Reported / Citable
Background
The City of Clearlake, a small city in Lake County, held shares in Highlands Mutual Water Company — a private water company that delivers water only to its shareholders. Those shares were appurtenant, meaning they were legally attached to specific parcels of land the City owned and passed automatically with the land. Appurtenant shares, unlike freely transferable stock, are real property: they cannot be separated from the land and entitle the holder only to water for that parcel.
California’s Corporations Code section 14300, subdivision (a), requires the secretary of any mutual water company organized for domestic-use water delivery to cancel appurtenant shares whenever a public entity acquires them. The statute allows the public entity to continue buying water at shareholder rates even after cancellation, but it strips the entity’s formal ownership of shares — and the shareholder rights (including board voting and records inspection) that accompany them. In late 2024, Highlands invoked section 14300 and cancelled all shares the City held.
The City sued, arguing that Corporations Code section 14300 violated California Constitution article XVI, section 17, a voter-approved provision that generally forbids public entities from owning stock in private companies but carves out an exception for shares in mutual water companies held “for the purpose of furnishing a supply of water for public, municipal or governmental purposes.” The trial court agreed, found section 14300 unconstitutional as applied, and issued a preliminary injunction ordering Highlands to reissue the cancelled shares. Highlands appealed.
The Court’s Holding
The First District Court of Appeal (Division One) reversed, holding that Corporations Code section 14300 does not violate article XVI, section 17 of the California Constitution.
The court applied the well-settled presumption that statutes are constitutional and should be struck down only when their conflict with the Constitution is “clear, positive and unmistakable.” Working from the text of section 17, the court concluded that the provision’s exception permitting public entities to hold mutual water company shares is limited to situations where the public entity is itself actively distributing or delivering water throughout its territory — not simply receiving water for its own parcels. The phrase “furnishing a supply of water,” the court reasoned, carries a connotation of affirmative action: the public entity must be a water purveyor, providing water to others, not merely a consumer using the mutual water company’s service on its own land.
Because appurtenant shares tie the water right to a specific parcel (with the company delivering to that parcel), the City’s ownership of those shares made it a passive customer rather than a water distributor. That passive role falls outside section 17’s exception. The court also relied on legislative history showing that the predecessor statute mandating cancellation of public-entity appurtenant shares predated section 17 itself, so voters who adopted section 17 are presumed to have known that appurtenant shares would continue to be cancelled. The court reversed the preliminary injunction.
Key Takeaways
- Public entities that hold appurtenant shares in a mutual water company — shares attached to specific parcels — can have those shares cancelled under Corporations Code section 14300 without constitutional violation, as long as water service continues at shareholder rates.
- Section 17’s exception for public-entity stock ownership in mutual water companies applies only where the entity acts as a water distributor (supplying water to others); merely receiving water for the entity’s own land parcels is not enough.
- When a public entity acquires land to which appurtenant water shares are attached, it should not assume it will retain shareholder rights — the mutual water company’s secretary is required by statute to cancel those shares.
- This decision resolves a gap in California water law: it confirms that the section 14300 cancellation mechanism is not overridden by section 17, harmonizing a decades-old statute with the 1974 constitutional provision.
- Public entities seeking to use water-company shares to secure governance rights (e.g., access to records, board representation) should structure acquisitions through non-appurtenant shares if permitted — appurtenant shares will be cancelled.
Why It Matters
California is home to hundreds of mutual water companies, many serving rural and semi-rural communities where public agencies own land — and historically held appurtenant shares — alongside private landowners. This decision settles a constitutional question that had been unresolved: a public entity cannot rely on section 17 to block cancellation of appurtenant shares when the entity is simply a land-owning water consumer rather than an active water provider. Cities, counties, school districts, and other public agencies that have been acquiring property served by mutual water companies should audit whether they hold appurtenant shares and understand that those shares are subject to mandatory cancellation under section 14300.
For water law practitioners, the opinion offers a careful analysis of how appurtenant versus non-appurtenant shares are treated differently under California law, and it reinforces that the Legislature’s longstanding interpretation of ambiguous constitutional language is entitled to strong deference. The ruling also underscores that public agencies seeking a meaningful governance voice in a mutual water company must acquire non-appurtenant shares — something that requires the company’s cooperation and may not always be available.