Judge Ralph C. Hofer, Case Number: 24NNCP00812, Date: 2025-04-17 Tentative Ruling

Petitioner Siu Fung Siegfried Lee alleges that petitioner is one of two directors who sit on the board of directors of Prince Dim Sum House, Inc. (Prince), a company which owns the restaurant “Prince Dumpling” (the Restaurant), and that respondent Yaxin Zhu is the other director of Prince. The petition alleges that there is a current deadlock between the directors over corporate governance and other issues which is paralyzing Prince at a critical time, and that unless the court appoints a provisional director to breach the deadlock, Prince will languish, losing profit and business opportunities to the detriment of its shareholders.

The petition alleges that Prince is jointly owned by respondent Zhu and Roy USA, Inc. (Roy), of which petitioner Lee is a representative, and that petitioner Lee is the CFO and director of Prince. Roy is a 50% shareholder of Prince. Respondent Zhu is the CEO and director and the other 50% shareholder of Prince.

Petitioner alleges that respondent Zhu manages all the day-to-day operations and finances of the Restaurant, and that petitioner has recently discovered that Zhu surreptitiously has been embezzling funds, including large amounts of cash, from Prince. The petition alleges that upon review of Prince’s accounting records, petitioner has discovered there are very few cash transactions being recorded, but a review of the Restaurant’s surveillance footage shows a much higher volume of customers that are paying in cash, and also shows numerous cash payments being brought to the restaurant manager and subsequently disappearing into his pockets. Petitioner is informed and believes that respondent Zhu is instructing the restaurant manager to take the cash and give it to Zhu.

The petition alleges that in December of 2024, petitioner sent a letter to Zhu demanding that Zhu resign from the office of CEO and that petitioner be appointed the new CEO of Prince and handle all financial and accounting matters going forward, However, Zhu had not responded, impairing the parties’ ability to concentrate on everyday operating needs and Prince’s property and business.

Petitioner Lee brings this motion for appointment of a provisional director to serve on the board of directors of Prince, arguing that respondent Zhu is causing Prince not to report all of its revenues to the Internal Revenue Service (IRS) and other taxing agencies, and is also causing Prince to pay its employees in cash to avoid payment of payroll taxes, unemployment insurance and other employer-related costs associated with the payment of employee wages. Petitioner argues that petitioner Lee and respondent Zhu, as the only two directors of Prince, are deadlocked as to the operational and accounting practices used by Zhu in his management of Prince, and that Zhu has stated through counsel that Zhu no longer recognizes Lee as a director of Prince or as its CFO. The motion argues that absent the immediate appointment of a provisional director, Prince, under Zhu’s management, will continue to commit financial crimes and create liability, risking the financial well-being of Prince.

“(a) If a corporation has an even number of directors who are equally divided and cannot agree as to the management of its affairs, so that its business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost, the superior court of the proper county may, notwithstanding any provisions of the articles or bylaws and whether or not an action is pending for an involuntary winding up or dissolution of the corporation, appoint a provisional director pursuant to this section. Action for such appointment may be brought by any director or by the holders of not less than 33 ¿ percent of the voting power.”

It is held that under the clear reading of Corporations Code section 308, the superior court “may” appoint a provisional director, giving “the superior court the discretion to grant or deny the petition. Discretionary trial court rulings are reviewed under the ‘abuse of discretion’ standard.” In re Annrhon, Inc. v. Lesinski (1993) 17 Cal.App.4th 742, 751. Under that standard, “appellate courts will disturb discretionary trial court rulings only upon a showing of a ‘clear case of abuse’ and ‘a miscarriage of justice.’ ” In re Annrhon, at 751-752, quotations omitted.

However, the opposition indicates and submits evidence that on September 12, 2024, Roy conveyed to respondent Zhu the unconditional option to purchase a 1% interest in Prince from Roy, which respondent exercised on January 24, 2025, giving Zhu a 51% majority interest in Prince, and leaving Roy with a 49% interest in Prince. [Zhu Decl., para. 5, Exs. A, B].

The opposition indicates that on March 13, 2025, Prince issued a Notice of Special Meeting of the shareholders of Prince, and at that meeting, Zhu, as majority shareholder, voted to clarify that petitioner Lee was not a director of Prince, and, in any case, Harry Pu was appointed as the second director of Prince. [Zhu Decl., paras. 17, 18].

Petitioner Lee accordingly cannot invoke the remedy under Corporations Code section 308(a) as he is not a “director” of the corporation Prince at the time the court is being asked to grant this relief, and is not a holder of not less than 33 and 1/3 of the voting power, as the moving papers concede and the opposition confirms that the entity Roy, not Lee, is the 49% owner of Prince. Roy is not named as a party to this petition. In addition, due to the second director currently being Harry Pu, not Lee, the purported deadlock between Lee and Zhu can no longer support this petition, as there is not in the corporation “an even number of directors who are equally divided and cannot agree as to the management of its affairs.”

Moreover, the opposition points out that the moving papers are not complete with respect to establishing that Lee was ever formally confirmed as the second director as the moving papers indicate that Lee believed that Zhu memorialized the terms of the Purchase Agreement and Investor Agreement in the Prince company minutes, without confirming that this was done, and also fails to establish that the directorship in Lee was set forth in those Agreements, rather than in a referenced meeting, without satisfying required corporate legal formalities. [See Lee Decl., paras. 3, 4]. The Purchase Agreement attached to the moving papers states, “FURTHERMORE, and pending a separate agreement with CEO ZHU and official ratification by means of PRINCE’s company minutes, LIANF hereby transfers his position as CFO of PRINCE to ROY.” [Lee Decl. para. 2, Ex. 1]. There is no mention of Lee, and no showing by the moving papers of a separate agreement or ratification by means of Prince company minutes of the transfer of the directorship to Roy, let alone to Lee. Again, Roy is not a named party to this petition.

The opposition also argues that the moving papers fail to establish that the situation concerning any previous deadlock between the parties rises to the level that “the business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost.” The opposition points out that the petition itself states that “the Restaurant is experiencing very good business,” which is supported by a sworn declaration of Lee making that statement. [Petition, para. 8, Lee Decl. attached to Petition, para. 5].

a “director” of the corporation Prince at the time the court is being asked to grant relief under Corporations Code section 308 (a), and Lee as an individual is not a holder of not less than 33and 1/3 percent of the voting power. [See Lee Decl., paras. 2, 3, 4, Ex. 1, Zhu Decl., paras. 5, 17, 18, Exs. A, B]. This showing indicates that there is not in the corporation Prince “an even number of directors who are equally divided and cannot agree as to the management of its affairs.”

Petitioner Lee has also failed to establish that any deadlock between the directors rises to the level that “the business can no longer be conducted to advantage or so that there is danger that its property and business will be impaired or lost.” [See Petition, para. 8, Lee Decl. attached to Petition, para. 5].

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