Opinion
C042821.
10-23-2003
JAMES MICHAEL OVERTON, Plaintiff and Respondent, v. HYDRO PRODUCTS & TECHNOLOGIES, INC., Defendant and Appellant. DAN GARCIA et al., Plaintiffs and Respondents, v. HYDRO PRODUCTS & TECHNOLOGIES, INC., Defendant and Appellant.
When a corporation refused to abide by its own bylaws and hold an annual meeting at which directors would be elected, a major shareholder took matters into his own hands. He called a special meeting at which new directors were elected. He and others then filed this action to determine the validity of the shareholders meeting and the election. The trial court entered judgment finding the meeting and election valid. We affirm.
FACTS AND PROCEDURE
In 1996, plaintiff James Michael Overton, along with Stephen R. Wurzburger, founded and incorporated defendant Hydro Products & Technologies, Inc. (HPT), a company involved in methods for hazardous waste clean-up. In May 1999, Overton and Wurzburger entered into a written contract with HPT granting a license to HPT to use patents owned by Overton and Wurzburger. In return, Overton and Wurzburger received additional shares in HPT. In June 2001, HPT terminated Overton as an officer in the corporation and removed him from the board of directors.
In 2002, in preparation for HPTs annual meeting of shareholders, which the bylaws required to be held in May of each year, Overton obtained proxies from other shareholders. Along with his own shares, the proxies gave Overton a majority voting position for the annual meeting. HPT, however, refused to go forward with the meeting, during which directors would have been elected. Furthermore, HPT had only three directors, in violation of the bylaws requirement that the corporation have at least five and not more than seven directors.
In June 2002, Overton, as the holder of at least 10 percent of outstanding stock, requested a special meeting of shareholders, as permitted by the bylaws. The board of directors, however, ignored Overtons request. Also in June 2002, the board of directors issued one million shares of stock to Wurzburger, increasing the total number of shares outstanding and divesting Overton of his majority voting position. Soon after the HPT board issued the new shares, it gave notice to the shareholders of an annual meeting to be held August 8, 2002.
Also in June 2002, the HPT board filed a lawsuit against Overton in federal court. The complaint alleged several causes of action and sought recission of the patent licensing agreement, among other forms of relief. After asserting grounds for recission, the complaint stated: "Based upon these mistakes of law and fact, and the breach referenced herein, plaintiff HPT seeks to exercise its equitable remedy to rescind the License in its entirety and to require return of consideration issued to Overton by HPT. HPT therefore further seeks a judicial determination that the contract is hereby rescinded and that the share transactions previously entered into purporting to issue shares to Overton are to be rescinded on the same mistake of law or fact and failure of due consideration."
Overton inspected HPTs shareholder record on August 1, 2002. It reflected the issuance in June 2002 of one million shares to Wurzburger. Overton objected to the record, and HPT issued a "corrected" shareholder record on August 2, 2002, which did not include the newly issued shares. Overton continued to object to the record, arguing that it was inaccurate and overstated the outstanding shares. Citing the inaccuracy of the shareholder record, Overton sought and obtained from the Yuba County Superior Court a temporary restraining order enjoining HPT from going forward with an annual meeting until it produced an accurate shareholder record.
In September 2002, counsel for Overton met with counsel for HPT and came to an agreement concerning an accurate shareholder record. HPT prepared a new shareholder record, and Overton made a new request, as the holder of more than 10 percent of the voting shares, for a special shareholders meeting. Because HPT refused to issue a notice of a shareholders meeting consistent with Overtons request, Overton, following the corporation bylaws, gave notice himself on October 17, 2002, of a shareholders meeting to be held on November 7, 2002. HPT produced a shareholders record as of October 16, 2002, the record date for the special meeting. Counsel for HPT stated in a letter to counsel for Overton: "There is no dispute that Mike Overton is a holder of 10% of more of the shares of HPT."
On October 23, 2002, the three directors of HPT sent to shareholders a letter claiming that Overtons notice was "null and void" and that there would be no meeting of shareholders on November 7, 2002. The directors concluded: "At this time, we believe the earliest date we could schedule a shareholders [sic] will be sometime after January 15, 2003." Overton responded with a letter to shareholders stating that the meeting would take place on November 7, 2002, as noticed.
HPT sought a temporary restraining order in the federal court to prevent Overton from holding the special meeting. Judge William Shubb denied the application because he believed the validity of the meeting should be determined in an action in state court.
