015, appellants sent a demand letter to the Ielmini Entities requesting annual meetings of the shareholders be held of each respective entity "for the purpose of electing directors, reviewing annual financial reports and conducting other business which is properly presented to the shareholders at an annual meeting." The letter explained that there had not been a shareholders' meeting for any of the Ielmini Entities since John's death in July 2010 and demanded that a meeting take place no later than October 2, 2015. If a shareholders' meeting was not held, appellants asserted that they would seek judicial intervention to compel a meeting under the provisions of section 600. Appellants argued that the Ielmini Entities were incorrect to believe that they were not required to hold shareholders' meetings because of the stay imposed by the court in light of the stock buyout proceeding under section 2000. Appellants argued that section 2000 did not usurp the other relevant sections of the Corporations Code and that the Ielmini Entities "must still comply with [their] corporate obligations, including holding annual meetings of shareholders."
The Ielmini Entities responded in a letter dated September 28, 2015, rejecting the request. The Ielmini Entities claimed that appellants "have no legitimate interest in the present management and control of the [Ielmini] Entities" because of the section 2000 proceeding and that the "identity of the present management of the [Ielmini] Entities is irrelevant and immaterial to [appellants'] interest."
On October 15, 2015, appellants filed an application in a separate proceeding in Stanislaus Superior Court, requesting the court to direct the Ielmini Entities to hold annual shareholders' meetings, and to set the time and place of the meetings. The Ielmini Entities moved to strike the application and, alternatively, moved to consolidate the application with the pending dissolution and buyout action.
On January 14, 2016, the court heard the application and opposing motions. At argument, the court explained that it thought it would be inconsistent to require the Ielmini Entities to hold shareholders' meetings in light of the buyout proceedings that were initiated under section 2000 and the resulting stay order imposed on the dissolution proceeding. In addition, the court was "a little concerned, given the animosity of the parties, whether it would be a good idea to force a meeting with these parties with such divergent interests."
In response, appellants argued that annual shareholders' meetings were mandatory, not discretionary, under California law irrespective of pending dissolution or buyout, and that the Ielmini Entities had not held shareholders' meetings for over five years.
The court acknowledged that there were empty positions on the boards of the Ielmini Entities, but that even if it appointed a neutral director to the Ielmini Entities it would be futile because that director would be outnumbered by Angelo-appointed directors. Appellants responded that by not holding shareholders' meetings, they were effectively disenfranchised. Despite having 50 percent of the voting interest, appellants were unable to use it, and were likewise unable to seek judicial intervention available in cases of deadlock because, without an election, deadlock could never occur. (See § 308.)
The court issued a written order on January 29, 2016, denying the application to compel shareholders' meetings. The court held that appellants did not maintain the right to force the Ielmini Entities to hold annual shareholders' meetings where, as here, the stay in the dissolution proceeding "would, at least in spirit, seem to constitute a prohibition on ordering the shareholders to 'meet and confer' on corporate governance given the fact that [the dissolution action] acts as a concession by [appellants that the] shareholders are unable to govern effectively as a group."
On May 23, 2016, the court entered judgment and dismissed the case.
DISCUSSION
This appeal addresses whether section 600 requires corporate shareholders to hold annual meetings and, if they do not, whether a court, when petitioned to compel the meeting, has discretion to deny the request and allow a corporation to operate without properly elected directors. Respondents contend that the court did not abuse its discretion in denying the request to order shareholders' meetings because the language of section 600, subdivision (c), is permissive, not mandatory; because a meeting would have been futile based on the fact that the two factions—each owning 50 percent of the shares—would end in deadlock; and that it would interfere with the pending dissolution and buyout proceedings.
The overarching question raised on appeal is whether one faction owning 50 percent of the outstanding shares has the right to retain control of the board of directors and the day-to-day operation of the corporations to the exclusion of the other faction of shareholders. As explained, as co-equal owners of shares, they do not have any greater rights. If the competing factions are not able to effectively govern the corporations and act in the fiducial interest of all of the shareholders, then the court has the authority to appoint neutral directors to do so. Under the circumstances here, notwithstanding the trial court's good faith effort to manage these competing shareholder factions, the court abused its discretion by not compelling a shareholders' meeting.
