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What Happens When A Board Fails To Determine The Fair Value Of The Consideration For Shares?

California Corporations Code Section 409(e) imposes a duty on the board of directors to determine "the fair value to the corporation in monetary terms of any consideration other than money for which shares are issued".  Does a board's failure to make this determination affect the valid issuance of the shares?  A recent ruling by Bankruptcy Judge M. Elaine Hammond suggests that it does:

"As an initial matter, the issuance of shares to Lindley did not satisfy the requirements of Cal. Corp. Code § 409(e).  Coastal's board was required to determine the fair value of Lindley's non-monetary consideration and state its determination by board resolution. Lindley provided no evidence that this occurred."

MUFG Union Bank, N.A. v. Brower (In re Brower), 2019 Bankr. LEXIS 3609.  Judge Hammond also found that the putative shareholder failed to provide any consideration to the corporation.  Thus, her statement could be viewed as dicta.

In any event, it is inconsistent with the position taken by the Corporations Committee of the Business Law Section of the California State Bar in its 2005 report on legal opinions in business transactions:

"The GCL does not, however, require any specific amount of consideration for the issuance of shares.  Thus, the failure of the board of directors to make that determination should not affect the validity of the issuance, but rather the fulfillment of the directors' fiduciary duty."

The Corporations Committee supports this position by citing a Georgia Supreme Court decision interpreting a similar statute.  Crowder v. Electro-Kinetics Corp., 228 Ga. 610, 187 S.E. 2d 249 (1972).  

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