Merlino v. Fresno MacAroni Manufacturing Co.

BARNARD, P. J.

The plaintiffs filed a complaint seeking the involuntary dissolution of the defendant corporation, based upon three of the grounds set forth in subdivision (B) of section 404 of the Civil Code. These grounds are that the holders of shares are so divided into factions that they cannot elect a new board of directors, that there is internal dissension and the two factions are so deadlocked that the business of the corporation cannot be conducted with advantage to its shareholders, and that the liquidation is reasonably necessary for the protection of the rights of the complaining stockholders.

The plaintiffs also secured an order to show cause why a receiver should not be appointed pending a hearing and determination of the dissolution issue. The request for the appointment of a receiver was heard and submitted upon the verified complaint, the verified answer of the individual defendants and an affidavit filed by the defendant Alfonso Borrelli. The court made an order appointing a receiver and the defendants have appealed from that order.

The main contention is that the individual defendants, who own 50 per cent of the stock of the corporate defendant, have elected to purchase the shares of stock owned by the respondents and have thereby brought themselves within the provisions of subdivision (B) of section 404 of the Civil Code, which provide, generally speaking, that under such circumstances the court shall stay the proceeding and shall proceed to fix the value of the plaintiffs’ shares in the manner therein provided; that these provisions are mandatory ; and that it follows that the court erred in ordering the appointment of a receiver.

The respondents contend that these provisions of section 404 (B) are directory and not mandatory, and that they merely authorize the court to proceed to a valuation of the plaintiffs’ shares when it feels that the equities are such as to call for such action. The statute in question reads, in part, as follows:

“. .. provided, however, that in any such suit the holders of

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50 per cent or more of the outstanding shares of the corporation shall have the right to avoid the appointment of a receiver or of the dissolution of such corporation by purchasing the shares of stock owned by the plaintiffs at their fair cash value. If 50 per cent or more of the outstanding shares of the corporation elect to purchase the shares owned by the plaintiffs and are unable to agree with the plaintiffs upon the fair cash value of such shares, and give bond with sufficient security to protect the interests and rights of the plaintiffs and to assure unto the plaintiffs the paymént of the value of their shares, the court shall stay the proceeding and shall proceed to ascertain and fix the value of the shares owned by the plaintiff.” (Here follows provisions for the manner in which the value of the plaintiffs’ shares shall be fixed.)