I. Standard of Review and Statutory Interpretation
Here, the application and interaction of two statutes are at issue, sections 600 and 2000. The interpretation of statutes is a question of law that we review de novo. (Goodman v. Lozano (2010) 47 Cal.4th 1327, 1332; accord, Council of San Benito County Governments v. Hollister Inn, Inc. (2012) 209 Cal.App.4th 473, 488-489; Cotton v. Expo Power Systems, Inc. (2009) 170 Cal.App.4th 1371, 1380.) "'[T]he superior court's interpretation of the statutory standard set forth in section 2000 is subject to de novo review on appeal.'" (Cotton, supra, at p. 1380, quoting Mart v. Severson (2002) 95 Cal.App.4th 521, 530.)
In addition, where, as here, section 600 affects the extent and nature of a trial court's discretion, we examine a trial court's actions in light of the specific law bearing on that discretion. (People v. Rodriguez (2016) 1 Cal.5th 676, 685-686 (Rodriguez).) As part of the inquiry, we consider whether the trial court's exercise of discretion is consistent with the statute's intended purpose. (See Horsford v. Board of Trustees of California State University (2005) 132 Cal.App.4th 359, 396 [trial court must "exercise its judicial discretion to accomplish the purposes of the law granting such discretion"].) This is true even though a trial court may have broad discretion under a statute. (See Williams v. City of Los Angeles (1988) 47 Cal.3d 195, 204 [trial court abused its discretion by ordering police officer's reinstatement and excluding his statements from consideration at subsequent disciplinary hearings even though the court had "broad discretion" under Gov. Code, § 3309.5, subd. (c) to fashion an "'appropriate'" remedy].)
II. Shareholders' Meetings Under Section 600
California law requires corporations to hold an annual shareholders' meeting at which directors are to be elected. "A shareholder has a wide range of statutory rights to participate in corporate affairs. For example, annual shareholders' meetings must be held for the election of directors and the transaction of other corporate business, and each shareholder is entitled to attend in person or by proxy." (Stephenson v. Drever (1997) 16 Cal.4th 1167, 1176, italics added.) Section 600, subdivision (b), states "An annual meeting of shareholders shall be held for the election of directors on a date and at a time stated in or fixed in accordance with the bylaws...." (Italics added; see 2 Ballantine & Sterling, Cal. Corporation Laws (4th ed. 2018) §§ 163.02, 169.01 ["[A]n annual meeting at which directors are elected must be held unless directors are elected annually by unanimous written consent of shareholders."].) The use of the word "shall" generally indicates that it is mandatory that corporations hold annual shareholders' meetings. (See Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 208 ["Generally speaking, 'the word "may" is permissive—you can do it if you want, but you aren't being forced to—while the word "shall" is mandatory—no way you can do it."].) Section 301, subdivision (a), explains that "at each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting...."
Section 600, subdivision (c), governs situations in which there is a failure to hold an annual shareholders' meeting. It "grants the trial court power to order an annual meeting if one has not been scheduled in the ordinary course of events." (Johnson v. Tago, Inc. (1986) 188 Cal.App.3d 507, 515.) "If there is a failure to hold the annual meeting for a period of 60 days after the date designated therefor or, if no date has been designated, for a period of 15 months after the organization of the corporation or after its last annual meeting, the superior court of the proper county may summarily order a meeting to be held upon the application of any shareholder after notice to the corporation giving it an opportunity to be heard...." (§ 600, subd. (c) ; see 2 Ballantine & Sterling, Cal. Corporation Laws, supra, § 163.02.) The court, after notice to the corporation giving it an opportunity to be heard, may summarily order a meeting to be held as well as any other orders as may be appropriate, including orders designating the time and place of the meeting, the record date for determination of shareholders entitled to vote, and the form of notice of the meeting. (§ 600, subd. (c).)
