Shareholders in Maryland close corporations have different inspection rights than those in ordinary Maryland corporations. See Md. Code Ann., Corps. & Ass’ns § 4-403 (West 2004). For corporations that have elected close corporation status, shareholders may inspect and copy any of the corporation’s documents relevant to its business including any: bylaws; minutes of directors and shareholders’ meetings; annual statement; stock ledger and books of account. Id. Furthermore, once a year each shareholder in the corporation may request a statement of affairs of the corporation which must then be made available within twenty days. § 4-404.
In ordinary Maryland corporations shareholders must meet certain standing requirements in order to exercise the right of inspection. § 2-513. Shareholders seeking inspection must be record owners for at least six months and either individually or in the aggregate own at least five percent of the outstanding shares of any class of the corporation’s stock. Id. Shareholders satisfying these requirements may request a statement of the corporation’s affairs and copy and inspect the corporation’s books, accounts and stock ledger. Id. Within twenty days of receipt of the request, the corporation must have the requested documents available for copying and inspection at its principal place of business. § 2-513(b).
Maryland law provides for dissolution of close and ordinary corporations in an action by shareholders if “the acts of the directors or those in control of the corporation are illegal, oppressive, or fraudulent.” § 2-413(b)(2), § 4-602(a). Although the statute does not define oppression, Maryland courts have discussed oppressive conduct in light of the reasonable expectations of the minority shareholders in investing in the corporation. Edenbaum v. Schwarcz-Osztreicherne, 885 A.2d 365, 377-78 (Md. Ct. Spec. App. 2005). Additionally, the court in Edenbaum also notes the often cited definition of oppression as: “burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visual departure from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Id. at 387.
Oppressive conduct does not necessarily have to involve fraudulent or illegal conduct; however, it must constitute something more than the minority shareholder’s disappointment or the failure of his or her “subjective hopes and desires in joining the venture.” Id. at 377, 379. Instead “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture.” Id. at 379 (quoting Matter of Kemp & Beatley, 473 N.E.2d 1173, 1179 (N.Y. 1984). These expectations generally involve employment in the corporation, participation it is management and operation and a share in its earnings. Id. at 378-79.
Because of the nature of closely held corporations, these expectations of the minority shareholders are subject to “freeze-outs” by the majority interest thereby frustrating the very purpose of participation in the venture in the first instance. Id. at 379. It is for this reason that dissolution has been authorized as a remedy for shareholder oppression. Id. at 380. However, dissolution is viewed as a drastic remedy because of its finality and the potential for it to be used by minority shareholders in retaliation against the majority. Id. Therefore, Maryland courts have discretion to fashion “less drastic” equitable remedies based on the particular facts of the case before them. Id. Examples of these alternative remedies include appointment of a receiver, an injunction prohibiting the oppressive conduct, an order requiring distribution of dividends or an award of damages to the minority shareholder as compensation. Id.
Furthermore, majority shareholders in closely held corporations owe minority shareholders fiduciary duties to not use their position of control in the corporation to the detriment of the minority interest. Mona v. Mona Elec. Group, Inc., 934 A.2d 450, 464 (Md. Ct. Spec. App. 2007). These duties also require the majority shareholders “not to use [their] voting power for [their] own benefit or for a purpose adverse to the interests of the corporation and its stockholders.” Id.
Shareholders in Maryland closely held corporations may bring derivative actions on behalf of the corporation for injuries sustained as a result of the wrongful actions of third parties. Bender v. Schwartz, 917 A.2d 142, 152 (Md. Ct. Spec. App. 2007). These suits are a check on the management power of the directors and the controlling interest of the corporation and allow shareholders to pursue a cause of action that those in control refuse to initiate. Id.
Before filing suit, shareholders must make a demand on the corporation that the board initiate the suit or otherwise show that making such a demand would be futile. Id. After receiving a demand the corporation must investigate the allegations and determine whether filing suit is in the best interests of the corporation. Id. This demand waives any claim the shareholders may have that the corporation is incapable of independently acting on the demand; however, they may still assert a claim that the board did not act independently or that it wrongly refused their demand. Id. If the corporation declines to bring suit after conducting its investigation, the shareholders may then initiate a “demand refused” action. Id. Directors are given business judgment rule protection in a determination of whether a demand was wrongful refused. Id. The board’s decision will be upheld unless the shareholders are able to show that the decision was not made independently or in good faith or that it was irrational. Id.
Any recovery obtained through a derivative action flows to the corporation and not the individual shareholder who brought suit. Mona, 934 A.2d at 465. However, if a shareholder directly and individually suffers an injury separate and distinct from that of the corporation he or she may bring a direct action and personally retain any recovery obtained. Paskowitz v. Wohlstadter, 882 A.2d 1272, 1276-77 (Md. Ct. Spec. App. 2003).
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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.
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