Theories of Liability & Common Defenses

A California corporate director must perform duties in good faith, in a manner believed to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances (Corp. Code § 309). The Business Judgment Rule (BJR) presumptively insulates informed, conflict-free decisions from judicial review — but the plaintiff can rebut the presumption by showing the director lacked a rational basis, was uninformed, or acted in bad faith. Gross negligence in oversight may also constitute a non-exculpable breach.

Directors and officers owe an undivided duty of loyalty to the corporation. An interested-director transaction (where a director has a material financial interest in the outcome) is voidable unless: (1) it is fair to the corporation; (2) it is approved by disinterested directors with full disclosure; or (3) it is approved by disinterested shareholders (Corp. Code § 310). Controlling shareholders also owe a fiduciary duty to minority shareholders not to use corporate power to advance their own interests at the minority's expense — the central holding of Jones v. H.F. Ahmanson & Co. (1969) 1 Cal.3d 93.

A shareholder may bring a derivative action on behalf of the corporation to recover for injury done to the corporation. California requires: (1) a verified complaint; (2) a pre-suit demand on the board or a showing of demand futility; (3) continuous shareholder status; and (4) a security-for-expenses bond (unless the plaintiff holds >5% or >$50,000 in shares). Bader v. Anderson (2009) 179 Cal.App.4th 775 established the California demand-futility standard: the plaintiff must plead particularized facts showing a majority of the board was interested or lacked independence.

Minority shareholders may petition for involuntary dissolution of a California corporation on grounds including: (1) deadlock in management; (2) fraudulent, oppressive, or illegal acts by those in control; or (3) failure to elect directors. Corp. Code § 2000 permits a majority to avoid dissolution by electing to purchase the petitioning minority's shares at fair value — creating a judicially supervised buyout mechanism. The fair value is determined by an appraiser or court, without marketability or minority discounts.

California recognizes shareholder oppression as a ground for both direct and derivative liability. Oppressive conduct — freeze-outs from employment and distributions, exclusion from corporate information, dilutive issuances without legitimate business purpose — violates the controlling shareholder's fiduciary duty to minority shareholders. California's broader protections (compared to Delaware) make minority-shareholder oppression claims a relatively accessible cause of action in closely-held corporations.

Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138 held that a third party who knowingly provides substantial assistance to a fiduciary's breach is jointly and severally liable. Elements: (1) the fiduciary breached their duty; (2) the defendant had actual knowledge of the breach; and (3) the defendant rendered substantial assistance. This theory is particularly useful against attorneys, accountants, lenders, and advisors who enabled or facilitated a controlling shareholder's or officer's misconduct.