Likewise, a nearly identical statute vests the court with the authority to summarily order members of nonprofit public benefit corporations to hold a meeting should they fail to do so. (See § 5510, subd. (c).)
"The court's power under ... section 600[, subdivision ](c), to 'issue such orders as may be appropriate' is limited to caretaking details and procedures involved in holding the annual shareholders meeting, and cannot be construed as a license for courts to trespass on substantive matters confided to the directors and shareholders of a corporation." (2 Ballantine & Sterling, Cal. Corporation Laws, supra, § 163.02; see Johnson v. Tago, Inc., supra, 188 Cal.App.3d at pp 515-516.) "[S]ection 600 is 'concerned with the mechanical aspects of holding the annual shareholders meeting.'" (Johnson v. Tago, Inc., supra, at p. 515.)
Respondents contend that section 600, subdivision (c), is permissive, not mandatory, and that a court is free to exercise its discretion to determine whether a shareholders' meeting need be ordered. Specifically, respondents contend that the use of the word "may" in the statute, when stating that a court "may summarily order a meeting to be held," indicates the court is not mandated to order a meeting, thereby providing support for the trial court's denial of the request to order a meeting be held. Accordingly, we must determine whether respondents' permissive interpretation is correct or, alternatively, whether the phrase "may summarily order" should be interpreted as permitting the court to order a shareholders' meeting without engaging in a lengthy, formal procedure, i.e., something more akin to a ministerial act.
Respondents do not challenge the fact that there had not been an annual meeting in the 15 months before the underlying action was filed. For the sake of this appeal, we will assume that appellants met their required burden, and the only remaining issue is whether the court was required to order a shareholders' meeting be held.
Here, we must interpret the meaning of the relevant Corporations Code sections. We do so by starting, as we always do with issues of statutory interpretation, by reviewing the plain language of the statutory text. (Rodriguez, supra, 1 Cal.5th at p. 686.) When interpreting the text of a specific provision, we consider the language of the entire legislative scheme and related statutes in ascertaining the Legislature's intended purpose. (See Riverside County Sheriff's Dept. v. Stiglitz (2014) 60 Cal.4th 624, 632-633.) We ask whether our interpretation, as well as its resulting consequences, advances that purpose. (See People v. Zambia (2011) 51 Cal.4th 965, 976-977.) Where the statutory text may be given more than one reasonable interpretation, we may also consider various extrinsic aids—including the legislative history—to the extent they are helpful in advancing the Legislature's purpose. (See Fluor Corp. v. Superior Court (2015) 61 Cal.4th 1175, 1198.)
No California court has addressed this issue. However, based on principles of statutory construction and interpretation of similar provisions, we have determined that to the extent there is discretion not to order a shareholders' meeting, it is limited to extraordinary circumstances not found here.
A. Context of Statutory Scheme
Before addressing the language of subdivision (c) of section 600, it must be noted that it follows subdivision (b), which requires that annual shareholders' meetings be held. Accordingly, subdivision (c) is the sole method by which parties can compel the corporation to hold the required annual shareholders' meeting, should the meeting not otherwise occur. Therefore, it would be inconsistent to require annual shareholders' meetings, but also authorize courts to use unfettered discretion to determine whether shareholders' meetings should be held. If so, corporations could remain out of compliance of the annual shareholders' meeting requirement of subdivision (b) in instances where the court does not compel a meeting.
In enacting section 600, the Legislature explained that "subdivision (c) authorizes the superior court upon application of a shareholder to summarily order the meeting to be held" "[t]o provide prompt relief in the event an annual meeting is not held." (Legis. Com. com., Deering's Ann. Corp. Code, § 600 (2009 ed.) p. 13, italics added.) The language of the comments provides support for an interpretation that the "may summarily order" language in section 600, subdivision (c), provides authority for the court to provide relief without unnecessary delay, rather than decide not to provide relief at all. Prompt relief could include only requiring a prima facie showing by the aggrieved shareholders, or a limited or expedited hearing procedure as left to the discretion of the trial court.
