By Gerald P. Burleson, Member of the California Bar, and Dylan Contreras, J.D., 2019, California Western School of Law, and 2019 candidate for the California Bar
© 2019 by Gerald P. Burleson, all rights reserved
Under California law, a corporation is permitted to issue a tax, often called a levy, on any or all classes of the corporation’s outstanding stock. The corporation may issue a levy to help pay for its operations, expenses, or even its debts. (See Bottle Mining & Milling Co. v. Kern (1908) 9 Cal. App. 527; Sullivan v. Triunfo Gold & Silver Mining Co. (1866) 29 Cal. 585). This power, however, is limited by the corporation’s bylaws that indicate whether it has the power to levy assessments against its shareholders. (Cal. Corp. Code §423). Even if the corporate bylaws permit the board to issue a levy, there is ample case law and statute that protect shareholders from fraudulent, misleading or phony issued levies.
The threshold requirement is that any imposed levy must be necessary for the corporation, and there must not be an abuse of discretion by the board of directors or a fraud on the shareholders. This basic requirement is intended to protect shareholders who feel they are being targeted by the corporation or its board of directors. (See Koshaba v. Koshaba (1942) 56 Cal. App. 2d 302). Any corporation that levies an assessment must provide each shareholder with the underlying reason as to why the corporation is issuing the levy and, most importantly, the levy must be necessary for the corporation’s well-being. If this threshold requirement is not met, the shareholder can quash the levy by challenging its validity in court.
Next, a levy cannot be imposed on certain shareholders of one class of stock and not imposed on other shareholders of that same class of stock. California courts have held in numerous cases that a levy assessed against a certain shareholder or shareholders and not others of that same class is improper, and that the levy is void as a matter of law. (See Herbert Kraft Co. Bank v. Bank of Orland (1901) 133 Cal. 64). A corporation may, however, issue a levy to shareholders who own a certain class of stock and not shareholders who own a different class of stock. The corporation’s bylaws will indicate this distinction. (Cal. Corp. Code §423).
Furthermore, an assessment must be adopted through a corporate resolution at the board of directors’ regularly scheduled meeting or at a special meeting. (See Cheney v. Canfield (1910) 158 Cal. 342). At both types of meetings, the board of directors are required to keep minutes that detail the topics discussed, resolutions passed, and the corporation’s on-going and future business. (Cal. Corp. Code §8320). This simple and universal requirement is intended to inform and protect the corporation’s shareholders.
In Cheney v. Canfield this requirement was not satisfied. The corporate bylaws stated that the board of directors’ meeting would take place on the first Monday of every month. The board, however, chose to hold its monthly meeting on the first Tuesday of September because the first Monday was a national holiday. At the Tuesday meeting, the board of directors adopted a resolution to issue a levy against its shareholders. The court ruled that the levy was invalid because it was adopted at a board meeting that occurred on a Tuesday that was not a special meeting, and the corporation’s bylaws did not otherwise provide for such an event.
Any shareholder that is issued a levy should request a copy of the corporation’s bylaws and the board of directors’ meeting minutes including any resolution(s) to ensure the validity of the levy. A shareholder may obtain these documents by submitting a written request to the corporation and the corporation is required to provide these documents pursuant to Cal. Corp. Code §1600 and §1601.
The corporation’s bylaws will show what classes of stock are subject to a levy and what regulations the corporation must follow when issuing a levy, such as the maximum amount a levy can impose. The minutes will show the resolution adopted that provided the board with the power to issue a levy. The resolution will indicate whether the levy was imposed on one shareholder or a small group of shareholders and not others. With these documents, a shareholder can also determine if the corporation has multiple classes of stock and, if so, determine if the levy was issued to certain shareholders who own a certain class of stock and not others of that same class.
In sum, all imposed levies must be for an essential corporate purpose, levied to all shareholders who own the same class of stock, and be issued in accordance with the corporation’s bylaws. Shareholders are well advised to check these requirements as, if any are not met, the levy will be void.