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Iowa Shareholder Law

Brief survey of Iowa shareholder law.

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Iowa Shareholder Law Survey

Shareholder Inspection Rights

Shareholders in Iowa close corporations have the same inspection rights as those in ordinary Iowa corporations. See Iowa Code § 490.1602 (1999). 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. § 490.1602(1). The items available for inspection and copying under this section are the corporation’s articles of incorporation, bylaws, resolutions of the board with respect to 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 biennial report. § 490.1601.

Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than those stated above. § 490.1602(2). Shareholders who make a good faith demand for a proper purpose that specifies the records to be inspected may inspect and copy the minutes of meetings of the board, committees thereof and shareholders, accounting records of the corporation and the record of shareholders provided those documents are directly connected to the stated purpose of the demand. § 490.1602(2), § 490.1602(3).

The corporation may charge a reasonable cost to the shareholder for labor and materials used in providing the requested documents. § 490.1603(4). Additionally, if a corporation refuses to comply with a properly demanded inspection for a reason other than a good faith belief that there is a reasonable basis to doubt the right of the shareholder to conduct the inspection, the court may order the corporation to comply with the demand and may award the shareholder expenses and attorneys’ fees. § 490.1604.

Furthermore, a director of a corporation has the right to inspect and copy the books, records and documents of the corporation to the extent reasonably related to the performance of his duties as director but not for any other purpose or in a way that would violate his duties to the corporation. § 490.1605(1).

Iowa law provides for involuntary dissolution of a close corporation by its 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.” § 490.1430(2)(b). Although the statute does not define oppression, Iowa courts have held that oppressive conduct must be examined in terms of the fiduciary duties majority shareholders owe to the minority and in light of the reasonable expectations of the minority shareholders in investing their time and money into the corporation. Maschmeier v. Southside Press, Ltd., 435 N.W.2d 377, 379-80 (Iowa Ct. App. 1988). This type of analysis is required because of the unique “freeze-out” situation minority shareholders in close corporations may find themselves. See id. Once oppressive conduct has been found, Iowa courts may fashion equitable remedies to meet the needs of the particular situation. Id. at 382. The available remedies include dissolution of the corporation or a court ordered purchase of the minority shareholder’s interest by the majority. See id. Additionally, majority shareholders in a close corporation owe fiduciary duties to the minority interest that require them to observe the “most rigid good faith in any transaction with the corporation or its property.” Des Moines Bank & Trust Co. v. George M. Bechtel & Co., 51 N.W.2d 174, 217 (Iowa 1952); see also Cookies Food Products, Inc. v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 451 (Iowa 1988).

Shareholder Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. §490.741. 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 then 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 by waiting the entire 90 day period. § 490.742. If the corporation initiates an investigation into the allegations, the court may stay the derivative proceedings pending the outcome of the investigation. § 490.743. 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. § 490.744. 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. §§ 490.745-46.

There appears to be some disagreement in the Iowa Court of Appeals as to whether shareholders in close corporations may bring a direct suit for acts or omissions that would generally be required to be brought derivatively and whether a recovery obtained in such an action goes to the corporation or to the shareholder who filed suit. See McGinnis v. Iowa Clinic, P.C., No. 08-1005, slip op. at 2 (Iowa Ct. App. Aug. 6, 2009); Redeker v. Litt, No. 04-0637, slip op. at 5-6 (Iowa Ct. App. May 25, 2005). The general rule recognized in Iowa is that shareholders have no individual cause of action for wrongful injury to their corporation by third parties unless the conduct also injured the shareholder individually. Cunningham v. Kartridge Pak Co., 332 N.W.2d 881, 883 (Iowa 1983).

However, in an unpublished decision, the court in Redeker found that because derivative actions in the close corporation context do not generally pose the same threats that prevent direct actions in public corporations, the court may discretionarily allow a direct action to proceed that normally must be brought derivatively. Redeker, No. 04-0637, slip op. at 6. Conversely, in McGinnis, the court held that Iowa common law does not recognize a “derivative direct action” and that while a derivative action is brought to remedy harm suffered by the corporation, a direct action is brought to redress an injury suffered by a shareholder that is “separate and distinct from that suffered by other shareholders.” McGinnis, No. 08-1005, slip op. at 2.

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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.

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