Indiana Shareholder Law Survey
Shareholder Inspection Rights
A shareholder in an Indiana close corporation has the same inspection rights as a shareholder in an ordinary Indiana corporation. See Ind. Code § 23-1-52-2 (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. Id. § 23-1-52-2(a). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board with respect to 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 certain financial statements. Id. § 23-1-52-1(e).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. Id. § 23-1-52-2(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. Id. § 23-1-52-2(b),(c). In order to protect shareholders’ investments from inspections that are potentially inconvenient or costly, the primary purpose of a requested inspection “must not be one that is adverse to the best interests of the corporation.” Dynamics Corp. v. CTS Corp., 479 N.E.2d 1352, 1355 (Ind. Ct. App. 1985). 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. Id. §§ 23-1-52-2(d), 23-1-52-3(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, attorneys’ fees and damages. Id. § 23-1-52-4.
Shareholder Oppression
Indiana law does not provide for statutory judicial dissolution by shareholders as a remedy for oppressive conduct by majority shareholders. Additionally, there does not appear to be judicial precedent for a cause of action based on shareholder oppression. However, Indiana law imposes heightened duties on shareholders in close corporations that provide a means of redress for minority shareholders who have been treated unfairly by the controlling interest. Barth v. Barth, 659 N.E.2d 559, 561 (Ind. 1995). Close corporations are treated as “incorporated partnerships” and therefore these duties are “substantially different” from those owed by shareholders in ordinary public corporations. McLinden v. Coco, 765 N.E.2d 606, 615 (Ind. Ct. App. 2002). Pursuant to these duties, shareholders must deal “fairly, honestly, and openly with both the corporation and other shareholders.” Barth, 659 N.E.2d at 561. Additionally, shareholders “may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty to the other stockholders and to the corporation.” McLinden, 765 N.E.2d at 615. As part of this duty of loyalty, shareholders may not usurp a corporate opportunity for themselves that in “equity and fairness” belongs to the corporation. Id.
As described below, in some instances, shareholder suits for breach of fiduciary duty may be brought as direct rather than derivative actions.
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See Ind. Code § 23-1-32-1. To have standing to bring a derivative suit, a plaintiff must adequately and fairly represent the interests of the shareholders 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. In his or her complaint, the aggrieved shareholder must specify with particularity the demand made on the corporation for redress or state why no such demand was made. Id. § 23-1-32-2. If the corporation initiates an investigation into the allegations, the court may stay the proceedings pending the outcome of that investigation. Id.
After a complaint has been initiated, the corporation may establish a committee of three or more disinterested directors or other persons to determine if the corporation has a remedy and, if so, if it is in the best interests of the corporation to pursue that remedy. Id. § 23-1-32-4. However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. Id. § 23-1-32-3. Additionally, the court may order a plaintiff to pay any defendant’s expenses and attorneys’ fees if the suit is deemed to have been brought without reasonable cause. Id.
In the close corporation context, lawsuits that would be required to be brought derivatively may sometimes proceed as direct actions because the policy considerations necessitating a derivative action are not present. W & W Equip. Co. v. Mink, 568 N.E.2d 564, 570-71 (Ind. Ct. App. 1991). Those traditional considerations include prevention of multiple shareholder lawsuits, protection of a corporation’s creditors by putting any recovery back into corporate coffers, protection of other shareholders and compensation of the suing shareholder by the indirect increase in the value of his or her shares through a corporate recovery. Id. at 571. Therefore, when these considerations are not relevant, as is often the case in a close corporation, a direct action by an aggrieved shareholder may be permissible where otherwise a derivative action would be required. See id.