Arizona Shareholder Law

Arizona Shareholder Law

Shareholder Inspection Rights

Shareholders in an Arizona close corporation have the same inspection rights as those in an ordinary Arizona corporation. See Ariz. Rev. Stat. Ann. § 10-1602 (West 2004). 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. Id. 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, the corporation’s most recent annual report and any shareholders’ agreements. Id. § 10-1601(e). A shareholder whose demand is made in good faith and for a proper purpose and that describes the purpose with particularity may examine additional records directly connected to that purpose. Id. § 10-1602(c). Those records include excerpts from minutes of shareholder and board of directors meetings, accounting records of the corporation, the record of shareholders and the corporation’s most recent financial statements “showing in reasonable detail its assets and liability and the results of its operations.” Id. § 10-1602(b). Neither a corporation’s articles of incorporation nor bylaws may abolish or restrict the shareholders’ right of inspection; however, the corporation may charge a reasonable fee for the labor and materials expended in complying with the request. Id. §§ 10-1602(e); 10-1603(c). Furthermore, Arizona courts have the authority to order an inspection irrespective of the shareholder’s length or percentage of ownership upon a showing of proper purpose. Id. If a corporation fails to comply with a properly demanded inspection it is liable for the shareholder’s costs and attorneys’ fees incurred in enforcing his or her rights. Id. § 10-1604(c). However, the corporation is not liable for these costs if it can show that the demand was refused “in good faith because it had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded. Id. § 10-1604(c).

Shareholder Oppression

A cause of action for shareholder oppression in close corporations appears to not yet have been addressed by the Arizona courts; however, there is statutory authority for judicial dissolution of a corporation where the “directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent.” Id. § 10-1430(b)(2). Furthermore, there appears to be an argument that majority shareholders owe fiduciary duties toward minority shareholders. See Mims v. Valley Nat. Bank, 481 P.2d 876, 878 (Ariz. 1971). There has been little elaboration on this premise by the Arizona courts, however, the Court of Appeals of Arizona held in an unpublished opinion that “shareholders that have the ability to control a corporation owe a fiduciary duty to the corporation and other shareholders.” Sports Imaging of Arizona, L.L.C. v. 1993 CKC Trust, No. 1 CA-CV 05-0205, 2008 WL 4448063,*12 (Ariz. Ct. App. Sept. 30, 2008).

Shareholder Derivative Suits

To bring a derivative suit against a corporation, the complaining shareholder must have "standing." He or she must have been shareholder at the time the cause of action accrued or became one by operation of law from a person who was a shareholder at that time and the complaining shareholder adequately and fairly represents the interests of the corporation. Ariz. Rev. Stat. Ann. § 10-741. Additionally, a shareholder may not institute a derivative proceeding unless he or she has first made a demand on the corporation requesting that appropriate action be taken. Id. § 10-742. The complaining shareholder must then wait 90 days before bringing suit unless he or she is notified earlier by the corporation that the demand has been rejected, the statute of limitations will expire during the 90 day period or irreparable harm will result. Id.

Derivative proceedings may be stayed by the court during the pendency of an investigation of the claim by the corporation and the suit may be dismissed on application to the court by the corporation. Id. §§ 10-743;10-744. A derivative proceeding may not be dismissed or settled without court approval and the court may require shareholder notification where dismissal or settlement substantially affects shareholder or corporate interests. Id. § 10-745. After the suit has been resolved the court may order either the corporation or the shareholder to pay the other’s expenses depending on whether the suit resulted in a benefit to the corporation or was brought without good cause or for an improper purpose respectively. Id. § 10-746.

Whether an exception to the demand requirement exists for close corporations remains unclear; however, current case law seems to suggest that one does not. See Albers v. Edelson Tech. Partners, 31 P.3d 821, 829 (Ariz. Ct. App. 2001). Furthermore, although the corporation receives any recovery obtained through a derivative suit, there is authority for the proposition that where the owners of a close corporation operate “more as partners than in strict compliance with the corporate form,” shareholders have standing to sue both derivatively and directly. Id.