Legal Question in Business Law in California

A California corporation's power, right or privilege to do most business, including entering into contracts, is indeed suspended while the corporation itself is in "suspended" status. See Revenue & Taxation Code section 23301. This sounds like the suspended corporation is, in effect, shut down by the law ....... can't sell merchandise, can't pay its payroll or rent, etc.

However, the practical effect of a so-called "suspension" is rather more limited. A suspended corporation cannot sue or defend in court, and any contracts it makes during suspension are voidable (not void) at the option of the other party, but not at the option of the corporation. Further, the right of the other party to have a contract declared void requires the other party to file a lawsuit against the suspended corporation. The court must then order the rescission of the contract, subject to two conditions: (1) the other party must give back any benefits it has received under the contract; and (2) the suspended corporation must be given a reasonable opportunity to cure the voidability (i.e., by getting itself revived and out of suspension).

So, you see, despite the superficial lack of "power" to make contracts, a suspended corporation can in reality plod along and do business pretty much as usual. It is on thin ice, of course, since it'll be powerless to enforce its contracts unless and until it gets back in good graces.

As a shareholder, you have the legal power to apply for reinstatement. See R&TC;23305. Indeed, the main purpose of the suspension law is to coax someone into paying the taxes. You may have additional indirect influence on the situation through your exercise of other shareholder rights, such as voting at shareholder meetings, making inspections of the books and records, and the like.

Without more information as to the relative size of the corporation (are its balance sheet footings in the hundreds or the millions?) and how many shares, directors, years of operating history, etc. are involved, I can't give more specific assistance. What do the bylaws say about the CEO's authority to act without board approval? Is the patent a sufficiently major asset? How liquid is the corporation? What do the other officers, directors and shareholders think? Have they been consulted? There are many questions that a lawyer would want to ask before suggesting decisive action. Needless to say, the fact that someone has allowed the corporation to become suspended is pretty strong evidence of either less-than-competent management, or a severe liquidity problem.

Please feel free to contact me directly for further discussion.