MBE Rules · Business Associations
Involuntary Dissolution
Cal. Corp. Code § 1800
The rule
Half the directors or one-third of shareholders may seek dissolution for deadlock, persistent mismanagement, fraud, or abuse; in close corporations the other shareholders may avoid dissolution by buying out the movant at fair value.
In plain English
Involuntary dissolution occurs when a significant portion of a corporation's directors or shareholders request to dissolve the company due to issues like deadlock, mismanagement, fraud, or abuse. In close corporations, the remaining shareholders can prevent this dissolution by purchasing the shares of the shareholder seeking dissolution at a fair price.
Worked example
In a close corporation with three shareholders, two shareholders want to dissolve the company due to ongoing disputes and mismanagement by the third shareholder. The third shareholder, however, offers to sell their shares at fair value to the other two. The other shareholders accept the offer, thus avoiding dissolution of the corporation.
Memory hook
Deadlock or fraud? Buy out to avoid the dissolution drought!
The trap
Exams often present scenarios where students must distinguish between close and non-close corporations, leading to confusion about the buyout option. Students may overlook the requirement for fair value in buyouts.
How examiners test it
Questions typically involve a fact pattern describing a corporate deadlock or mismanagement, followed by options for resolution, testing knowledge of both dissolution and the buyout mechanism.
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