To further assist a party seeking relief from the court to compel a shareholders' meeting, the Legislature provided suggested forms, including one titled "Application by Shareholder Requesting Designation of Annual Meeting—Failure of Corporation to Hold Annual Meeting" to bring an action under section 600, subdivision (c). The short form, at paragraph 5, explains that the result of the failure of a corporation to hold a meeting is that "the shareholders of defendant corporation have been deprived of the opportunity to participate in the management of the affairs of defendant and to ascertain the condition of the business operated by defendant, and have been completely cut off from any information regarding the operation and financial position of defendant." (Suggested forms foll. § 600, Deering's Ann. Corp. Code, supra, at p. 18.)
California law is clear that directors or shareholders should not be able to subvert the corporate requirements to retain power. "Certainly no directors of a corporation, whatever their number, may perpetuate themselves in office by refusing to call an election." (Burnett v. Banks (1955) 130 Cal.App.2d 631, 634.) "It is clear that the court has the right [to order an election] when it appears that a corporation election will not be held because of the failure of its directors to call it, or that such directors will not conduct a free, fair and full election ...." (Id. at p. 635; see Singh v. Singh (2004) 114 Cal.App.4th 1264, 1278.) In most every circumstance, allowing the trial court unfettered discretion to decide whether shareholders' meetings should be held is contrary to the intent of the Legislature in enacting section 600 to require the meetings.
However, the use of the term "may" in section 600, subdivision (c), raises the question to what extent the Legislature intended to vest the court with discretion to order a shareholders' meeting. Delaware courts have addressed this issue with regard to its nearly identical statutory provision to compel shareholders' meetings.
B. Delaware Law and Scope of Court's Discretion to Compel Shareholders' Meetings
The state of Delaware has a nearly identical code section providing authority for the court to summarily order shareholders' meetings. (See 8 Del. Code, § 211, subd. (c) ["If there be a failure to hold the annual meeting ... for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months" after the last annual meeting, the court "may summarily order a meeting to be held upon the application of any stockholder or director" (italics added)].) Courts can "'properly rely on corporate law developed in the State of Delaware given that it is identical to California corporate law for all practical purposes.'" (Apple Inc. v. Superior Court (2017) 18 Cal.App.5th 222, 244, fn. 9.; see Shields v. Singleton (1993) 15 Cal.App.4th 1611, 1621 [analyzing demand futility under California law, but noting the parties viewed both states' laws as substantially the same].)
In Saxon Industries, Inc. v. NKFW Partners (Del. 1984) 488 A.2d 1298 (Saxon Industries), the Delaware Supreme Court decided that the court properly compelled a stockholders' meeting under section 211 of Delaware's General Corporation Law (Section 211), despite an automatic stay based on the corporation's pending reorganization under Chapter 11 of the Bankruptcy Code. (Saxon Industries, supra, at p. 1299.) The court began by noting that "absent other compelling legal or equitable factors, insolvency alone, irrespective of degree, does not divest the stockholders of a Delaware corporation of their right to exercise the powers of corporate democracy." (Saxon Industries, supra, at p. 1300.) "'[G]iven the importance of an annual meeting of stockholders in the administration of corporate affairs, "prompt" relief is essential under § 211.'" (Id. at p. 1302.)
The Delaware Supreme Court considered the language "'may summarily order'" in Section 211 and found the provision permissive in nature. (Saxon Industries, supra, 488 A.2d at p. 1301.) However, although finding the provision permissive, the Delaware Supreme Court stated that once a prima facie case under Section 211 had been made, "no Delaware decision has declined to convene a stockholders' meeting, or refused to require a meeting to be held as scheduled." (Saxon Industries, supra, at p. 1302.) Accordingly, while courts are not mandated to order a meeting under Section 211, however, the law strongly protects the rights of shareholders. "Although that provision does not mandate such a result, this Court has recognized that a stockholder's right to have a meeting convened to elect directors is 'virtually absolute.'" (Saxon Industries, supra, at p. 1301.)
