Shareholders in an Alabama close corporation have the same inspection rights as those in an ordinary Alabama corporation. See Ala. Code § 10A-2-16.02(a). During regular business hours at the corporation’s principal office with five written days notice, a shareholder may inspect and copy a limited number of documents pertaining to the corporation. The items available for inspection and copying under this section are the corporation’s articles of incorporation, 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. § 16.01(e). Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. Id. § 16.02(b). Shareholders whose demand states a proper purpose and who have been record holders for at least 180 days or of at least five percent of the outstanding shares may inspect and copy all of the books, papers, records of account, minutes and records of shareholders. However, where a corporation is in the business of banking, shareholders’ rights of inspection are limited and do not include the financial affairs of individuals other than officers, directors, employees and those in business with them. Inspection of these documents requires a court order after an in camera inspection and the order is subject to review on writ of mandamus. Furthermore, where the corporation is engaged in the business of banking, reports to and from state and federal regulatory or supervisory agencies are not subject to shareholder review or inspection. 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. Id. § 16.03(c).
A corporation that fails to permit a shareholder inspection complying with the statutory procedure is liable for “a penalty of an amount not to exceed 10 percent of the value of the shares owned by such shareholder, in addition to any other damages or remedy afforded him or her by law.” Id. § 16.02(c). A corporation’s defenses to a suit under this rule are that within the two years prior to the demand, the demanding shareholder sold or offered for sale a list of shareholders of any corporation, “aided or abetted” another in doing so, improperly used information obtained through a shareholder inspection or was not “acting in good faith or for a proper purpose in making this demand.” There is also statutory authorization for court ordered inspection where a corporation fails to permit an inspection after a proper demand along with imposition of costs and attorneys’ fees expended in enforcing the shareholder’s rights. Id. § 16.04.
Alabama courts recognize a cause of action based on shareholder oppression in close corporations. See Burt v. Burt Boiler Works, Inc., 360 So.2d 327 (Ala. 1978). The oppression cause of action is based on the idea that closely held corporations are similar to partnerships or sole proprietorships where the owners generally have interests and expectations in the business that are greater than the typical passive investor in an ordinary corporation. Brooks v. Hill, 717 So.2d 759, 765 (Ala. 1998). The cause of action then becomes necessary when these expectations are frustrated because the “corporate form that governs their legal relationship assigns control of the corporation to the majority.” Id. This allows the majority to exclude the minority interest from participation in the running of the business and from sharing in its profits by refusing to declare dividends without running afoul of its traditional legal authority. Id. However, the oppression cause of action remedies this problem and makes the majority interest accountable to the minority. See id.
Under Alabama law “dissolution of a corporation is an extreme remedy and should be ordered only where the facts clearly warrant it.” Levine v. Beem, 608 So.2d 373, 374 (Ala. 1992). However, it is available where a shareholder can establish that 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.” Ala. Code § 10A-2-14.30.
In closely held corporations majority shareholders “owe a duty to at least act fairly to the minority interests, and the majority cannot avoid that duty merely because the action taken is legally authorized.” Burt, 360 So.2d at 331. Furthermore, in at least some situations, this duty of fairness rises to the level of a fiduciary duty. Id. at 332. This is particularly true where the majority interest “attempts to eliminate minority shareholders or to deprive them of their proportionate rights and powers without a just equivalent.” Id.
To bring a derivative claim on behalf of a corporation, the plaintiff must be a shareholder at the time the cause of action arose or have obtained the shares by operation of law from a person holding them at that time. Ala. R. Civ. P. 23.1; see Shelton v. Thompson, 544 So.2d 845, 848 (Ala. 1989). Before bringing a derivative claim under Alabama law, the aggrieved shareholder must make a pre-suit demand on the corporation and its board “so that the corporation can deal with the problems internally if possible.” James v. James, 768 So.2d 356, 360 (Ala. 2000). The demand should identify those persons committing the wrongful acts, describe the circumstances and the injury caused to the corporation and state the relief requested. Stallworth v. AmSouth Bank of Alabama, 709 So.2d 458, 463-64 (Ala. 1997). However, this requirement is excused when the complaining shareholder can show that a demand would be futile because “there is such a degree of antagonism between the directors and the corporate interest that the directors would be incapable of performing their duty.” Elgin v. Alfa Corp., 598 So.2d 807, 814 (Ala. 1992). The purpose of the demand requirement is to allow the derivative corporation on whose behalf the suit is brought to “take over the litigation, thus permitting the directors the opportunity to act in their normal status as conductors of the corporation’s affairs.” Stallworth, 709 So.2d at 463. Any recovery in a derivative action is awarded to the corporation and not to the complaining shareholders, although they benefit indirectly “by virtue of their ownership in the corporation.” Robbins v. Sanders, 890 So.2d 998, 1014 (Ala. 2004).
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