Kentucky Shareholder Law Survey

Right to Inspect Books and Records

Kentucky shareholders have the right to inspect corporate books and records upon written demand. The demand must give the corporation business five days notice. KY. REV. STAT. ANN. § 271B.16-020(1) (West 2009). The shareholder can inspect and copy during regular business hours at a reasonable location chosen by the corporation. § 271B.16-020(2).

The shareholder’s written demand must be made in good faith and for a proper purpose. § 271B.16-020(3)(a). He must “describe[ ] with reasonable particularity his purpose” and the records he wants to inspect. § 271B.16-020(3)(b). The records must be “directly connected” with the shareholder’s proper purpose. § 271B.16-020(3)(c).

If a minority shareholder states his intent to inspect corporate books and records, the corporation has the burden to show evidence that the request was not made for a proper purpose. Bennett v. Mack’s Supermarkets, Inc., 602 S.W.2d 143, 148 (Ky. 1979).

If the corporation fails to allow an inspection, the shareholder may petition with the Circuit Court located in the county where the corporation’s principal office is located. KY. REV. STAT. ANN. § 271B.16-040(1) (West 2009).

If the court orders the inspection, the corporation must bay the shareholder’s costs and reasonable attorney’s fees unless the corporation shows that the inspection was refused in good faith. § 271B.16-040(1).

Shareholder Oppression

A shareholder may apply for judicial dissolution if the shareholder can show that the directors or those controlling the corporation have acted in some way that is illegal or fraudulent. § 271B.14-300(2)(b).

Derivative Actions

Kentucky shareholders in close corporations can file a derivative suit to redress harm to the corporation. §271B.7-400(1); Allied Ready Mix Co. v. Allen, 994 S.W.2d 4, 8 (Ky. App. 1998). To have standing to bring a derivative suit, plaintiff must be a shareholder when the wrong occurred or become a shareholder through transfer by operation of law. § 271B-400(1). The shareholder must first make a demand on the corporation to take the desired action or show why the demand requirement was excused. §271B.7-400(2). The shareholder bears the burden to overcome the business judgment rule. Allied Ready Mix, 994 S.W.2d at 4.

A shareholder may bring a direct action rather than a derivative action, but the shareholder must show that a violation of a duty owed directly to him. Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir.), reh’g denied, 652 F.2d 1001 (1981).

A derivative action, once commenced, cannot be discontinued or settled without the court’s permission. §271B.7-400(3). If the court determines that the suit affects shareholders’ interest, the court will require that those shareholders be notified. §271B.7-400(3).