Based on the statutory language of Section 211, the Delaware Supreme Court held that the movant need only make a prima facie showing that they are a stockholder of the corporation and that the corporation has not held a meeting under either of the time requirements described in the statute to be entitled to relief. (Saxon Industries, supra, 488 A.2d at p. 1301.) "Nonetheless, a stockholder's prima facie case can be defeated by an adequate affirmative defense." (Ibid.) While in certain instances adequate affirmative defenses could form the basis for a court not ordering a meeting, the court placed limitations on the defense, namely, that the motive for moving for a meeting, "whatever its inspiration, is immaterial." (Ibid.)
The Delaware Supreme Court explained that an "appropriate balance must be struck between the Bankruptcy Code and our General Corporation Law. But given the strong Delaware policy behind the free exercise of a stockholder's right to elect directors, and the absence of that focus in the pending bankruptcy proceedings, the scales necessarily tip in favor of the former." (Saxon Industries, supra, 488 A.2d at p. 1302.) The court found the alleged harm that a shareholders' meeting may convince a buyer to retract its offer to acquire the company out of bankruptcy "too ethereal to constitute an adequate affirmative defense to a section 211 action." (Id. at p. 1303.)
In light of the authority from Saxon Industries, lower courts in Delaware have "jealously protect[ed] the right of a stockholder to seek an order compelling an annual stockholder meeting ...." (Opportunity Partners, L.P. v. Transtech Serv. Partners, Inc. (Del.Ch., Apr. 14, 2009, Civ. A. No. 4340-VCP) 2009 Del.Ch. Lexis 49, at pp. 10-11.) After the issuance of Saxon Industries, there is at least one instance in which a lower Delaware court has declined to order a shareholders' meeting under Section 211. (Clabault v. Caribbean Select, Inc. (Del.Ch. 2002) 805 A.2d 913, 918 (Clabault).) In Clabault, a private company was attempting to conduct a "reverse merger" as a method to become a publicly traded company without fulfilling the ordinary disclosure and registration obligations of a newly public company. (Id. at p. 915.) The private company arranged to be acquired by Caribbean Select, Inc., a company that declared bankruptcy and was liquidated over a decade earlier but, due to a filing error, was never officially dissolved. (Id. at p. 914.) The result would have been that the private company could go public more quickly and with less expense than it could following the normal, regulated pathway to achieving public corporation status. (Id. at p. 915.) Despite acknowledging that "Section 211(c) strongly favors the convening of an annual meeting" (id. at p. 917) and "that discretion will rarely be exercised to refuse a request" (id. at p. 915), the court in Clabault chose not to order a shareholders' meeting where it was part of "a plan to make an 'end run' around the federal rules and regulations governing the public trading of securities" (ibid.) and that the other shareholders of the corporation would not likewise enjoy a material benefit from the actions (ibid.). Accordingly, the court was satisfied that it would be an abuse of discretion to facilitate the plaintiffs' efforts to achieve its questionable ends and declined to order an annual meeting. (Ibid.)
III. Analysis
Respondents do not challenge that appellants made a prima facie showing under section 600 in that appellants are shareholders of the Ielmini Entities and the requisite time has passed since the last shareholders' meeting occurred. Instead, respondents assert that the court did not abuse its discretion in denying the application to compel shareholders' meetings because of the stay in effect under section 2000 and that a meeting would be futile because it is not likely that the shareholders could effectively govern as a group.
We begin with the contention that the stay of the dissolution would prohibit the parties from convening a shareholders' meeting. Under the corporate buyout provisions of section 2000, if the purchasing parties wish to avoid dissolution of the corporation, they may move to purchase the shares of those moving for dissolution. If so, section 2000, subdivision (b), directs that the court "shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair value of the shares owned by the moving parties." Starting with the statutory language itself, while section 2000 directs the court to stay the dissolution proceeding, it is silent with regard to staying or otherwise inhibiting the day-to-day operations of the underlying entities. Section 2000, subdivision (b), explicitly directs only that the dissolution action be stayed, a necessary step to keep the corporation in existence during the attempted buyout. We have not been presented any evidence that the day-to-day operations of any of the Ielmini Entities have ceased or that respondents are not actively managing them.
