Kentucky shareholders have the right to inspect corporate books and records upon written demand. The demand must give the corporation business five days notice. KY. REV. STAT. ANN. § 271B.16-020(1) (West 2009). The shareholder can inspect and copy during regular business hours at a reasonable location chosen by the corporation. § 271B.16-020(2).
The shareholder’s written demand must be made in good faith and for a proper purpose. § 271B.16-020(3)(a). He must “describe[ ] with reasonable particularity his purpose” and the records he wants to inspect. § 271B.16-020(3)(b). The records must be “directly connected” with the shareholder’s proper purpose. § 271B.16-020(3)(c).
If a minority shareholder states his intent to inspect corporate books and records, the corporation has the burden to show evidence that the request was not made for a proper purpose. Bennett v. Mack’s Supermarkets, Inc., 602 S.W.2d 143, 148 (Ky. 1979).
If the corporation fails to allow an inspection, the shareholder may petition with the Circuit Court located in the county where the corporation’s principal office is located. KY. REV. STAT. ANN. § 271B.16-040(1) (West 2009).
If the court orders the inspection, the corporation must bay the shareholder’s costs and reasonable attorney’s fees unless the corporation shows that the inspection was refused in good faith. § 271B.16-040(1).
A shareholder may apply for judicial dissolution if the shareholder can show that the directors or those controlling the corporation have acted in some way that is illegal or fraudulent. § 271B.14-300(2)(b).
Kentucky shareholders in close corporations can file a derivative suit to redress harm to the corporation. §271B.7-400(1); Allied Ready Mix Co. v. Allen, 994 S.W.2d 4, 8 (Ky. App. 1998). To have standing to bring a derivative suit, plaintiff must be a shareholder when the wrong occurred or become a shareholder through transfer by operation of law. § 271B-400(1). The shareholder must first make a demand on the corporation to take the desired action or show why the demand requirement was excused. §271B.7-400(2). The shareholder bears the burden to overcome the business judgment rule. Allied Ready Mix, 994 S.W.2d at 4.
A shareholder may bring a direct action rather than a derivative action, but the shareholder must show that a violation of a duty owed directly to him. Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir.), reh’g denied, 652 F.2d 1001 (1981).
A derivative action, once commenced, cannot be discontinued or settled without the court’s permission. §271B.7-400(3). If the court determines that the suit affects shareholders’ interest, the court will require that those shareholders be notified. §271B.7-400(3).
We are licensed only in Texas
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.