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What Happens When A Corporation Cannot Afford To Pay Dissenting Shares?

Chapter 13 of the California General Corporation governs so-called "dissenters' rights".  In general, Chapter 13 provides that in certain specified transactions, a shareholder can require the corporation to purchase the shareholder's "dissenting shares" (as defined in Section 1300(b)) for cash at the shares' fair market value.  Because a corporation's purchase or redemption of its shares constitutes a "distribution to its shareholders" (as defined in Section 166), the purchase is subject to the constraints of Chapter 5 of the GCL.  If the corporation cannot meet the requirements of Chapter 5, it will be in the seemingly untenable position of being obligated under Chapter 13 to purchase dissenting shares while Chapter 5 forbids such repurchase.

Fortunately, Section 1306 supplies a way out of this dilemma.  It provides that to the extent Chapter 5 does not permit the payment for dissenting shares, the holders of those shares become creditors of the corporation in the amount owed plus interest at the legal rate on judgments until the date of payment.  They are, however, subordinate to all other creditors in a liquidation proceeding.  The corporation is obligated to pay for the shares when it is permissible under Chapter 5.

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California Corporations Code, General Corporation Law

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