Brief survey of Utah shareholder law.

Utah Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Utah close corporations have the same inspection rights as those in ordinary Utah corporations. See Utah Code § 16-10a-1602. 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. § 16-10a-1602(1). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, 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, certain financial statements, names and business addresses of current officers and directors, and the corporation’s most recent annual report. Id. § 16-10a-1601(5).

Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. Id. §16-10a-1602(2). Shareholders who make a good faith demand for a proper purpose that is reasonably related to his or her interest as a shareholder and that specifies the records to be inspected may inspect the minutes of meetings of the board, committees thereof and shareholders, waivers of notice of these meetings, accounting records of the corporation and the record of shareholders. Id. § 16-10a-1602(2),(3).

The inspection right may not be abolished or limited by the corporation’s articles of incorporation or bylaws; however, a corporation may charge a reasonable cost to cover the labor and materials involved in complying with the inspection demand. Id. §§ 16-10a-1602(5), 16-10a-1603(3). A corporation that fails to comply with a properly demanded inspection is subject to an inspection under court order and the imposition of costs, attorneys’ fees and damages associated with the shareholder’s enforcement of his or her inspection rights unless the corporation “refused the inspection in good faith because it had a reasonable basis for doubt” about the right of the shareholder to inspect the records demanded. § 16-10a-1604.

The shareholder inspection rules and requirements apply equally to directors of a corporation seeking access to corporate records and documents. Id. § 16-10a-1602.

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Shareholder Oppression

Utah law provides for judicial dissolution of a close corporation by shareholders if the “directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.” Id. § 16-10a-1430(2)(b). Although the statute does not specifically define oppression and therefore does not appear to be any significant judicial commentary on the subject, the dissolution remedy is closely related to the enhanced fiduciary duties owed by the majority shareholders to the minority. McLaughlin v. Schenk, 220 P.3d 146, 154 (Utah 2009).

McLaughlin discusses the relationship between shareholders in close corporations in light of their differences with those in public corporations. Id. The fact that the board of directors is likely to consist of the majority shareholders and therefore be an interested party in all corporate decisions makes minority shareholders in close corporations more susceptible to unfair treatment. Id. As a result, Utah adopted the Massachusetts standard that requires shareholders in close corporations to observe a duty of utmost good faith and loyalty to the other shareholders. Id. at 155. This approach allows an oppressed minority shareholder to pursue other remedies besides dissolution and better protects them from the vulnerabilities to which the minority is subjected by virtue of his or her position in the corporation. Id. at 155-56.

Business Law
Serving The Woodlands
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Derivative Suits

Shareholder Derivative Suits

Shareholders in close corporations are entitled to bring suits on behalf of the corporation for wrongs suffered by the corporation. Utah Code § 16-10a-740. In order to have standing to bring a derivative action, the plaintiff must adequately and fairly represent the interests of the corporation and have been a shareholder at the time the cause of action arose or received his shares from someone who held them at that time. Id. § 16-10a-740(2). Additionally, the complaining shareholder must make a written demand on the corporation seeking appropriate relief before filing suit. Id. § 16-10a-740(3). However, if the situation is such that making the demand would be futile, the requirement is waived provided the plaintiff alleges this futility with particularity. Dansie v. City of Herriman, 134 P.3d 1139, 1146 (Utah 2006). The futility exception is met if the plaintiff can show that corporate management explicitly stated that it would not pursue the claims presented or when making a demand would be “substantively detrimental” to the claim. Id. at 1147. 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. Utah Code § 16-10a-740(3). If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the outcome of the investigation. Id. § 16-10a-740(3)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, a committee thereof or other appointed individuals that maintenance of the suit is not in the best interests of the corporation. Id. § 16-10a-740(4). However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. Id. § 16-10a-740(5). Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff if it is determined that the suit conferred a substantial benefit to the corporation or a defendant upon a finding that the suit was brought without reasonable cause or for an improper purpose. Id. § 16-10a-740(6).

While Utah generally subscribes to the recognized rule that a shareholder may not individually assert a cause of action belonging to the corporation, it has adopted the exception that allows individual shareholder action and recovery in certain suits involving close corporations. Dansie, 134 P.3d at 1144-45.