Written by attorney Todd Eric Gallinger

Involuntary Dissolution of California Corporations, Limited Partnerships and LLCs

Involuntary dissolution is the choice of last resort for aggrieved investors and business owners. It is an extreme judicial remedy which comes about by a lawsuit from an investor, almost always a minority owner, who feels that they are being locked out of the business or otherwise treated unlawfully. Involuntary dissolution is not a preferred outcome, because it very rarely leads to any of the business owners getting a fair value for their investments. However, it is sometimes the only choice to those deprived investors.

The dissolution of a California corporation can only be initiated by a lawsuit brought by half of the directors or shareholders holding at least one-third of the issued shares. If these people bring a lawsuit, they must show that the company has either been abandoned, that the board is deadlocked and unable to make decisions necessary to run the business, that the shareholders are deadlocked and unable to reach necessary decisions, that the company and its investors have been the victims of fraud, mismanagement or abuse by the company’s managers, that the term for the corporation set forth in the Articles of Incorporation has expired, or, in a corporation of thirty-five (35) or fewer shareholders, that liquidation is necessary to protect the rights of the complaining shareholder.

A California limited partnership is a type of entity wherein a general partner, which runs the business, takes individual liability for the conduct of the company. Limited partners, who play no role in running the business, are protected from liability, like shareholders in a corporation. Although this is sometimes the best form under which to conduct business, most often used in real estate investments, it can lead to the general partner exercising their authority for their own benefit, rather for the benefit of all partners.

Under California law, any partner in a California limited partnership may bring a case for judicial dissolution. That individual partner must show that it is not practical to carry on the activities of the business in conformance with the partnership agreement. This means that the general partner must be exercising their powers in an unfair manner, and refusing to do otherwise, and that the limited partners have not been able to remove the general partner and/or that the business contemplated by the partnership agreement is impossible or illegal to currently conduct.

Many people are familiar with a Limited Liability Company (LLC), a relatively new statutory entity which provides liability protection to investors. If an investor in an LLC feels they are unfairly treated, they also can bring a case for judicial involuntary dissolution of the company. This lawsuit may be brought by any member (investor) or manager (those who run the company). In order to show that the company should be dissolved, the plaintiff in the lawsuit must show that it is not reasonably practicable to carry on the business in conformity with the Articles of Formation or the operating agreement, that dissolution is necessary to protect the rights of the complaining investor, that the business has been abandoned, that management is deadlocked in subject to internal dissention and unable to operate the business, or that there has been fraud, mismanagement of abuse on behalf of the managers.

If the plaintiff in any of these cases is able to prove what a statutory necessary for a court to dissolve the business, the court is then confronted with several options. It will, most often, order an auction of the business, wherein the business will be sold in its entirety as an operating concern. Rather, if the court concludes that it is in the best interest of the investors for the business assets to be sold separately, then it can so order. Of course, neither of these results are likely to be bring full value for any of the investors. For this reason, California offers escape from involuntary dissolution by the purchase at fair market value, set at the liquidation, i.e. auction value, by any of the investors. If any of the owners are willing to do this, then they can avoid this extreme judicial remedy.

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