The shareholders meeting was held on November 7, 2002. In attendance was Brian J. Stowell as inspector of elections. Using the shareholder records supplied by HPT, Stowell determined that a quorum was present in person or by proxy. Five new directors were nominated and elected to the HPT board (Dan OCallahan, Bob Kopico, Dan Garcia, Dan Sloan, and Al Swain), replacing the existing members of the board of directors.
On November 8, 2002, Overton filed action number 68364 in the Nevada County Superior Court pursuant to Corporations Code section 709 to determine the validity of the shareholders meeting and the election of directors. On November 12, 2002, Dan Garcia, Sue Garcia, Judith Boyd, George Chan, Dan Sloan, and Larry Jones filed action number 68366, also to determine the validity of the election of directors. The two actions were consolidated.
After a hearing (held on parts of two different days) in which evidence was presented by way of documentary evidence and declarations and counsel made their arguments, the trial court entered judgment in favor of the plaintiffs, holding that Overton had the authority under the bylaws to hold the special shareholders meeting and that the election of a new board of directors was valid. The court ruled:
"It is undisputed that the board of directors did not call an annual meeting in May, 2002 as required by Article III, Section 2 of the [HPT] corporate bylaws. An annual meeting noticed by the board for August 8, 2002 was enjoined by the Yuba County Superior Court. Plaintiff Overton contended in that proceeding that he had demanded shareholder and other records prior to the meeting but he had not received all the records and some were incorrect. The United States District Court, Eastern District, in an action pending between the parties herein, refused to enjoin the special election noticed by Overton for November 7, 2002.
"The evidence presented in this hearing confirms that Overton held more than 10% of the votes at the special meeting through his own shares and proxies of other shareholders. Therefore, under Article III, Section 3, Overton had the right to call a special meeting. See also Corporations Code Section 600(d) which allows special meetings to be called by the holders of shares entitled to cast not less than 10 percent of the votes at the meeting or such additional shares as may be provided in the articles or bylaws.
"It is concluded that Article IV, Section 3 controls the issue of whether Overton could call a special meeting to elect new directors. It provides that if the annual meeting is not held or the directors are not elected thereat, directors `may be elected at any special meeting of shareholders held for that purpose. (Italics added.) This section unambiguously allows a qualified shareholder to call a special meeting to elect directors when an annual meeting is not held. [¶] . . . [¶]
"Defendant [HPT] argues that shareholder confusion was sufficient to invalidate the election. Upon reflection it is concluded that there is no substantial evidence of shareholder confusion. The fact that a majority of shareholders attended the special meeting belies defendants argument. Moreover, there is evidence that the corporations response to the notice of the special meeting may have been the source of shareholder confusion, if any.
"In summary, it is concluded that Overton had the right to call a special meeting to elect directors after the corporation had failed to hold an annual meeting for that purpose, that the meeting was properly noticed and conducted, and that a majority of shareholders entitled to cast votes at the meeting voted in favor of the new slate of directors to replace the existing directors of the corporation. In reaching the conclusion that the November 7, 2002 election is valid, the declarations of inspector of elections Brian J. Stowell have been considered. However, even without consideration of his declarations, substantial evidence supports the courts ruling." (Bold type and fn. omitted.)
Neither party requested a statement of decision. HPT appeals.
DISCUSSION
Before we discuss HPTs contentions on appeal, we note that HPT did not request a statement of decision or request modifications to the courts ruling. "`A memorandum opinion is not a decision. Although it may purport to decide issues in the case, it is merely an informal statement of the views of the trial judge. It does not constitute findings of fact. (Taormino v. Denny (1970) 1 Cal.3d 679, 684.) There are instances where a courts comments may be valuable in illustrating the trial judges theory but they may never be used to impeach the order or judgment." (In re Marriage of Ditto (1988) 206 Cal.App.3d 643, 646.)" (Burbank-Glendale-Pasadena Airport Authority v. Hensler (1991) 233 Cal.App.3d 577, 591.)
I
Abatement of Action
HPT contends the trial court erred by not abating this action until the action initiated against Overton in the federal court is completed. The contention is without merit.
HPT argues: "The Federal Action operates to rescind the License Agreement under which nearly all the shares in HPT were issued to Overton and Wurzburger. As a result, Overton no longer holds 10% or more of the shares in HPT, and does not have the authority under the corporate bylaws of HPT to call or notice a shareholder meeting. Therefore, abatement of this action is required under Code of Civil Procedure section 597, which provides for abatement of an action when there is another action `pending upon the same cause of action, or sets up any other defense not involving the merits of the plaintiffs cause of action but constituting a bar or ground of abatement to the prosecution thereof . . . . The trial court has no discretion to deny abatement when there are two actions pending raising substantially the same issues between the same parties. See Lawyers Title Ins. Corp. v. Superior Court (1984) 151 Cal.App.3d 455, 460."
