West Virginia Shareholder Law Survey
Shareholder Inspection Rights
Shareholders in West Virginia close corporations have the same inspection rights as those in ordinary West Virginia corporations. See W. Va. Code § 31D-16-1602 (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. § 31D-16-1602(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 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, and the names and business addresses of current officers and directors. § 31D-16-1601(e).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 31D-16-1602(b). Shareholders who make a good faith demand for a proper purpose 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 for reasons directly connected to the stated purpose. § 31D-16-1602(b),(c).
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. §§ 31D-16-1602(d), 31D-16-1603(d). 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.” § 31D-16-1604(c).
West Virginia law provides for judicial dissolution of a 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.” § 31D-14-1430(2)(B). However, because dissolution is such a severe remedy, courts should reserve it for “plain cases” and employ other less drastic equitable remedies in other cases. Masinter v. WEBCO Co., 262 S.E.2d 433, 438 (W. Va. 1980). One such remedy is a forced buy-out of the aggrieved minority interest by the majority. Van Kirk v. Young, 375 S.E.2d 196, 198 (W. Va. 1988). Although the statute does not define what conduct by the majority interest constitutes oppression, courts have cited the often quoted definition of “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 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.” Masinter, 262 S.E.2d at 440. However, oppression has also been discussed in terms of the expectations held by minority shareholders in participating in a corporation. Id. at 441. In this context it has been noted that individuals often invest in closely held corporations with the expectation of employment or a return on their investment which are then frustrated by the oppressive conduct of the majority shareholders. Id.
Furthermore, majority shareholders in close corporation owe fiduciary duties to the minority that generally embody the same standards of conduct embraced in the oppression cases from other states. Id. at 440. However, the imposition of these duties “does not mean that the officers and directors are not accorded a rather broad latitude in the conduct of corporate affairs.” Id. at 438.
Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See W. Va. R. Civ. P. 23.1. 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 or received the shares by operation of law from someone who held them at that time. Id. Additionally, the plaintiff’s complaint must allege with particularity the efforts used to obtain appropriate relief from the corporation and why those efforts failed or were not made. Id. Court approval is required before a suit may be dismissed or compromised and notification of affected shareholders may be required. Id.
West Virginia courts have acknowledged that suits for shareholder oppression differ from traditional derivative actions because the injury is usually more personal. Masinter, 262 S.E.2d at 442. However, the same conduct may give rise to both a direct and derivative action. Id.