CITY OF CLEARLAKE
Court agrees with City, Highlands Water must hold new election
Regarding a lawsuit filed by the City of Clearlake on June 20 with the Superior Court of Lake County, the Court ruled this week that Highlands Mutual Water Company's recent election of its board of directors was invalid and mandated a new election to take place within 45 days. The Court's ruling is based on Highlands' failure to notify all shareholders about its April 10 board election as mandated by the CA Corporations Code and outlined in its own articles of incorporation and bylaws.
Highlands is a private California Corporation operating as a mutual water company where the members or shareholders collectively own and control the company, primarily by electing the board of directors.
The plain language in Highlands' own documents states that all lot owners, including those without water connections, should have been notified and allowed to vote in the election. Highlands incorrectly maintained that only owners with water connections are considered shareholders and, therefore, eligible to vote.
The Court determined the language in Highlands's bylaws is clear, explicit and consistent with Highlands articles of incorporation which state every owner of a lot or unsubdivided parcel in Highlands' service area--regardless of whether the parcel has a water connection--is entitled to a share of stock in the company and, therefore, to vote in electing the board.
"It is imperative that every property owner within Highlands' service area has a voice in critical decisions affecting them, such as electing the board of directors or determining rate changes," stated City Manager Alan Flora. "Even property owners without a current water connection are entitled to a say in managing Highlands to safeguard their future access to water connections. We are fortunate the authors of the articles and bylaws recognized the need, and the court affirmed their intent and purpose."
"For too long, an essential community utility operated with a lack of transparency and without proper representation," said Mayor David Claffey. "Property owners within the Highlands service area who have lacked access to water have seen their parcels become unappealing, undevelopable, and nearly impossible to sell, with little recourse. We are working hard to foster community pride by encouraging property owners to be engaged, resisting blight, and improving City infrastructure and facilities."
"This is a victory for all shareholders that have previously been excluded from having a say in managing the water company serving the area where their property is located," stated Vice Mayor Joyce Overton. "We look forward to a new election that follows the process Highlands Board should have been using all along."
City officials noted via a recent newsletter to residents that they are continuing to experience a difficult time with several aspects of Highlands service that are negatively impacting current customers and future development.
Other relevant background and findings by the Court
The Court summarized the statement of facts as: Election Notice: In March 2024, Highlands announced a special meeting of shareholders for the purpose of electing a board of directors. The election was held April 10, 2024 during a board meeting with the election held only with owners of properties with a current water connection.
Proxy Ballots and Notices: Highlands did not send proxy ballots or election notices to owners of parcels without water connections since Highlands did not consider them as shareholders.
Objection and Election: Despite the City's objections during the April 10 board meeting about the process, Highlands still held the election of the board of directors that day.
The Court summarized the relevant language in Highlands's articles of incorporation as follows: Water Management:
Highlands was established to acquire, own, hold, and develop water and water rights in Lake County. Highlands' purpose is to sell and distribute water to shareholders of the corporation who own land served by the company's infrastructure.
Shareholder Guarantee: Water will only be provided to people who own at least one share of the company's stock.
Infrastructure & Property: Highlands is authorized to acquire and manage various types of infrastructure (e.g., canals, ditches, dams) and property necessary for water distribution, including land and shares in other water companies.
Cost of Service: Water is to be served to stockholders based on cost of service only (e.g. with no profit).
State law requires a minimum of 30 days until a new election can take place, meaning in this case that Highlands must hold its new election between September 12 and September 27.
—Submitted
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