Shareholder Inspection Rights
Shareholders in North Carolina close corporations have the same inspection rights as those in ordinary North Carolina corporations. See N.C. Gen. Stat. Ann. § 55-16-02 (West 2009). During regular business hours at the corporation’s principal office a shareholder may, upon written demand at least five days in advance, inspect and copy a limited number of documents pertaining to the corporation. § 55-16-02(a). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board that create classes or series of shares, minutes of shareholders’ meetings and records of actions taken without a meeting in the previous three years, written communications to shareholders in the previous three years, names and business addresses of current officers and directors and the corporation’s most recent annual report. § 55-16-01(e).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 55-16-02(b). Shareholders who make a good faith demand for a proper purpose that specifies the records to be inspected may inspect and copy the minutes of meetings of the board, committees thereof and shareholders, accounting records of the corporation and the record of shareholders provided those documents are directly connected to the stated purpose of the demand. § 55-16-02(b),(c). There is a presumption in favor of the shareholder seeking inspection that he or she is acting with a proper purpose. Carter v. Wilson Const. Co., 348 S.E.2d 830, 832 (N.C. Ct. App. 1986).
The corporation’s articles of incorporation or bylaws may not restrict or eliminate the shareholders’ right of inspection; however, the corporation may charge a reasonable cost to the shareholder for labor and materials used in providing the requested documents. §§ 55-16-02(d), 55-16-03(c). Additionally, if a corporation refuses to comply with a properly demanded inspection for a reason other than a good faith belief that there is a reasonable basis to doubt the right of the shareholder to conduct the inspection, the court may order the corporation to comply with the demand and may award the shareholder expenses and attorneys’ fees. § 55-16-04(a),(c). The right of inspection is enforceable by a mandamus action. Carter, 438 S.E.2d at 832.
Additionally, a director of a corporation is entitled to inspect and copy the books, records and other documents of the corporation for a purpose reasonably related to the performance of his duties as director. § 55-16-05(a).
North Carolina law provides for involuntary judicial dissolution of a close corporation if a shareholder can establish that “liquidation is reasonably necessary for the protection of the rights or interests of the complaining shareholder.” § 55-14-30(2)(ii). Although the statute does not describe the conduct of the majority in terms of oppression, the judicial discussion of the dissolution remedy encompasses conduct traditionally thought to be oppressive to the minority interest. Norman v. Nash Johnson & Sons’ Farms, Inc., 537 S.E.2d 248, 258-59 (N.C. Ct. App. 2000). When relationships break down in close corporations, those in control often have the ability to exclude the minority from corporate management leaving them with few options given the limited market for their stock. Id. at 258.
In deciding whether dissolution is authorized, the particular “rights or interests of the complaining shareholder” must be determined based on the specific facts and circumstances of the case. Meiselman v. Meiselman, 307 S.E.2d 551, 562 (N.C. 1983). The rights and interests of the minority shareholder are determined by ascertaining his or her reasonable expectations from the outset of participation in the corporation and their evolution throughout the parties’ course of dealing. Id. Reasonable expectations are those that are “known or assumed by the other shareholders and concurred in by them” and are “embodied in understandings, express or implied, among the participants.” Id. Furthermore, “[p]rivately held expectations” that are not shared with the other corporate participants are not considered reasonable. Id.
Therefore, although the dissolution statute does not authorize the remedy specifically for “oppressive” conduct, it operates to address the same conduct by the majority through reference to the reasonable expectations of the minority interest and serves essentially the same function as other oppression statutes. Id.
Furthermore, majority shareholders in close corporations owe the minority interest fiduciary duties to not abuse corporate power for personal interests to the detriment of the corporation. Farndale Co. v. Gibellini, 628 S.E2d 15, 19 (N.C. Ct App. 2006).
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 55-7-41. In order to have standing to bring a derivative suit, a plaintiff must adequately and fairly represent the interests of the corporation and have been a shareholder at the time the cause of action arose or received the shares by operation of law from someone who held them at that time. Id.
A plaintiff with standing must then make a written demand on the corporation requesting that the corporation act appropriately. § 55-7-42. The shareholder is then prohibited from bringing a derivative action until 90 days have passed after the demand was made unless the shareholder is notified that the demand has been rejected by the corporation or waiting the full 90 day period would cause irreparable injury to the corporation. Id. If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the outcome of the investigation. § 55-7-43. A derivative suit may be dismissed upon a determination in good faith and after reasonable investigation by a disinterested and independent majority of the board, a committee thereof or other appointed individuals that maintenance of the suit is not in the best interests of the corporation. § 55-7-44. However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. § 55-7-45. Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff if the court finds that the suit conferred a substantial benefit on the corporation or a defendant upon a finding that the suit was brought without reasonable cause or for an improper purpose. § 55-7-46.
North Carolina recognizes the general rule that shareholders may not individually bring a claim on behalf of the corporation but must instead assert that claim derivatively. Norman, 537 S.E.2d at 253. Pursuant to that rule, a shareholder may only assert an individual claim against a third party if he “can show a special relationship with the wrongdoer and also show an injury peculiar to himself.” Id. at 255. However, minority shareholders in close corporations may maintain an individual as well as derivative action for “wrongful conduct and corruption against the majority shareholders.” Id. at 259.
If you are a shareholder of a closely-held corporation experiencing oppressive behavior from majority shareholders, please call The Law Offices of J. Edgar Halstead, III, PLLC at (704) 464-1088.