## Facts

- Helga and Robert Johnson founded Tago, Inc., held about 41% of its shares, and served as officers and directors.
- At a special board meeting, three non-Johnson directors outvoted the Johnsons, adopted a resolution removing them as officers, and directed them to vacate their offices and stop participating in operations.
- The Johnsons refused to comply without a court order and sued Tago and the three directors, alleging refusal to hold an annual shareholders’ meeting and seeking damages, injunctive relief, and attorneys’ fees based on an asserted corporate benefit.
- The trial court issued an order to show cause and a temporary restraining order requiring the corporation’s business to continue as then conducted, with no major changes pending a hearing.
- The board later appointed new officers, renewed the directives against the Johnsons, and scheduled a shareholders’ meeting, which was moved up at the Johnsons’ request.
- A proxy contest began, with the Johnsons soliciting proxies to regain control.
- Before the proxy contest concluded, the trial court issued a preliminary injunction requiring Tago to pay the Johnsons an attorneys’ fee retainer based on their ownership percentage and to pay proxy-solicitation expenses incurred by the Johnsons, the board, or the corporation.
- Tago appealed the fee-and-expense order, arguing that California Corporations Code § 600 did not authorize shifting proxy-fight costs during an ongoing contest.

## Issues

1. Whether California Corporations Code § 600 authorizes a trial court to order a corporation to pay shareholders’ attorneys’ fees and proxy-solicitation expenses while a proxy contest is pending.

## Decision

- The Court of Appeal reversed the order requiring Tago to pay the Johnsons’ attorneys’ fees and proxy-solicitation expenses (and related proxy expenses for other participants).
- The court held that Corporations Code § 600 does not authorize awards of expenses and attorneys’ fees to shareholders engaged in an ongoing proxy fight.
- The court concluded the trial court’s injunction rested on an erroneous interpretation of § 600 and exceeded permissible equitable relief tied to that statute.

## Legal Principles

- Corporations Code § 600 addresses the calling and conduct of shareholders’ meetings and authorizes judicial relief to ensure meetings occur; it does not confer implied authority to finance a shareholder proxy contest.
- Under the American rule, each party bears its own attorneys’ fees absent statutory authorization or a recognized equitable exception.
- “Substantial benefit” fee concepts apply most readily to representative shareholder litigation; they do not justify ordering interim corporate payment for expenses incurred primarily to gain or retain corporate control in a proxy contest.
- A court’s equitable powers in enforcing a corporate statute must remain connected to the statute’s purpose; equity cannot be used to create fee-shifting remedies that materially alter the economic balance of a pending control contest.
- Interim fee and expense orders entered before any success on the merits are especially disfavored where the asserted corporate benefit is speculative.

## Conclusion

The court held that Corporations Code § 600 allows courts to compel shareholder meetings but does not permit ordering a corporation to fund one side’s attorneys’ fees and proxy-solicitation costs during an unresolved proxy contest, and it reversed the preliminary injunction to that extent.


Johnson v. Tago, Inc., 188 Cal. App. 3d 507 (Cal. Ct. App. 1986)