Virginia Shareholder Law
Shareholder Inspection Rights
Shareholders in Virginia close corporations have the same inspection rights as those in ordinary Virginia corporations. See Va. Code Ann. § 13.1-771 (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. § 13.1-771(A). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board creating classes 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. § 13.1-770(E).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 13.1-771(B). Shareholders who make a good faith demand for a proper purpose that specifies the records to be inspected and who either have been record shareholders for six months or own five percent of the outstanding shares may inspect the minutes of meetings of the board, committees thereof and shareholders, accounting records of the corporation and the record of shareholders. § 13.1-771(B),(C). The corporation’s articles of incorporation or bylaws may not restrict or eliminate the shareholders’ right of inspection; however, the corporation may charge a reasonable cost to the shareholder for labor and materials used in providing the requested documents. §§ 13.1-771(D), 13.1-772(C). Shareholder inspection rights are based on the premise that the shareholders are the real owners of the corporation and, as such, they are entitled to information regarding the operation of the corporation. Bank of Giles County v. Mason, 98 S.E.2d 905, 908 (Va. 1957). However, the inspection right is not a “roving commission to pore at will through the books and records” of the corporation and the shareholder must have a proper purpose for the request. Id.
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 order the corporation to comply with the demand and may award the shareholder expenses and attorneys’ fees. § 13.1-773(C). Additionally, a shareholder may seek a writ of mandamus to compel an inspection if his or her demand was improperly denied. Bank of Giles County, 98 S.E.2d at 909.
Furthermore, a director has a right to inspect and copy the corporation’s books, records and other documents for any purpose reasonably related to the performance of his or her duties as director. § 13.1-773.1(A).
Virginia law provides for involuntary 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, oppressive, or fraudulent.” § 13.1-747(A)(1)(b). Although the statute does not specify what conduct by the majority shareholders constitutes oppression, Virginia courts have defined oppression as “conduct that departs from the standards of fair dealing and violates the principles of fair play on which persons who entrust their funds to a corporation are entitled to rely.” Giannotti v. Hamway, 387 S.E.2d 725, 730 (Va. 1990). A finding of oppression does not require “imminent” disaster or a finding of fraudulent conduct; however, it does “contemplate a continuous course of conduct and includes a lack of probity in corporate affairs to the prejudice of some of its shareholders.” Id.
In analyzing claims of oppression by the minority, courts “generally should be reluctant to order liquidation of a functioning corporation” because of the severity of the remedy. Id. at 733. However, while the liquidation remedy should be used with caution, it is the “exclusive” remedy available to redress claims of oppression and the courts are not free to employ other equitable remedies. Id.
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 13.1-672.1. 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, received the shares by operation of law from someone who held them at that time or acquired the shares without knowledge of the act or omission complained of and before its public disclosure. § 13.1-672.1(A). Additionally, the complaining shareholder must make a written demand on the corporation seeking appropriate relief before filing suit. § 13.1-672.1(B). 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. Id. If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the outcome of the investigation. § 13.1-672.1(C).
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. § 13.1672.3. However, court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required. § 13.672.2(A). Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff if its determined that the suit conferred a substantial benefit to the corporation or a defendant upon a finding that the suit was brought vexatiously or in bad faith. § 13.1-672.5.
Virginia subscribes to the rule generally accepted by the majority of states that suits for injuries to a corporation must be brought derivatively. Simmons v. Miller, 544 S.E.2d 666, 674 (V.a. 2001). Although a minority of jurisdictions has adopted an exception that allows shareholders in close corporations to sue individually rather than derivatively for breaches of fiduciary duty, Virginia has declined to adopt this rule and, as such, all claims on behalf of the corporation must be brought derivatively. Id. at 675.