Respondents argue that although the section does not specifically state that the stay applies to the ongoing management and operation of the corporation, the statute should be interpreted broadly so that it prevents routine annual voting of directors by the shareholders. We do not find that the text of section 2000, or the overall legislative scheme, supports such an expansive view of the stay. (Rodriguez, supra, 1 Cal.5th at p. 686; accord, People v. Zambia, supra, 51 Cal.4th at pp. 976-977.) Respondents' interpretation would be inconsistent with the wide range of statutory rights a shareholder possesses to participate in corporate affairs, including the jealously protected right to compel annual shareholders' meetings. (Stephenson v. Drever, supra, 16 Cal.4th at p. 1176; accord, Opportunity Partners, supra, 2009 Del.Ch. Lexis 49, at pp. 10-11.)
It also would be inconsistent to determine that the stay under section 2000 is a basis for not compelling the parties to hold a shareholders' meeting when the more restrictive stay in place during federal bankruptcy did not preclude a compelled meeting. (Manville Corp. v. Equity Sec. Holders Comm. (In re Johns-Manville Corp.) (2d Cir. 1986) 801 F.2d 60, 64.) ["[T]he right to compel a shareholders' meeting for the purpose of electing a new board subsists during reorganization proceedings."].) "As a consequence of the shareholders' right to govern their corporation, a prerogative ordinarily uncompromised by reorganization, 'a bankruptcy court should not lightly employ its equitable power to block an election of a new board of directors.'" (Ibid.)
Likewise, the pendency of a buyout proceeding under section 2000 does not alter the rights of shareholders. (Abrams v. Abrams-Rubaloff & Associates, Inc. (1980) 114 Cal.App.3d 240, 250 (Abrams).) Until the shareholder's stock is actually purchased, the shareholder continues to accrue benefits and liabilities arising therefrom. (Ibid.)
Nor is the fact that appellants wish to protect their financial interests in the Ielmini Entities a sufficient affirmative defense for a court to deny an application to hold a shareholders' meeting. While such motive is not likely even relevant to such an inquiry (Saxon Industries, supra, 488 A.2d at p. 1301), respondents have presented no evidence to show that appellants intend to act in bad faith, or appoint directors to the corporation that would do anything more than make sure that appellants' interests are taken into consideration.
Respondents also contend that appellants no longer have any financial interest in the corporation because, should the buyout proceed, the value of the buyout is based on the value of the corporation on the date of the initiation of the dissolution proceeding. The record affords little information concerning the status of the buyout, but it does reflect that buyout proceedings were initiated roughly four years ago. Nothing in section 2000 addresses the profits and liabilities accruing during the buyout process while the appellants remain shareholders and retain a direct financial interest in the operations of the corporations. Moreover, it is also possible that the buyout may never occur. (Abrams, supra, 114 Cal.App.3d at pp. 250-251 ["[T]he election pursuant to section 2000 does not amount to a firm commitment to purchase, and the corporation could still be dissolved."].) Respondents failed to present the trial court with an adequate affirmative defense to overcome the strong presumption that a shareholders' meeting should be compelled.
"A shareholder without a shareholder's rights is at best an anomaly, and at worst a shadowy figure in corporate limbo who would be voiceless in the conduct of the business of which he is part owner and largely defenseless against neglect or overreaching by management." (Stephenson v. Drever, supra, 16 Cal.4th at pp. 1177-1178.) For over seven years, appellants have not been able to appoint directors, or for that matter, reach deadlock allowing them to seek further judicial remedies. Even though appellants initiated a dissolution proceeding, the Corporations Code nonetheless directs corporations to elect officers and to continue the conduct of the business despite the commencement of a dissolution proceeding. (§ 2001; Trahan v. Trahan (2002) 99 Cal.App.4th 62, 72 ["'Neither a voluntary election to dissolve, nor court order for involuntary dissolution, automatically terminates the corporation's existence or its business.'"].) In continuing to operate the business entities, the Angelo faction owed the remaining shareholders a fiduciary duty and "'may not use their power to control corporate activities to benefit themselves alone or in a manner detrimental to the [other shareholders]. Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation's business.'" (Stephenson v. Drever, supra, at p. 1178.)
