Brief survey of Michigan shareholder law.

Michigan Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Michigan close corporations have the same inspection rights as those in ordinary Michigan corporations. See Mich. Comp. Laws Ann. § 450.1487 (West 2004). Shareholders are entitled to receive from the corporation, upon written request, the corporation’s balance sheet for the preceding fiscal year, its income statement for the fiscal year and its statement of source and application of funds. Id. § 450.1487(1). Additionally, upon written demand, shareholders have the right to inspect the corporation’s stock ledger, shareholder list and books and accounts for any proper purpose reasonably related to the person’s interest as a shareholder. Id. § 450.1487(2). The demand must state with particularity the purpose for the inspection, the documents to be inspected, and that those documents are directly connected with the stated purpose. Id. Michigan courts have held that a proper purpose for inspection is “one that is in good faith, seeks information bearing upon protection of the shareholder's interest and that of other shareholders in the corporation, and is not contrary to the corporation's interests.” N. Oakland County Bd. of Realtors v. Realcomp, Inc., 572 N.W.2d 240, 242 (Mich. Ct. App. 1997) . Although the statute is not meant to be a stumbling block to shareholders legitimately seeking inspection, “idle curiosity or mere speculation of mismanagement” are not sufficient purposes. Id.

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 and attorneys’ fees. Mich. Comp. Laws Ann. § 450.1487(3)-(4). Furthermore, a director of a corporation has the right to inspect and copy the books, records and documents of the corporation to the extent reasonably related to the performance of his duties as director but not for any other purpose or in a way that would violate his duties to the corporation. Id. § 450.1487(4).

Grey Bg One

Shareholder Oppression

Michigan law provides a number of remedies for actions by directors or those in control of a corporation that are “illegal, fraudulent, or willfully unfair and oppressive.” Id. § 450.1489(1). Those available remedies are dissolution, cancellation or amendment of a provision of the bylaws or articles of incorporation, alteration or injunction against a resolution or action of the corporation, direction or prohibition of actions of any party to the suit, a buy-out of the aggrieved shareholder or an award of damages. Id. Conduct that is willfully unfair and oppressive is defined as “a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder.” Id. § 450.1489(3).

Michigan courts have rejected the reasonable expectations of the minority shareholder test when determining what conduct by the majority interest constitutes oppresion. Franchino v. Franchino, 687 N.W.2d 620, 629-30 (Mich. Ct. App. 2004). This rejection stems from the fact that the definition of oppression is couched in “terms of the majority’s conduct rather than the effect of that conduct on the minority.” Id. at 630. The statute authorizing various remedies for oppression states that oppressive conduct may include termination of a minority shareholder from a position of employment or limitation of employment benefits in a way that disproportionately affects the aggrieved shareholder. Id. § 450.1489(3).

Furthermore, there is judicial support for the proposition that controlling shareholders owe the minority interest heightened fiduciary duties similar to those imposed on partners by partnership law. See Estes v. Idea Eng’g & Fabrication, Inc., 649 N.W.2d 84, 91 (Mich. Ct. App. 2002).

Business Law
Serving The Woodlands
Review Shape
Grey BG

Derivative Suits

Shareholder Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See Mich. Comp. Laws Ann. § 450.1492a. 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. Id. § 450.1492a. The shareholder must also continue to be a shareholder until the time of judgment unless the failure to do so is a result of corporate action to which the shareholder did not agree and the proceeding was commenced prior to the termination of the plaintiff’s status as a shareholder. Id. Additionally, the complaining shareholder must make a written demand on the corporation seeking appropriate relief before filing suit. Id. § 450.1493a. 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.

If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the outcome of the investigation. Id. § 450.1494. 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. Id. § 450.1495. However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. Id. § 450.1496. Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff upon a finding that the proceeding conferred a substantial benefit on the corporation or to a defendant upon a finding that the suit was brought without reasonable cause. Id. § 450.1497.