Shareholders in an Arkansas close corporation have the same inspection rights as those in ordinary Arkansas corporations. See Ark. Code Ann. § 4-26-715 (2001). To have standing to exercise those rights, the requesting shareholder must make a written demand stating a proper purpose and be a shareholder of the corporation for at least six months preceding the demand. Id. § 4-26-715(b). Shareholders with standing, or their agents, then have the right to examine and copy the corporation’s “books and records of account, minutes, and record of shareholders.” Id. If the corporation or its officers refuse a properly requested inspection, the aggrieved shareholder may file a civil suit to obtain an order requiring the corporation to comply with the request. Id. § 4-26-715(c)(1). Pursuant to its order, the court may impose limitations and restrictions on an ordered inspection and “grant such other relief as to the court may seem just and proper.” Id. § 4-26-715(c)(2). However, the court may refuse or place restrictions on an inspection if it determines that the requesting shareholder has misused information obtained through a previous inspection of corporate documents or made the present demand in bad faith or for an improper purpose. Id. § 4-26-715(c)(4).
There is statutory authorization for judicial dissolution of an Arkansas corporation for actions by directors or controlling interests in a corporation that are “illegal, oppressive, or fraudulent.” Id. § 4-26-1108(a)(1)(B). Arkansas courts adopted the New York standard when defining oppression, namely, “conduct that substantially defeats the ‘reasonable expectations’” of shareholders. Smith v. Leonard, 876 S.W.2d 266, 272 (Ark. 1994) (quoting In re Kemp & Beatley, Inc., 473 N.E.2d 1173 (N.Y. 1984)). However, the majority shareholders have not engaged in oppressive conduct merely because the minority shareholders’ “subjective hopes and desires in joining the venture were not fulfilled.” Taylor v. Hinkel, 200 S.W.3d 387, 392 (Ark. 2004). Close corporations are “unique creatures” that often lead shareholders to expect to have management positions or other employment opportunities with the corporation when they decide to make their investment. Id. Therefore, before making a determination that the majority interest engaged in oppressive conduct, an inquiry is made into the extent of the majority’s knowledge regarding the minority’s expectations concerning the corporation. Id. Furthermore, in at least one unreported case, the Arkansas Court of Appeals held that majority shareholders in close corporations owe fiduciary duties to minority shareholders that are breached when the majority engages in oppressive conduct. Hall v. Wells, No. 87-399, 1988WL 5517, at *2 (Ark. Ct. App. Jan. 27, 1988).
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation, but as individuals they have no direct cause of action unless they have individually suffered direct harm. See Ark. Code Ann. § 4-26-714. 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. Id. § 4-26-714(a). Furthermore, the plaintiff must make a demand on the corporation and allege in his or her complaint that the demand was rejected or otherwise explain why no demand was made. Id. § 4-27-740. However, if the suit is brought by shareholders representing less than 5% of the outstanding shares of any class of the corporation, the corporation or the defendants may move the court to order the plaintiff to provide security unless the value of the plaintiff’s shares is at least $25,000. Id. § 4-26-714(c)(1). The defendant’s motion to compel security must be based on an assertion that there is no reasonable possibility that the suit will benefit the corporation or that the defendant, if other than the corporation, did not participate in the transaction that is the subject of the suit. Id. § 4-26-714(c)(2). Furthermore, Arkansas courts decline to recognize a direct cause of action by shareholders on behalf of the corporation where the recovery runs to the shareholders for an injury to the corporation. See Hames v. Cravens, 966 S.W.2d 244, 248 (Ark. 1998). Where shareholders are harmed directly they have a direct cause of action; however, this type of suit is not derivative on behalf of the corporation. See id.
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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.
We are offering general consultation and are performing our work in Texas. We often consult with out-of-state clients on litigation strategy or assist them in organizing for litigation or settlement or in putting together a legal team. We also assist out-of-state clients in exercising their rights to corporate information.
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.