Brief survey of Washington shareholder law.

Washington Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in Washington close corporations have the same inspection rights as those in ordinary Washington corporations. See Wash. Rev. Code Ann. § 23B.16.020 (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. § 23B.16.020(a). 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. § 23B.16.010(5).

Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 23B.16.020(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, accounting records of the corporation and the record of shareholders. § 23B.16.020(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. §§ 23B.16.020(4), 23B.16.030(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 and attorneys’ fees 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.” § 23B.16.040(3).

Furthermore, directors have a right to inspect corporate books, records and documents provided they do not have an improper or hostile motive. State ex rel. Paschall v. Scott, 247 P.2d 543, 548-49 (Wash. 1952). The right is not absolute because directors’ access is premised on their duties toward the corporation and their obligation to not do anything to harm or destroy it. Id.

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Shareholder Oppression

Washington law provides for judicial dissolution of a close corporation by shareholders if the “directors or those in control of the corporate have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.” § 23B.14.300(2)(b). However, dissolution is a drastic remedy and should not be granted lightly; the court should consider the impact on all shareholders and the public. Scott v. Trans-System, Inc., 64 P.3d 1, 5 (Wash. 2003).

Although the statute does not define what conduct by the majority constitutes oppression, Washington courts have analyzed oppressive conduct using two widely accepted tests. Id. at 6. The “reasonable expectations of the minority shareholder” test is generally used where the aggrieved shareholder was one of the original participants in the corporation. Id. These expectations have bee described as “those spoken and unspoken understandings on which the founders of a venture rely when commencing the venture.” Id. The second test applied describes oppression as “burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visible 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. Under both tests, the complaining shareholder has the burden of proof to show facts justifying dissolution by a preponderance of the evidence; however, the court, in its discretion, may fashion other less drastic equitable remedies. Id.

Business Law
Serving The Woodlands
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Shareholder Oppression

Shareholders in close corporations are entitled to bring suits on behalf of the corporation for wrongs suffered by the corporation. § 23B.07.400. In order to have standing to bring a derivative action, the plaintiff must have been a shareholder at the time the cause of action arose or received his shares from someone who held them at that time. § 23B.07.400(1). The complaint must allege with particularity the efforts taken to obtain appropriate relief from the corporation or why no such efforts were made or why they failed. § 23B.07.400(2). If the corporation then commences an investigation into the allegations, the court may stay the derivative proceedings pending the outcome of the investigation. Id. Court approval is required before a derivative suit may be discontinued or settled and notification of affected shareholders may be required. § 23B.07.400(3). Additionally, a plaintiff may be required to pay the defendant’s reasonable expenses and attorneys’ fees incurred in connection with the suit if it is found to have been brought without reasonable cause. § 23B.07.400(4).

Washington courts have defined the standing requirements for a shareholder as: being that “(1) he or she must be a shareholder at the time of the complained of transaction, (2) the action must not simply be collusive in order to confer jurisdiction on the court, (3) the complaint must allege what attempts the shareholder made to have the directors or corporation bring the suit, and (4) the shareholder bringing suit must fairly and adequately represent the interests of the class.” Gustafson v. Gustafson, 734 P.2d 949, 953 (Wash. Ct. App. 1987).

Although Washington subscribes to the general rule that derivative actions are brought on behalf of the corporation and therefore any recovery obtained belongs to the corporation and not the individual shareholder who brought suit, courts have noted that in some circumstances there may be exceptions to this rule. LaHue v. Keystone Inv. Co., 496 P.2d 343, 352 (Wash. Ct. App. 1972). Even though a direct action “amounts to a forced distribution of corporate assets” to shareholders, it may be permitted in some circumstances provided the rights of third party creditors are not prejudiced. Id.