Brief survey of South Carolina shareholder law.
South Carolina Shareholder Law Survey
Shareholder Inspection Rights
Shareholders in South Carolina close corporations have the same inspection rights as those in ordinary South Carolina corporations. See S.C. Code Ann. § 33-16-102 (2008). During regular business hours at the corporation’s principal office a shareholder may, upon written demand at least five days in advance, inspect and copy a limited number of documents pertaining to the corporation. § 33-16-102(a). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board that create classes or series of shares, minutes of shareholders’ meetings and records of actions taken without a meeting in the previous three years, written communications to shareholders in the previous three years, names and business addresses of current officers and directors, the corporation’s most recent annual report and the corporation’s tax returns for the previous ten years. § 33-16-101(e). Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 33-16-102(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. § 33-16-102(b),(c).
Despite these requirements, the court may order inspection and copying of corporate documents. § 33-16-102(e)(2). Furthermore, the corporation may charge a reasonable fee to the shareholder to cover the cost of labor and materials used in complying with the inspection demand. § 33-16-103(c). Furthermore, 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 award the shareholder expenses and attorneys’ fees incurred in enforcing the inspection right. § 33-16-104(c).
South Carolina law provides for involuntary judicial dissolution of a close corporation by its shareholders if the “directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, fraudulent, oppressive or unfairly prejudicial to the corporation or to any shareholder.” § 33-16-300(2)(ii).
Although the statute does not define what conduct by the majority interest is oppressive or prejudicial, the courts have held that these are “elastic terms whose meaning varies with the circumstances presented in a particular case.” Kiriakides v. Atlas Food Sys. & Servs., Inc., 541 N.E.2d 257, 263-64 (S.C. 2001). Despite the absence of a specific definition, South Carolina rejects the widely used test based on frustration of the reasonable expectations of the minority shareholders. Id. at 264. Because the dissolution statute is couched in terms of the conduct of the majority rather than the rights and interests of the minority, a definition of oppression based on shareholder expectations requires a subjective inquiry into the intentions of the shareholders and an examination of the business practices of the corporation that are contrary to the legislative intent in enacting the statute. Id. Therefore, courts are given discretion to make a determination of whether oppression has occurred on a case by case through reference to “various factors which may be indicative of oppressive behavior.” Id. at 266. Conduct that may indicate oppression includes siphoning off of corporate assets through high salaries, refusal to declare dividends and exclusion of the minority shareholder from corporate management. Id. at 267.
Furthermore, majority shareholders in close corporations owe fiduciary duties to the minority interest. See Clearwater Trust v. Bunting, 626 N.E.2d 334, 347 (S.C. 2006).
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 33-7-400. 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. S.C. R. Civ. P. 23(b)(1). The shareholder’s complaint must allege the efforts used to obtain appropriate relief from the corporation or either state why those efforts failed or why none were made. Id. Additionally, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. Id.
Shareholders that seek to pursue an action for loss to the corporation must do so through a derivative suit. Brown v. Steward, 557 N.E.2d 676, 684 (S.C. Ct. App. 2001). However, if a shareholder suffers an injury that is “separate and distinct from that of the corporation,” he or she may bring an individual action. Id. Additionally, an individual action is also allowed if the suit is based on the breach of a fiduciary duty owed to the shareholder where recovery to the corporation would not fully compensate for the injury. Id. at 685.