Any person who claims to have been denied the right to vote may challenge the election of a director.

Haah v. Kim, 175 CA4th 45 (2009)
Court of Appeal of the State of California
Second Appellate District
Division Four

Many of the facts in this case were contested at trial, but based solely on the appellate court's decision the story is that Galleria Plus, Inc. (GPI) was formed by incorporating attorney Yoon Han Kim on behalf of Francis Key. Key sought to own and operate a supermarket with GPI. Yoon Han Kim prepared, and Se Heon Yoon signed, a statement of information naming Se Heon Yoon the sole director and officer of GPI. Later, Se Heon Yoon left GPI, and Yoon Han Kim prepared another statement of information, this one naming Donghyuk Kim sole director and officer of GPI. Donghyuk Kim signed this statement of information. When Key's supermarket project encountered financial trouble, Key gave 25% of GPI's stock to Stephan Haah in consideration for finding investors to purchase other blocks of GPI stock.

After Haah successfully found investors and Key sold blocks of GPI stock to these investors, Key requested Yoon Han Kim sign an action naming Key as director of GPI. Soon after, Key asked Stephan Haah to act as sole director. Haah agreed, but protested when Key modified the action naming Key as director to with correction fluid so the document read as an action naming Haah as director. Later during the same day, Key produced another action naming Haah as the sole director of GPI, and appearing to be signed by Yoon Han Kim.

Haah acted as GPI's sole director until Key died, and Donghyuk Kim disputed Haah's directorship, alleging that the Yoon Han Kim's signature on the action appointing Haah as director was a forgery. Haah agreed to step down, allowing Donghyuk Kim sole directorship of GPI, on the condition that Donghyuk Kim honor some agreements Haah had entered into on behalf of GPI. Donghyuk Kim did not honor the agreements as promised, and Haah had Yoon Han Kim void the action he had signed making Donghyuk Kim a director.

Unfazed, Donghyuk Kim continued to act as GPI's director, and Haah began holding his own shareholder meetings. At Haah's shareholder meetings, Donghyuk Kim's directorship was renounced and Haah and others were elected directors.

Haah filed suit under California Corporations Code § 709 Donghyuk Kim appealed the trial court's decision on the grounds that:

• The court erred in overruling his demurrer;

• Haah lacked standing to bring the cause of action;

• The trial court abused its discretion by appointing directors.

The appellate court noted that the California Code of Civil Procedure does not contain a provision allowing a party to join in a demurrer, and as such Donghyuk Kim may not challenge the trial court’s overruling because the demurrer was not his motion, and his one-page “joinder” was merely “a cheerleading effort” in support of the motion.

The legislative history of § 709 was considered by the appellate court in evaluating Donghyuk Kim’s argument that Haah lacked standing to bring the cause of action under § 709. The appellate court found an action may be brought under § 709 by, “any shareholder” and “any person who claims to have been denied the right to vote.”

Finally, in regard to Donghyuk Kim’s assertion that the trial court abused its discretion in appointing directors for GPI, the appellate court pointed out that no objection was made by Donghyuk Kim or Donghyuk Kim’s counsel at the hearing to appoint directors, thus waiving the right to appeal.

Clear documentation of stock transactions, including clear specification of transaction effective dates, could have saved everyone involved in this case from years of costly litigation. While corporate formalities often take a back seat to more "pressing" demands on the time of business owners, this case and its tale of two, self-appointed boards of directors is a fine illustration of why keeping up with those formalities is so important.