Shareholders in Georgia close corporations have the same inspection rights as those in ordinary Georgia corporations. See Ga. Code Ann. § 14-2-1602 (2000). 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. § 14-2-1602(b). The items available for inspection and copying under this section are: (1) the corporation’s articles of incorporation; (2) bylaws; (3) resolutions by the board or shareholders relating to the number and classification of directors and their names and residence addresses; (4) resolutions of the board creating classes of shares; (5) minutes of shareholders’ meetings and records of actions taken without a meeting in the previous three years; (6) written communications to shareholders in the previous three years; (7) names and business addresses of current officers and directors; (8) and the corporation’s most recent annual registration. § 14-2-1602(a). Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 14-2-1602 (c). 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. § 14-2-1602C(c)-(d).
The inspection right may not be abolished or limited by the corporation’s articles of incorporation or bylaws except as to shareholders owning less than two percent of the outstanding shares. § 14-2-1602(e). Additionally, a corporation may charge a reasonable cost to cover the labor and materials involved in complying with the inspection demand. § 14-2-1603(c).
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. § 14-2-1604. However, application for a writ of mandamus is not an available remedy for shareholders whose inspection demands have been refused. Standard Factor & Finance Co. v. Fincher, 144 S.E.2d 554, 556 (Ga. Ct. App. 1965). Even though in many jurisdictions mandamus is available to enforce the inspection right, in Georgia it is “not the remedy to enforce a purely private right of a stockholder against a corporation when the right sought to be enforced is in no way affected with a public interest.” Id. Instead, aggrieved shareholders should seek redress in a court of equity. Id.
Georgia law provides an option for judicial dissolution of a statutory close corporation if the directors or those in control have “acted, are acting, or will act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner, whether in his capacity as shareholder, director, or officer of the corporation.” § 14-2-940. Furthermore, the majority interest in a close corporation owes fiduciary duties to minority shareholders because the “control and management of corporations is always dictated by the majority.” Marshall v. W.E. Marshall Co., 376 S.E.2d 393, 396 (Ga. Ct. App. 1988). These duties stem from the fact that minority shareholders are vulnerable to “freeze out” tactics and require majority shareholders to act in good faith in the management of corporate business. Id. In some instances, suits against the majority interest for breach of fiduciary duties may be brought as direct rather than derivative actions. Levy v. Reiner, 659 S.E.2d 848, 851 (Ga. Ct. App. 2008).
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 14-2-741. In order to have standing to bring a derivative suit, a plaintiff must be capable of adequately and fairly representing 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. Before bringing a derivative action, the aggrieved shareholder must make a demand on the corporation seeking appropriate relief and wait 90 days to allow the corporation an opportunity to pursue the litigation unless the demand is rejected or irreparable harm would result to the corporation. § 14-2-742.
If the corporation initiates an investigation into the allegations, the court may stay the derivative proceedings pending the outcome of the investigation. § 14-2-743. A derivative suit may be dismissed upon a determination by a disinterested and independent majority of the board, a committee thereof or other appointed individuals that maintenance of the suit is not in the best interests of the corporation. § 14-2-744. Furthermore, the court must approve a settlement or discontinuance of the suit and may award costs to a successful plaintiff or to a defendant if the suit is brought without reasonable cause or for an improper purpose. §§ 14-2-745, 14-2-746.
Although Georgia follows the general rule that derivative actions are brought on behalf of the corporation, it does recognize situations where direct actions are more appropriate given the nature of the relationships of participants in close corporations. See Thomas v. Dickson, 301 S.E.2d 49, 51 (Ga. Ct. App. 1983). The rationale behind the general rule is that disallowing direct actions by shareholders prevents multiple lawsuits, protects creditors by giving the recovery to the corporation, protects the interests of the non-suing shareholders by disallowing individual recovery and compensates the injured shareholder by indirectly increasing the value of his shares through a corporate recovery. Id. However, Georgia courts have held in some instances that direct actions are appropriate where the justifications for the general rule do not exist in the close corporation setting. Sw. Health & Wellness, L.L.C. v. Work, 639 S.E.2d 570, 577 (Ga. Ct. App. 2006). These situations include those in which there is only a single aggrieved shareholder or where the complaining shareholder would not be adequately compensated if the recovery went to the corporation. See Thomas, 301 S.E.2d at 51.
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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.