Brief survey of Rhode Island shareholder law.

Rhode Island Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Rhode Island close corporations have the same inspection rights as those in ordinary Rhode Island corporations. See R.I. Gen. Laws § 7-1.2-1502 (2008). Shareholders have the right, upon written demand stating a proper purpose, to inspect and copy the corporation’s books and records of account, minutes and record of shareholders. § 7-1.2-1502(b).

If the corporation or its officers or directors fail to comply with a properly demanded inspection, the court may order inspection and that person or the corporation is liable to the demanding shareholder for a penalty in the amount of ten percent of the value of the shareholder’s interest in the corporation in addition to any other available remedy. § 7-1.2-1502(c). A corporation’s defenses to a suit under this rule are that within the two years prior to the demand, the demanding shareholder sold or offered for sale a list of shareholders of any corporation, “aided or abetted” another in doing so, improperly used information obtained through a shareholder inspection or was not “acting in good faith or for a proper purpose in making his or her demand.” Id.

The shareholders’ inspection right is rooted in the fact that they are the beneficial owners of the corporation and, as such, have an interest in ensuring the corporation is properly managed which requires access to corporate information. Sarni v. Meloccaro, 324 A.2d 648, 639 (R.I. 1974)..

Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 48-26-102(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. § 48-26-102(b),(c).

A corporation may charge a reasonable cost to the shareholder for the labor and material expended in complying with the inspection demand. § 48-26-103(c). If the corporation fails to comply with a properly demanded inspection, the court may order the inspection and require the corporation to pay the shareholder’s reasonable costs, including attorneys’ fees, incurred in enforcing the inspection right unless the corporation had a reasonable basis to doubt the right of the shareholder to conduct the inspection. § 48-26-104(c). Additionally, a director of a corporation has the right to full and complete access to corporate books, records and other documents because his position as corporate fiduciary requires that he or she have as much information as possible when making decisions on behalf of the corporation. State ex rel Oliver v. Soc. for the Preservation of Book of Common Prayer, 693 S.W.2d 340, 343 (Tenn. 1985).

Grey Bg One

Shareholder Oppression

Rhode Island law provides for court ordered liquidation of a close corporation if the “acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent.” § 7-2.1-1314(a)(ii). The statute does not define what conduct by the majority interest constitutes oppression, however, the courts have analyzed it in terms of the heightened duty of good faith owed by the majority interest to the minority as well as by reference to the reasonable expectations of the minority in joining the corporation. Hendrick v. Hendrick, 755 A.2d 784, 791 (R.I. 2000). The court uses the reasonable expectations approach because it accounts for the differing interests that shareholders in close corporations often have that are not present when investing in an ordinary corporation. Id. An examination of shareholder expectations requires an analysis of the “understanding of the parties concerning their role in corporate affairs.” Id. Based on those expectations, examples of oppressive conduct include refusing to declare dividends, siphoning off corporate profits through excessive salaries or bonuses, withholding of corporate information or termination of employment with the corporation. Id. at 791-92.

As alluded to above, majority shareholders in closely held corporations may owe fiduciary duties to the minority interest because of their power over corporate management and the limited market for the minority interest’s shares. See Id. at 784. Whether or not fiduciary duties are owed involves an examination of whether the shareholders intended by their “active participation . . . in management decisions, and their close and intimate working relations, that [they], by acting as if they were partners, thus assumed a fiduciary duty toward one another.” A. Teixeira, Co. v. Teixeira, 699 A.2d 1383, 1383 (R.I. 1997).

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 § 7-1.2-711. 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. § 7-2.1-711(b).

Additionally, the complaining shareholder must make a written demand on the corporation seeking appropriate relief before filing suit. § 7-2.1-711(c). 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. § 7-2.1-711(d). 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 or a committee thereof that maintenance of the suit is not in the best interests of the corporation. § 7-2.1-711(e). However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. § 7-2.1-711(f). Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff whose suit conferred a substantial benefit on the corporation or a defendant upon a finding that the suit was brought without reasonable cause or for an improper purpose. § 7-2.1-711(g).