Delaware Shareholder Law

Delaware Shareholder Law Survey

Shareholder Inspection Rights

Shareholders in Delaware close corporations have the same inspection rights as those in ordinary Delaware corporations. See Del. Code Ann. tit. 8, § 220 (2007). To exercise inspection rights, a shareholder must first provide a written demand under oath stating the purpose of the inspection. § 220(b). The requesting shareholder may then inspect and copy the corporation’s stock ledger, list of shareholders and the corporation’s other books and records. Id. If the corporation or its officers fail to allow a properly demanded inspection or to reply to an inspection demand within five days, the shareholder may request a court order to compel the inspection. § 220(c). The court has exclusive jurisdiction to determine whether the demanding shareholder is entitled to the inspection and may impose restrictions or limitations on any inspection ordered. Id.

Furthermore, directors have the right to inspect the corporation’s stock ledger, shareholder list and other books and records for a “purpose reasonably related to the director’s position as director. § 220(d).

The purpose of shareholders’ inspection rights is to provide shareholders with a means to protect themselves and their investment by being aware of the directors’ and the corporation’s actions. Saito v. McKesson HBOC, Inc., 806 A.2d 113, 116 (Del. 2002). However, the inspection right is not unlimited and the “proper purpose” must be sufficiently specific so as to inform the court of the reasoning behind the inspection demand. See Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 (Del. Ch. 2007) (stating that a shareholder seeking inspection to investigate corporate mismanagement must provide evidence to suggest a “credible basis” to believe that mismanagement has in fact occurred).

Shareholder Oppression

Delaware does not have an involuntary judicial dissolution statute based on oppression by controlling shareholders in a close corporation. Furthermore, as one unreported case points out, there is little judicial discussion of minority shareholder oppression. See Litle v. Waters, No. 12155, 1992 WL 25758, at *7 (Del. Ch. Feb. 11, 1992). In Litle, the court analyzed whether the majority shareholder’s actions in causing the corporation to withhold distribution of dividends constituted shareholder oppression. See id. The court conducted this analysis under two definitions of oppressive conduct outlined by the New York courts in Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1018 (N.Y. Supr. 1984). Id. at *7. The first standard is the widely used “frustration of the reasonable expectations of minority shareholders” and the second is whether the conduct is burdensome, harsh or wrongful. Id. Under both standards the court found that the minority shareholder’s allegations were sufficient to state a claim for oppression. Id. at *8. Furthermore, the court found that if oppression had occurred, an order compelling distribution of dividends, among other equitable remedies, would be appropriate. Id. at *7.

Additionally, a majority shareholder in both close and ordinary corporations owes fiduciary duties to the minority interest where the shareholder “owns a majority interest in or exercises control over the business affairs of the corporation”. See Riblet Products Corp. v. Nagy, 683 A.2d 37, 39 (Del. Supr. Ct. 1996); see also Ivanhoe Partners v. Newmont Min. Corp., 535 A.2d 1334, 1334 (Del. 1987).

Shareholder Derivative Suits

In order to bring a derivative claim on behalf of a corporation, a plaintiff must be a shareholder at the time the cause of action arose or have obtained the shares by operation of law from a person who held them at that time. Del. R. Civ. P. 23.1(a). The complaint must state with particularity the actions taken to obtain the requested relief from the corporation. Id. Additionally, the complaining shareholder must submit an affidavit stating that he or she is not receiving impermissible compensation for acting as the shareholders’ representative. Del. R. Civ. P. 23.1(b). After a complaint has been filed it may not be dismissed or settled without approval from the court. Del. R. Civ. P. 23.1(c). A complaining shareholder must first exhaust all available corporate remedies and give the board the opportunity to manage the litigation. Agostino v. Hicks, 845 A.2d 1110, 1116 (Del. Ch. 2004). Even if this requirement appears futile because a majority of the directors are unable or unwilling to pursue the action, it must still be satisfied because the board could appoint a special litigation committee to determine whether the claim is in the corporation’s best interest. Id. The prerequisites involved in bringing a derivative action reflect the necessary balancing between the directors’ responsibility to manage the corporation and the shareholders’ need for a mechanism to oversee their actions. Id. at 1117.

In a derivative action the recovery runs to the corporation and not to the complaining shareholder; however, where appropriate, a shareholder may bring a direct action individually for harm personally suffered. Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. Supr. Ct. 2004).