Important New Case: California Corp. Code §709 Permits Challenges to the Election or Appointment of a Director on Breach of Fiduciary Duty and Conflict of Interest Grounds, and on Any Other Legally Recognized Ground

California Corporations Code §709 allows any shareholder or any person who claims to have been denied the right to vote to file a petition in the appropriate California Superior Court to determine the validity of any election or appointment of any director of a California corporation or, of any foreign (non-California) corporation if the election was held or the appointment was made in California. Section 709 provides for a summary proceeding.

Pursuant to §709, in pertinent part, upon the filing of the complaint, and before any further proceedings are had, the court shall enter an order fixing a date for the hearing, which shall be within five days unless for good cause shown a later date is fixed, and requiring notice of the date for the hearing and a copy of the complaint to be served, and the court may make such further requirements as to notice as appear to be proper under the circumstances.

Section 709 further provides that court may determine the person entitled to the office of director or may order a new election to be held or appointment to be made, may determine the validity, effectiveness and construction of voting agreements and voting trusts, the validity of the issuance of shares and the right of persons to vote and may direct such other relief as may be just and proper.

Morrical v. Rogers (California Court of Appeal, First Appellate District, Case No. A137011, October 10, 2013) involved a dispute and litigation between the shareholders of a group of family corporations. The Court of Appeal for the First Appellate District held that challenges under §709 are allowed not only on the grounds of breach of fiduciary duty and conflict of interest (a corporate shareholder challenged an election of corporate directors based on the alleged violation of §310 governing corporate transactions with companies in which one or more corporate directors have a material financial interest) but also that the plain language of §709 restricts only standing to bring an action – it says nothing about the grounds on which persons with standing may challenge the validity of an election – §709 does not restrict the grounds on which the validity of an election can be challenged.

Dave Tate, Esq. (San Francisco)

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