Nothing in the language of section 600 contemplates scenarios in which annual shareholders' meetings of active corporations are not required to be held, regardless of whether the parties have sought federal bankruptcy relief or corporate dissolution and buyout of shares. Moreover, to do so with the objective of limiting control or access to the remaining shareholders would be in violation of the fiduciary duty owed to those shareholders.
IV. Deadlock of Shareholders Voting for Directors
Here, the court based its decision to not order annual shareholders' meetings because of the potential futility of an election of the shareholders that would end in deadlock. Deadlock of a closely held corporation based on two competing shareholder factions is a common enough occurrence that the Corporations Code contains provisions that contemplate such a situation. Rather than allow one competing faction of shareholders to retain control if the shareholders at their annual meeting cannot agree to the appointment of new directors, various code sections provide for judicial relief to ensure that the deadlock can be avoided. "Perpetuation in office of an incumbent majority, as a result of a shareholder deadlock which prevents election of a successor board, will ordinarily only occur when there are two competing factions each holding 50 percent of the voting power, since if one faction or one cooperating group of factions holds more than a majority of the voting power it or they can elect a majority of an uneven-numbered board at an annual meeting of shareholders." (1 Ballantine & Sterling, Cal. Corporation Laws, supra, § 82.02, fn. 13.) Should such a deadlock occur, the superior court of the proper county is empowered to appoint a provisional director or directors on petition of a shareholder or shareholders holding 50 percent or more of the voting power. (§ 308, subd. (b).) Section 308, subdivision (b) states:
"If the shareholders of a corporation are deadlocked so that they cannot elect the directors to be elected at an annual meeting of shareholders, the superior court of the proper county may, notwithstanding any provisions of the articles or bylaws, upon petition of a shareholder or
shareholders holding 50 percent of the voting power, appoint a provisional director or directors pursuant to this section or order such other equitable relief as the court deems appropriate."Here, the trial court, after acknowledging the ability to appoint neutral directors, posited that it would be futile to do so. However, that is not necessarily the case, as if appointing one neutral director would not resolve the deadlock, then the court is vested with the authority to appoint more than one director.
"Unlike a deadlock on an even-numbered board of directors, where appointment of a single provisional director will break the deadlock, appointment of a single director to an uneven-numbered board (thereby creating an even-numbered board) may simply produce a deadlock among an even number of directors thereby transferring the shareholder deadlock to the board." (1 Ballantine & Sterling, Cal. Corporation Laws, supra, § 82.02.) "This could occur if members of a nondeadlocked, uneven-numbered board vote in accordance with the respective shareholder factions electing them so that a single provisional director could create a deadlocked board if he or she voted with the previously minority faction on the board." (Ibid.) "For this reason the superior court is granted the power to appoint one or more provisional directors to prevent creation of a deadlock and also to end control of a board by the incumbent majority, which will have been elected or perpetuated in office by only 50 percent of the voting power of the corporation." (Ibid.)
The present situation was contemplated by the Legislature, and sections 600 and 308 were enacted to break the deadlock of two shareholder factions, to ensure that the governance of a corporation is equitable. Rather than provide appellants the right to vote their shares, the trial court anticipated deadlock, but deprived appellants of the remedies designed to ensure fairness in that situation. By failing to compel the requested annual meeting, appellants were left powerless to stop the perpetuation of control of the board by the Angelo faction or seek judicial relief to appoint neutral directors under section 308. While we join Delaware courts in holding that the court has discretion to order shareholders' meetings under section 600, subdivision (c), based on the strong policy behind the free exercise of a stockholder's right to elect directors that borders on being virtually absolute, the trial court abused its discretion in denying the application to compel shareholders' meetings. The present dispute, arising from the inability of family members to work together to continue to operate the family business regularly occurs, and is not such an extraordinary occurrence as to find the court's decision to deny appellants the right to convene a shareholders' meeting reasonable.
