Brief survey of Idaho shareholder law.

Idaho Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Idaho close corporations have the same inspection rights as those in ordinary Idaho corporations. See Idaho Code Ann. § 30-29-1602 (1999). 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. § 30-29-1602(1). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board creating classes 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. § 30-29-1601(5). 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. §§ 30-29-1602(4), 30-1-1603(4).

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. § 30-29-1604.

Additionally, a director of a corporation is entitled to inspect and copy the corporation’s books, records and documents for any purpose reasonably related to his duties as a director. § 30-29-1605.

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Shareholder Oppression

Idaho law provides for involuntary judicial dissolution of a close corporation by its shareholders if the “directors or those in control of the corporation have acted or are acting in a manner that is illegal, oppressive or fraudulent, and irreparable injury to the corporation is threatened or being suffered” as a result of those actions. § 30-29-1430(2)(b). However, there does not appear to be significant judicial elaboration as to what conduct by controlling shareholders constitutes oppression. See, e.g., Rowland v. Rowland, 633 P.2d 599, 505-506 (Idaho 1981).

On the other hand, there is judicial support in Idaho for the proposition that controlling shareholders in a close corporation owe fiduciary duties to the minority interest. See Steelman v. Mallory, 716 P.2d 1282, 1285 (Idaho 1986). The imposition of additional duties on majority shareholders is justified by the temptation and opportunity for them to squeeze out the minority interest and to “deprive them of their proportionate rights and powers without a just equivalent” by virtue of their control over the corporation. See id. Therefore, it is reasonable to treat the relationship between shareholders in close corporations like partners in a partnership and require them to observe similar fiduciary duties. See id.

Business Law
Serving The Woodlands
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Derivative Suits

Shareholder Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 30-29-741. In order to have standing to bring a derivative suit, a plaintiff must fairly and adequately 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. § 30-29-741. Additionally, the complaining shareholder must make a written demand on the corporation seeking appropriate relief before filing suit. § 30-29-742. 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. Although there is no particular form required for the demand, it must give the directors an opportunity to pursue the claim by at a minimum naming the potential defendants. McCann v. McCann, 61 P.3d 585, 591-92 (Idaho 2002). To that end, the demand must be “earnest and sincere, and not a feigned or simulated, effort to induce the directors to take remedial action” and not an attempt to circumvent the 90 day waiting period. Id. If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the outcome of the investigation. § 30-29-743.

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. § 30-29-744. However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. § 30-29-745. Additionally, reasonable expenses and attorneys’ fees may be awarded to a successful plaintiff or a defendant upon a finding that the suit was brought without reasonable cause. § 30-29-746.

There is no direct shareholder recovery in a derivative action brought on behalf of the corporation; however, a shareholder may sue directly as an individual for an injury sustained directly. See McCann, 61 P.3d at 590. Therefore, the same actions or omissions may give rise to both a direct and derivative suit by an aggrieved shareholder. Id.