Legal Question in Business Law in California

Re: Owner rights within an S Corporation

Yes, you have rights regarding the S Corporation. The sherrif cannot do anything without a court order, which will require time and money.

When did he "Start the process"?

You probably will want to disolve the corporation, too, under the circumstances. However, you need someone to review the corporate documents and papers to see exactly what the Articles of Incorporation states, any by-laws or other agreements.

Re: Owner rights within an S Corporation

Your starting point is to review the corporation's bylaws and articles of incorporation, and also any private contract or agreement between the two of you covering the formation and operation of this corporation. Then also look at all valid resolutions of the board of directors, and the makeup of the board. Anything you find in the articles, bylaws, or resolutions of the corporation or your contracts MAY modify the general law applicable to deadlocks and dissolution.

If you don't find anything, here are a few of the rules that govern:

(1) A corporation with two stockholders must have at least two directors. This doesn't necessarily mean you are the second director (or even that the corporation has followed the law and elected two directors), but with 50% of the stock you would have had the voting power to elect yourself.

(2) The law largely governing your situation is found at Corporations Code section 1800 et seq., and is entitled 'INVOLUNTARY DISSOLUTION.' If you read the Code on the Web, you'll see that deadlock between an even number of directors or equal 50% shareholders is a ground for dissolution. See 1800(b)(2) and (3).

Dissolving a corporation under deadlock conditions requires (with minor exceptions) a court decree. The Code describes the procedure, which usually starts with a verified complaint filed by one faction or the other,

(3) Typically, the court will appoint a tie-breaking director to determine issues necessary to handle the dissolution smoothly. Code section 1802. The court can appoint a receiver if necessary, section 1803.

(4) If the corporation is dissolved, its assets and liabilities will be divided by the court, somewhat like a divorce. The faction opposed to dissolution is entitled to an appraisal of the value of its interest in the corporation and to compensation by the faction demanding dissolution.

Due to the high cost of a formal dissolution proceeding, most squabbling small corporations arrive at an informal solution, often leaving the corporate shell to become delinquent (on franchise taxes) and thus become inactive. No lawyer would go out on a limb and recommend this because of potential liability for the former directors, but the fact is it happens all the time.

So, the bottom line is that the sheriff isn't about to come calling unless there has already been a heckuva lot of court activity already, including service of a summons and verified complaint on you. However, you need to REVIEW all the documents mentioned above to be sure there is nothing therein that affects my comments about the more general law.