We adopt the standard set forth under Delaware law, providing courts to use discretion to to order shareholders' meetings in extraordinary circumstances, based on the sound reasoning of the decisions of the Delaware courts, and to maintain uniformity between the jurisdictions. (Apple Inc. v. Superior Court, supra, 18 Cal.App.5th at p. 244, fn. 9.) However, we also find strong support for finding section 600, subdivision (c) to be mandatory, rather than discretionary, and that the "may" in the phrase "may summarily order" only modifies the word summarily. Under such an interpretation, courts would have discretion to expedite the process to determine whether a shareholders' meeting should be ordered, but would not have the discretion to decline to order the parties to hold a meeting upon a showing of the criteria set forth in section 600, subdivision (c). Under either standard, the result here would be the same.
V. Motion to Dismiss Appeal
We briefly address respondents' motion to dismiss the appeal. Respondents contend that the appeal should be dismissed because it was an impermissible splitting of causes of actions and that it violates the stay issued by the trial court.
Respondents' motion was to dismiss or, in the alternative, stay the appeal. Having previously denied the motion to stay, we shall address the remaining issues relevant to the motion to dismiss.
"An appellate court has the inherent power to dismiss an appeal by a party that refuses to comply with a lower court order." (Gwartz v. Weilert (2014) 231 Cal.App.4th 750, 757, citing Stoltenberg v. Ampton Investments, Inc. (2013) 215 Cal.App.4th 1225, 1229 (Stoltenberg).) This doctrine of disentitlement is not jurisdictional, but is a discretionary tool that may be used to dismiss an appeal when the balance of the equitable concerns makes dismissal an appropriate sanction. (Stoltenberg, supra, at p. 1230.) The rationale underlying the doctrine is that a party to an action cannot seek the aid and assistance of an appellate court while standing in an attitude of contempt to the legal orders and processes of the courts of this state. (Ibid.) An appellate court may dismiss an appeal where the appellant has willfully disobeyed the lower court's orders or engaged in obstructive tactics. (Ibid.)
Respondents contend that dismissal is appropriate because appellants' actions of filing the application to compel a shareholders' meeting and this appeal are an attempt to circumvent the court-ordered stay of the dissolution action pending the buyout proceeding. We have already addressed and held that the stay pursuant to section 2000 was limited to the dissolution proceeding and did not extend to the continued management of the corporation. Accordingly, appellants did not act in violation of the trial court's stay when moving the trial court to compel shareholders' meetings.
Nor is this action an impermissible splitting of appellants' cause of action. "The cases have invoked the rule against splitting causes of action in order to abate a later suit or bar it on res judicata grounds when that suit alleged a different theory of recovery for the same injury [citations], or a different remedy for the same injury [citations], or a somewhat greater factual elaboration of the same injury [citations]." (Grisham v. Philip Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 642.) Appellants correctly argue that the action under section 600 is fundamentally different from causes of action in the dissolution action. Here, appellants seek to enforce their right to shareholders' meetings, whereas the dissolution action sought damages and equitable relief based on the breach of respondents' fiduciary duties to appellants and the Ielmini Entities. The actions seek different remedies for different injuries. The motion to dismiss is denied.
DISPOSITION
The judgment is reversed and remanded to the superior court to order that the Ielmini Entities hold shareholders' meetings as authorized under Corporations Code section 600, subdivision (c). Respondents' motion to dismiss the appeal is denied. Appellants are entitled to their costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1).)
/s/_________
MEEHAN, J. WE CONCUR: /s/_________
HILL, P.J. /s/_________
SMITH, J.