Defendants, a management company and its directors

Defendants, a management company and its directors

Defendants, a management company and its directors, appealed a judgment from the Superior Court of San Mateo County (California), which, in a suit brought by plaintiff minority shareholder pursuant to Corp. Code, § 709, set aside the election of new directors to the boards of corporations that had contracted with the management company for its services and invalidated several of the underlying corporate transactions.

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Overview

The majority shareholders of a group of family-owned corporations voted to restructure the boards of directors, placing the management company in control. The minority shareholder asserted breach of fiduciary duty and conflict of interest allegations, contending that the majority shareholders had a disqualifying financial interest because they had obtained loans from the management company. The complaint did not join the majority shareholders, and the trial court did not award relief against them. The court held that because a § 709 action was in the nature of an equitable proceeding to determine all questions that could affect the validity of a contested election, breach of fiduciary duty and conflict of interest allegations on which an election contest was based could be decided in the proceeding. The summary nature of the proceeding did not violate due process absent a showing of prejudice. The majority shareholders were indispensable parties whose joinder was required under Code Civ. Proc., § 389, subd. (a)(2), because invalidating the agreements with the management company impaired or impeded their ability to protect their interests as to the loans and related transactions.

Outcome

The court reversed and remanded with instructions to require joinder of the majority shareholders as indispensable parties.

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