Brief survey of Tennessee shareholder law.

Tennessee Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Tennessee close corporations have the same inspection rights as those in ordinary Tennessee corporations. See Tenn. Code Ann. § 48-26-102 (West 2009). 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. Id. § 48-26-102(a). The items available for inspection and copying under this section are the corporation’s charter, 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 and the corporation’s most recent annual report. Id. § 48-26-101(e).

Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. Id. § 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. Id. §§ 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. Id. § 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. Id. § 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).

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Shareholder Oppression

Tennessee 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 or are acting in a manner that is illegal, oppressive or fraudulent.” Tenn. Code Ann. § 48-24-301(2)(B) (West 2009). There is little judicial commentary on what conduct by the majority shareholders constitutes oppression. See Cochran v. L.V.R. & R.C., Inc., 2005 WL 2217067, at *5 (Tenn. Ct. App. Sept. 12, 2005).

In one unreported case, the court held that oppressive conduct can be determined by reference to the fiduciary duties owed by shareholders in close corporations and the reasonable expectations of the minority interest. Id. That case also cited the often quoted definition of oppression as conduct which lacks “probity and fair dealing with the affairs of a company to the prejudice of some of its members, or a visual departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Id. The fiduciary duties owed in close corporations require shareholders to “act in good faith and fairness with regard to their respective interests as shareholders” and are analogous to the duties of good faith and loyalty owed by partners in a partnership. Id. at *4. Additionally, the reasonable expectations of minority shareholders that may be frustrated by majority conduct include prevention of the minority from benefiting financially from his investment by termination of employment and withholding of dividends as well as denial of participation in corporate management. Id.

However, although a finding of oppression does not require fraudulent or illegal acts, it does require that shareholder expectations be objectively reasonable and an oppression action cannot be used as a mechanism to save a minority shareholder from a poor investment decision. Id. at * 5. Furthermore, dissolution is a “drastic remedy” and courts have discretion fashion other less permanent equitable remedies including buy-outs, ordering a declaration of dividends, appointment of a receiver or an award of damages. Id.

Business Law
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Shareholder Oppression

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. Id. § 48-17-401. 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. Id. § 48-17-401(a). The plaintiff’s complaint must allege with particularity the actions taken to obtain appropriate relief from the corporation or state why no such actions were taken or why they failed to remedy the problem. Id. § 48-17-401(b). If the corporation institutes an investigation into the allegations, the proceedings may be stayed pending the outcome of the investigation. Id.

Court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. Id. § 48-17-401(c). 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 or for an improper purpose. Id. § 48-17-401(d).

While generally shareholders may only assert a cause of action based on injury to the corporation through a derivative action, shareholders may also individually “recover for an injury done directly to them distinct from that incurred by the corporation and arising out of a special duty owed to the shareholders by the wrongdoer.” Franklin Capital Assocs., L.P. v. Almost Family, Inc., 194 S.W.3d 392, 401 (Tenn. Ct. App. 2005).