Pennsylvania Shareholder Law Survey

Shareholder Inspection Rights

Shareholders in Pennsylvania close corporations have the same inspection rights as those in ordinary Pennsylvania corporations. See 15 Pa. Cons. Stat. § 1508. During regular business hours, upon written demand, shareholders of a corporation have the right to examine and copy the share register, books and records of account and the records of proceedings of the incorporators, directors and shareholders. § 1508(b). The shareholder seeking inspection must have a proper purpose germane to his or her interest as a shareholder. Id. A proper purpose for an inspection does not need to allege fraud or mismanagement; a more general purpose of ascertaining whether the corporation is being run properly will suffice in light of the fact that the true owners of a corporation are its shareholders and, as such, they have a right to be informed of corporate activities. Zerbey v. J.H. Zerbey Newspapers, Inc., 560 A.2d 191, 196-97 (Pa. Super. Ct. 1989).

If the corporation or its officers or directors refuse a properly demanded inspection or fail to respond to the demand within five days, the shareholder may apply for an order from the court requiring the corporation to comply. § 1508(c). Before ordering inspection of books and records other than the share register or list of shareholders, the court must determine that the shareholder seeking inspection has complied with the demand requirements and has a proper purpose for the inspection. Id. The corporation has the burden of establishing an improper shareholder purpose when the object of the inspection is the share register or list of shareholders. Id. Furthermore, the corporation’s articles of incorporation may not restrict or eliminate the rightof inspection. § 1508(d).

Additionally, corporate directors have an unqualified right to inspect corporate books, records and other documents. Strassburger v. Phila. Record Co., 6 A.2d 922, 924 (Pa. 1939). This right stems from their position as fiduciaries of the corporation and, as such, they are entitled to the use of all available information in making decisions on behalf of the corporation. Id.

Shareholder Oppression

Pennsylvania law provides for judicial dissolution of a close corporation upon application by a shareholder if the “acts of the directors, or those in control of the corporation, are illegal, oppressive or fraudulent and that it is beneficial to the interests of the shareholders that the corporation be wound up and dissolved.” § 1981(a)(1).

The statute does not define what conduct by the majority constitutes oppression and although the courts cite the common “burdensome, harsh and wrongful conduct” definition, it ultimately applies the “reasonable expectations of the minority shareholders” test. Adler v. Tauberg, 881 A.2d 1267, 1269 (Pa. Super. Ct. 2005). The unique personal relationships that usually exist between the shareholders in a close corporation make it “impossible to hypothesize a set of expectations that will be held in common by all minority shareholders.” Del Borrello v. Del Borrello, 62 Pa. D. & C.4th 417, 429 (Pa. Com. Pl. 2001). However, based on the vulnerable position that minority shareholders often find themselves, reasonable expectations common to many minority shareholders include employment with the corporation, a voice in management and a share of corporate earnings. Id. at 429-30. Despite these expectations, oppression should not be found lightly as they must be “balanced against the corporation’s ability to exercise its business judgment and run its business efficiently.” Id. at 431-32. Therefore, the court should tread cautiously when conducting the balancing analysis and before it interferes in the internal operations of a corporation. Id. at 432.

Furthermore, majority shareholders in close corporations owe the corporation and the minority interest fiduciary duties of loyalty and fairness. Viener v. Jacobs, 51 Pa. D. & C.4th 260, 283 (Pa. Com. Pl. 2000). This duty is one of intrinsic fairness to the minority and prohibits the majority from self-dealing to the detriment of corporate interests. Id.

Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 1782. 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. § 1782(a). However, even if a plaintiff does not meet the standing requirement, the court may allow the suit to continue if there is a “strong prima facie case in favor of the claim asserted on behalf of the corporation and that without the action serious injustice will result.” § 1782(b). Additionally, if the plaintiff or plaintiffs initiating the suit own less than five percent of the outstanding shares of any class of the corporation’s stock, the corporation is entitled to require them to provide adequate security for the costs that may be incurred as a result of the action unless the value of their shares is at least $200,000. § 1782(c).

A shareholder must exhaust all corporate remedies including the filing of a demand on the corporation to take appropriate action even where doing so appears futile. White v. George, 66 Pa. D. & C4th 129, 135 (Pa. Com. Pl. 2004). However, in the close corporation context, these formalities may be circumvented by the treatment of a traditionally derivative action as direct “as long as doing so would not: ‘(i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested persons.’”