Corporation Shares- Whose Share Is It Anyway?

Whose Share Is It Anyway?

My family loves the television show “Whose Line Is it Anyway.” It is a brilliant comedy improve by some incredibly gifted comedians. The host sets up a premise, skit, or whatever, and the comedians have to create the scene, action or what have you RIGHT ON THE SPOT! More amazingly, they are almost without fail very funny. Usually, we are laughing hysterically. I guess they call it “Whose Line Is It Anyway,” because they all just jump in and do whatever comes to mind without worrying about whose line it is. Naturally, this leads me to the topic of outstanding shares of privately held corporation stock. Of course it does. Naturally. Let me explain.

I have a client. The client is a California corporation. When the shares of stock of the client were initially issued some 40 plus years ago, minutes were prepared that clearly reflected the following:

Shareholder A received 500 shares

Shareholder B received 500 shares

Shareholder C received 100 shares

Shareholder D received 90 shares

Shareholder E received 90 shares

The above share issuance was also clearly reflected in the share certificates and share certificate “stubs” in the client’s stock record book from 40 years ago. So far, so good.

About 20 years ago, Shareholders A – E executed an amended shareholder’s agreement. In the body of the shareholder’s agreement the shares held by the shareholders were recited as follows:

Shareholder A held 500 shares

Shareholder B held 500 shares

Shareholder C held 100 shares

Shareholder D held 80 shares

Shareholder E held 80 shares

This discrepancy also showed up in a couple other places in the client corporate records.

There is no record or explanation in any of the client’s corporate records for why Shareholders D and E now held 80 shares. None of the shareholders could explain it. Was it a typo? Was it a mistake? Did Shareholders D and E somehow transfer away 10 shares each? Did the shares in question just magically disappear? Were the shares taken by the “share burglar” (think McDonald’s Hamburglar)? Was it the result of gravitational anomalies? Did the dog get tired of eating the kids’ homework and eat the shares instead? What the heck happened? No answers. None. So now what? How do we determine what shares were issued? WHOSE SHARE IS IT ANYWAY? (Clever, huh?).

The term “issuance of shares” is not defined either in the General Corporation Law or in the Corporate Securities Law, but basically refers to the act or contract of a corporation by which a person becomes the owner of new shares. The intent of the parties determines when issuance actually occurs, and their contract frequently discloses this intent [see People v. Beber (1951) 104 Cal. App. 2d 359, 367–368, 231 P.2d 516].

The corporation is required to keep a record of its shareholders at its principal executive office, or at the office of its transfer agent or registrar [Cal. Corp. Code § 1500]. This record gives the names and addresses of all shareholders of record, and the number and class of shares held by each. The record must be either in written form or in any other form capable of being converted into written form [Cal. Corp. Code § 1500]. So, what does this all mean? Let’s look at some of the cases interpreting Cal. Corp. Code § 1500:

If a corporation postpones the formal entry of record of the acts of its directors, they may be proved by parol testimony. Bay View Homestead Asso. v. Williams (Cal. Oct. 1, 1875), 50 Cal. 353, 1875 Cal. LEXIS 166.

Books of corporation are competent evidence to prove number of shares of stock subscribed for and issued, and who were stockholders at time alleged indebtedness accrued. Evans v. Bailey (Cal. Nov. 20, 1884), 66 Cal. 112, 4 P. 1089, 1884 Cal. LEXIS 703.

Testimony as to the contents of the minutes is an endeavor to prove the contents of a writing by evidence other than the writing itself. Nixon v. Goodwin (Cal. App. Apr. 2, 1906), 3 Cal. App. 358, 85 P. 169, 1906 Cal. App. LEXIS 330; Spangenberg v. Nesbitt (Cal. App. June 10, 1913), 22 Cal. App. 274, 134 P. 343, 1913 Cal. App. LEXIS 20; Lawrence v. Premier Indem. Assurance Co. (Cal. July 5, 1919), 180 Cal. 688, 182 P. 431, 1919 Cal. LEXIS 542.

Minutes are not a written instrument so as to preclude evidence as to what actually took place at a meeting. Lawrence v. Premier Indem. Assurance Co. (Cal. July 5, 1919), 180 Cal. 688, 182 P. 431, 1919 Cal. LEXIS 542.

So, to boil it down a little, we may:

1.       Look to the act or contract of the corporation,

2.       Look to the corporation’s books and record of shareholders,

3.       Look to the corporation’s minutes, and

4.       Resort to parol testimony (extraneous evidence) if needed.

Okay. At this stage, the corporation’s books, record of shareholders, and minutes seem to be more of a problem than a solution. The act or contract of the corporation does not help. It looks like we will be resorting to parol testimony for the time being. In the meantime, stay tuned for the next episode of Whose Share Is It Anyway?