This paragraph makes two assertions: (1) the federal action rescinds the licensing agreement under which Overton holds most of his shares and (2) abatement is required in this action pursuant to Code of Civil Procedure section 597. Each assertion fails.
Effect of Federal Action
In its federal action, HPT sought recission of the licensing agreement pursuant to which Overton held most of his shares. Filing a complaint serves as notice of recission. (Civ. Code, § 1691.) However, recission is an equitable remedy, to which equitable defenses apply. (Neet v. Holmes (1944) 25 Cal.2d 447, 457-458.) "The right to rescind may be waived. [Citations.] It is waived by recognition of the existence of the contract after the right to rescind was created. [Citation.]" (Id. at p. 458; see also 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 886, pp. 794-795.)
Here, HPT acknowledged Overtons ownership of more than 10 percent of the outstanding shares, the threshold for calling a shareholders meeting, at the time of Overtons request to hold a meeting, his notice of the meeting, and the meeting itself. Only after the meeting did HPT claim Overton did not own sufficient shares. Accordingly, it cannot now assert that Overton did not own sufficient shares at the time. The federal action was unnecessary to the resolution of this claim. Furthermore, the trial court could properly find HPT is estopped in this equitable action from asserting prior recission of the licensing agreement. (See Shahin v. Wawro (1982) 136 Cal.App.3d 749, 754 [action under Corp. Code, § 709 equitable in nature].) Since HPT did not request a statement of decision, we cannot rule out the possibility that the trial court applied this equitable principle. (In re Marriage of Arceneaux (1990) 51 Cal.3d 1130, 1132-1136.)
Abatement
"Under the rule of exclusive concurrent jurisdiction, `when two superior courts have concurrent jurisdiction over the subject matter and all parties involved in litigation, the first to assume jurisdiction has exclusive and continuing jurisdiction over the subject matter and all parties involved until such time as all necessarily related matters have been resolved. [Citations.] The rule is based upon the public policies of avoiding conflicts that might arise between courts if they were free to make contradictory decisions or awards relating to the same controversy, and preventing vexatious litigation and multiplicity of suits. [Citations.] The rule is established and enforced not `so much to protect the rights of parties as to protect the rights of Courts of co-ordinate jurisdiction to avoid conflict of jurisdiction, confusion and delay in the administration of justice. [Citation.] The rule of exclusive concurrent jurisdiction may constitute a ground for abatement of the subsequent action. [Citation.] `An order of abatement issues as a matter of right not as a matter of discretion where the conditions for its issuance exist. [Citation.] However, abatement is not appropriate where the first action cannot afford the relief sought in the second. [Citations.]" (Plant Insulation Co. v. Fibreboard Corp. (1990) 224 Cal.App.3d 781, 786-787.)
The trial court, here, did not err in denying abatement because the federal action could not afford the relief sought in this action — determination of the validity of the shareholders meeting and election. (Plant Insulation Corp. v. Fibreboard Corp., supra, 224 Cal.App.3d at pp. 786-787.) As noted above, Judge Shubb denied HPTs request for a temporary restraining order preventing Overton from holding the shareholders meeting because Judge Shubb believed the validity of the meeting needed to be litigated in the state courts.
"[I]n order for one action to abate another it must not only be pending at the same time, for the same cause and between the same parties, but it must also be pending in the same jurisdiction. [Citation.]" (Dodge v. Superior Court (1934) 139 Cal.App. 178, 181.) None of these requirements are met here. The federal action and this action are not based on the same cause of action. Although some of the same parties are involved in both actions, others are not. And the federal action, of course, is pending in federal court, which is jurisdictionally separate from the state court. Abatement in favor of an action pending in another jurisdiction is subject to the discretion of the court. (Tinney v. Tinney (1963) 211 Cal.App.2d 548, 553.) Here, the trial court did not abuse its discretion.
HPT contends Shahin v. Wawro, supra, 136 Cal.App.3d 749 requires abatement here. In that case, a corporate shareholder filed an action for judicial supervision of a corporate dissolution. Thereafter, the only other shareholder filed an action pursuant to Corporations Code section 709 to determine the validity of actions taken at a shareholders meeting during which he voted to revoke the dissolution of the corporation. (Id. at pp. 751-752.) Sustaining a demurrer, the trial court dismissed the second action, including the cause of action pursuant to Corporations Code section 709. (Id. at pp. 752-753.) The appellate court agreed the second action was subject to abatement. It found that the first action, "though denominated a matter involving the corporation, is, in fact, one brought and opposed by the respective parties herein, depending for the resolution of its propriety on the same issues present in the section 709 suit." (Id. at p. 754.)
