Shareholders in Alaskan close corporations have the same inspection rights as those in an ordinary Alaskan corporation. See Alaska Stat. § 10.06.430 (2009). To exercise the right of inspection, the person seeking inspection must be a shareholder of the corporation and must make a written demand stating with “reasonable particularity” the purpose of the inspection. Id. § 10.06.430(b). The inspection must be made at a reasonable time and only the “books and records of account, minutes, and the record of shareholders directly connected to the stated purpose of the inspection may be inspected or copied.” Id.
If a corporation or its officers fail to allow a properly demanded inspection, the officer or corporation is liable to the shareholder for 10% of the value of the shares owned by the shareholder requesting inspection or $5,000, whichever amount is greater. Id. § 10.06.430(c). This penalty is in addition to other available remedies or damages. Id. A corporation sued for failing to permit an inspection has several defenses including that the requesting shareholder has in the previous two years sold or offered for sale a list of shareholders of any corporation, “aided or abetted” another in doing so, improperly used information gained from a previous inspection of a corporation’s books and records, or was not acting “in good faith or for a proper purpose” in demanding the inspection. Id. Alaskan courts also have the power to force a corporation to comply with a properly demanded inspection. Id. § 10.06.430(d).
Alaska recognizes a cause of action for shareholder oppression in close corporations. Stefano v. Coppock, 705 P.2d 443, 446 (Alaska 1985). Oppressive conduct is defined as action by a majority interest that “substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise.” Id. This occurs when, among other things, a minority shareholder is denied employment in the corporation, a share in corporate profits or a voice in management decisions thereby substantially reducing the value of the investment the shareholder believed he or she was making. Id.
When this type of oppression occurs, dissolution is an available remedy; however, “courts retain equitable authority to fashiona less drastic remedy to fit the parties’ situation.” Id.; Alaska Stat. § 10.06.628(b)(5) (stating that involuntary dissolution is an available remedy in corporations of 35 or fewer shareholders where dissolution is “reasonably necessary for the protection of the rights or interests of the complaining shareholder”). A buy-out of the complaining minority interest by the controlling interest is another available equitable remedy. Stefano, 705 P.2d at 446. Additionally, as a result of the differing expectations of shareholders in close corporations and their unique nature similar to partnerships, shareholders owe each other a fiduciary duty. Alaska Plastics, Inc. v. Coppock, 621 P.2d 270, 276 (Alaska 1980). This duty arises because of the trust and confidence necessary between shareholders in close corporations and the “inherent dangers” faced by minority shareholders. Id.
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs suffered by it, but as individuals they have no direct cause of action. See Arctic Contractors, Inc. v. State, 573 P.2d 1385, 1385 (Alaska 1978); Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1336 (Alaska 1997). To have standing to bring a derivative suit, a plaintiff must 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. Alaska Stat. § 10.06.435(b). However, if the plaintiff does not meet the standing requirements the court may, in its discretion, allow the suit to proceed provided there is evidence that “(1) there is a strong prima facie case in favor of the claim asserted on behalf of the corporation; (2) no other similar action has been or is likely to be instituted; (3) the plaintiff acquired the shares before there was disclosure to the public or to the plaintiff of the wrongdoing of which the plaintiff complains; (4) unless the action can be maintained the defendant may retain a gain derived from the defendant's willful breach of a fiduciary duty; and (5) the requested relief will not result in unjust enrichment of the corporation or a shareholder of the corporation.” Id.
Before filing suit, the plaintiff shareholder must make a demand on the directors of the corporation requesting the relief desired unless it can be shown that a majority of the directors are involved in causing the injury to the corporation. Id. § 10.06.435(c); Jerue v. Millett, 66 P.3d 736, 743 (Alaska 2003). After a demand has been made, a determination by the board in its business judgment that further pursuit of the action is not in the best interests of the corporation terminates the action unless the court rejects the board’s determination and allows the suit to continue. Alaska Stat. § 10.06.435(e),(f).
Furthermore, if the derivative action is brought by shareholders representing less than five percent of the outstanding shares of any class of the corporation, the corporation or the defendants may “move the court to require the plaintiff to give security for the reasonable expense, including attorney fees, that may be incurred by the moving party.” Id. § 10.06.435(h).
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In order to remain on the cutting edge of business owner rights law, Fryar Law Firm keeps abreast of legal developments in all 50 states. This 50-state survey is presented for educational purposes. However, we do not hold ourselves out as experts on the law of any jurisdiction other than Texas, and we may not practice law in any other state, with the following exceptions:
The lawsuit involves a non-Texas company but may be brought in Texas courts--example, if the client is a Texan or the company operates in Texas.
We are part of a legal team that includes local counsel. Out of state legal teams benefit from our experience when we consult. We may also act as lead counsel, if we have local co-counsel and permission of the court.
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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.