North Dakota Shareholder Law Survey

Shareholder Inspection Rights

Shareholders in North Dakota corporations that are not publicly traded have slightly different inspection rights than those that are publicly traded. See N.D. Cent. Code § 10-19.1-84 (2008). Upon written demand, shareholders in corporations that are not publicly traded have an absolute right to inspect and copy the following corporate documents: share register; records of proceedings of shareholders and the board for the past three years; articles of incorporation and bylaws; certain financial statements; reports made to shareholders for the past three years; names and business addresses of current directors and officers; voting trust and shareholder agreements and certain other agreements and contracts. §§ 10-19.1-84(2), 10-19.1-84(4). These documents must be made available to the requesting shareholder within ten days of receipt of the inspection demand. § 10-19.1-84(4). Additionally, other corporate documents are available for inspection upon a showing of a proper shareholder purpose. § 10-19.1-84(5). In contrast, shareholders in publicly traded corporations have the right to inspect the same corporate documents; however, this right is not absolute and the requesting shareholder must first state a proper purposein his or her demand. § 10-19.1-84(6).

Upon application by the corporation, a court may issue a protective order allowing the corporation to withhold from the documents supplied in response to an inspection demand portions of proceedings of the board if disclosure would cause competitive injury to the corporation. § 10-19.1-84(8).

Shareholder Oppression

North Dakota law allows shareholders of a close corporation to petition for involuntary judicial dissolution of a corporation if the “directors or those in control of the corporation have acted fraudulently or illegally toward one or more shareholders in their capacities as shareholders, directors, officers or employees.” § 10-19.1-115(1)(b)(2). Dissolution is also available if the directors or controlling interest have acted in a manner that is unfairly prejudicial toward other shareholders. § 10-19.1-115(1)(b)(3).

Although not statutorily defined, the “oppression” concept is intended to cover a broad range of conduct that is neither illegal nor fraudulent but is nevertheless improper. Balvik v. Sylvester, 411 N.W.2d 383, 385-86 (N.D. 1987). North Dakota courts have analyzed oppression in terms of the fiduciary duties owed by the majority to the minority and the reasonable expectations of the minority shareholder in participating in the corporation. Id. at 387. The fiduciary duties owed by the majority are analogous to those owed by partners in a partnership and require the majority to observe a standard of the utmost good faith and loyalty. Id. This means that the majority “may not act out of avarice, expediency or self-interest in derogation of their duty.” Id. Violation of these duties often frustrates the expectations of the minority interest that generally include employment with the corporation, a share in its earnings and a voice in its management. Id. Whether the minority’s expectations have been frustrated depends on what the majority interest knew or should have known at the time the minority interest joined the corporation. Id. Courts should examine these expectations objectively and not find oppression simply because the minority shareholder was subjectively disappointed or that his hopes or desires were not fulfilled by the operation of the business. Id.

Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 10-19.1-86. In order to have standing to bring a derivative suit, a plaintiff must 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. § 10-19.1-86. If the shareholder or shareholders pursuing the derivative action own, either individually or in the aggregate, less than five percent of the outstanding shares of any class of stock, the corporation is entitled to demand security for the reasonable expenses incurred in connection with the suit unless the value of the plaintiffs’ shares exceeds twenty-five thousand dollars. § 10-19.1-86(2).

Additionally, if the court determines that the action was brought without reasonable cause the plaintiff may be required to pay the defendants’ reasonable expenses and attorneys’ fees incurred in connection with the suit. § 10-19.1-86(1). North Dakota recognizes the general rule that shareholders who seek to redress an injury to the corporation must do so through a derivative suit rather than an individual action. Schumacher v. Schumacher, 469 N.W.2d 793, 798 (N.D. 1991). However, in cases that involve a breach of the fiduciary duty owed by the majority or where the shareholder suffers a harm that is unique to him, the court may allow the claim to proceed directly whereas otherwise it would have to be brought as a derivative action. Id.