The situation here is dissimilar. In Shahin, the two actions were both litigated in state court. As noted above, the actions here were litigated in separate jurisdictions. But even more distinguishing is the fact that the federal action would not decide the validity of the actions taken at the shareholders meeting. HPT asserts this is not true because, if the federal court determined that the licensing agreement was rescinded before Overton gave notice of the shareholders meeting, that would mean Overton did not hold 10 percent of HPT stock at that time and did not have the authority under the bylaws to request and give notice of the meeting. This assertion fails because an action pursuant to Corporations Code section 709 is equitable in nature. (Shahin v. Wawro, supra, 136 Cal.App.3d at p. 754.) Thus, HPT could be estopped from claiming prior recission of the licensing agreement pursuant to which Overton held most of his shares. It appears that, if HPT had asserted the prior recission of the licensing agreement at the time Overton was requesting the meeting, Overton could have recruited other shareholders to satisfy the 10 percent shareholder requirement. We need not determine whether the trial court so found. It suffices that the trial court had the power to fashion an equitable outcome. Therefore, this action is not necessarily dependent on the determinations to be made in the federal action.
II
Courts Reliance on Evidence Concerning Shareholders
HPT asserts the trial court erred in ruling on the validity of the shareholders meeting because it considered the number of shares owned at the time of the meeting, not at the time Overton gave notice of the meeting. The court stated: "The evidence presented in this hearing confirms that Overton held more than 10% of the votes at the special meeting through his own shares and proxies of other shareholders. Therefore, under Article III, Section 3, Overton had the right to call a special meeting."
There was substantial evidence to support the inference that Overton held more than 10 percent of the outstanding shares at the time he requested and noticed the shareholders meeting. Since HPT did not request a statement of decision or modification of the ruling, we draw that inference from the evidence and uphold the ruling, even if the written reasoning was flawed. (See In re Marriage of Arceneaux, supra, 51 Cal.3d at pp. 1132-1136.)
III
Shareholder Confusion
As noted, suits brought pursuant to Corporations Code section 709 are equitable in nature. (Shahin v. Wawro, supra, 136 Cal.App.3d at p. 754.) HPT asserts the trial court should have invalidated the meeting and election as a matter of equity because some of the shareholders were confused about whether the meeting was valid and therefore did not attend or vote. As the trial court concluded, however, there was no substantial confusion. To the extent there was any confusion, it was caused deliberately by the old board in sending out a letter stating that Overtons noticed meeting would not be held. "No one can take advantage of his own wrong." (Civ. Code, § 3517.) "`One who seeks equity must do equity." (Dickson, Carlson & Campillo v. Pole (2000) 83 Cal.App.4th 436, 446.)
HPT asserts: "Since the existing board of directors had already let both Overton and the shareholders know that the annual shareholder meeting would occur in January 2003, the equitable result would have been to invalidate the election purportedly held by Overton and allow those shareholders who did not attend that meeting on the assumption that it was invalid an opportunity to be heard and vote." This argument takes liberties with the facts. The old HPT board did not tell shareholders there would be a shareholders meeting in January 2003. Instead, it stated: "[W]e believe the earliest date we could schedule a shareholders [sic] will be sometime after January 15, 2003." Given the old boards failure to follow the bylaws, it is reasonable to conclude the old board would never hold a shareholders meeting as long as Overton had the votes to elect a new board. Drawing this reasonable inference in favor of the judgment, we conclude the trial court did not err, as a matter of equity, in validating the meeting and election. (See In re Marriage of Arceneaux, supra, 51 Cal.3d at pp. 1132-1136.)
IV
Opinion of Inspector of Elections
HPT asserts the trial court improperly admitted and relied on the opinion of Stowell, the inspector of elections, concerning the validity of the meeting and the election of directors. As noted above, the trial court considered Stowells opinion, but it also stated that the result would be the same without Stowells opinion. Accordingly, admission of and reliance on Stowells opinion could only be prejudicial if, without it, the evidence was insufficient to sustain the judgment. (Evid. Code, § 353 [judgment reversed only if error in admitting evidence resulted in miscarriage of justice].) HPT, however, does not make this argument when asserting that the admission of and reliance on Stowells opinion was prejudicial. We, therefore, need not consider the propriety of the trial courts admission of and reliance on Stowells opinion because HPT fails to make an adequate showing of prejudice.
DISPOSITION
The judgment is affirmed.
We concur: BLEASE, Acting P.J., and SIMS, J.