Colorado Shareholder Law Survey
Shareholder Inspection Rights
A shareholder in a Colorado close corporation has the same inspection rights as a shareholder in an ordinary Colorado corporation. See COLO. REV. STAT. ANN. § 7-116-102 (West 2008). 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. § 7-116-102(1). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, 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 certain financial statements. § 7-116-101(5). Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 7-116-102(2). Shareholders who make a good faith demand for a proper purpose that specifies the records to be inspected and who either have been record shareholders for three months or own five percent of the outstanding shares may inspect the minutes of meetings of the board, committees thereof and shareholders, waivers of notice of meetings, accounting records of the corporation and the record of shareholders. § 7-116-102(3). 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. §§ 7-116-102(5), 7-116-103(3).
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, attorneys’ fees and damages. § 7-116-104(2)(3).
Shareholder inspection rights are based on the rationale that the directors and officers are conducting transactions as fiduciaries on behalf of the shareholders and, as such, they have a right to information regarding those transactions. Left Hand Ditch Co. v. Hill, 933 P.2d 1, 5 (Colo. 1997). Therefore, although there is a requirement that a shareholder demanding to inspect the corporate books have a “proper purpose,” it is unclear to what extent this requirement limits the inspection right. Id.
Colorado law provides for involuntary dissolution of a close corporation by its shareholders if 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.” § 7-114-301(2)(b). Although the Colorado General Assembly has not defined what conduct constitutes oppression under the statute, the courts have generally defined it as: “[B]urdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of the company to the prejudice of some of its members; or a ... departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Polk v. Hergert Land & Cattle Co., 5 P.3d 402, 404 (Colo. Ct. App. 2000) (citing Jorgensen v. Water Works, Inc., 582 N.W.2d 98, 107 (Wis. Ct. App. 1998).
A determination of whether oppressive conduct has occurred “requires consideration of the reasonable expectations of minority shareholders” which include the expectation that the controlling interest will comply with the law and “promote the purpose of the corporation.” Colt v. Mt. Princeton Trout Club, Inc., 78 P.3d 1115, 1119 (Colo. Ct. App. 2003). However, oppression is not found in every case where the minority’s expectations are not met and instead “should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [plaintiff's] decision to join the venture.” Id. at 1120 (quoting In re Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984).
Furthermore, the majority interest in a close corporation owes fiduciary duties to the minority interest the breach of which often constitutes evidence of oppressive conduct. Id. at 1118. In this context, the majority interest’s fiduciary duties arise because the shareholders’ relationship is analogous to that of partners in a partnership and therefore requires them to “act in good faith and in a manner they reasonably believe to be in the best interests of the corporation and all its shareholders” Id. at 1119.
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 7-107-402. In order to have standing to bring a derivative suit, a plaintiff must 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. § 7-107-402(1). If the suit is brought by shareholders representing less than five percent of the outstanding shares of the corporation, the defendant may move the court to order the plaintiff to provide security unless the value of the plaintiff’s shares is at least $25,000. § 7-107-402(3). Furthermore, if after final judgment the suit is determined to have been brought without reasonable cause, the plaintiff is required to pay the defendant’s expenses in defending against the suit. § 7-107-402(2).
However, to prevent multiple suits by individual shareholders and to ensure that recovery for an injury to the corporation flows to the corporation, direct shareholder recovery in derivate suits is not recognized. See River Mgmt. Corp. v. Lodge Props., 829 P.2d 398, 404 (Colo. Ct. App. 1991).