Court Finds No Right To Prejudgment Interest In Buy-Out Of Shares

Section 1800 of the California Corporations Code authorizes specified persons to file a complaint for involuntary dissolution of the corporation based on specified grounds.   Section 2000 provides an "escape hatch" by which involuntary dissolution may avoided by the corporation may purchase for cash the shares owned by the plaintiff.  If the corporation does not elect to purchase this right may be exercised by the holders of 50% or more of the corporation's "voting power".   The statute requires that the valuation date be the date on which the involuntary dissolution action was commenced, but allows the court upon the hearing of a motion by any party to designate some other date.

Valuations under this procedure can take time.  In the case of Crane v. R.R. Crane Investment Corp., Inc., 2022 WL 3714406, the buy-out process took about three years.  Consequently, the plaintiff sought prejudgment interest on the value of his shares.  The plaintiff argued that he was entitled to recover interest pursuant to Civil Code Section 3287 which prescribes interest for "damages".  The Court of Appeal disagreed finding that Section 2000 creates an optional business exchange "within the prerogative of the buyer".   The court also rejected the plaintiff's argument that he was entitled to payment under Section 3288 which applies to actions for breach of an obligation not arising from contract and "in every case of oppression, fraud, or malice".  

The plaintiff in Crane alleged that during the extended valuation period, the corporation failed to make its usual distributions.  Presumably, these retained earnings would be captured in an increased valuation.  The plaintiff did seek a later valuation date, but the trial court denied his request and the plaintiff did not ask the appellate court to review that decision.

Finally, readers should be aware that Section 2000 is also available in voluntary dissolution proceedings initiated by the vote of shareholders representing only 50% of the "voting power" of the corporation.   

Tags: dissolution