The Rights of Minority Shareholders in Washington
Minority shareholders—those who don’t own a controlling interest in a corporation—frequently do not have a say in corporate financial or management decisions. And in closely held corporations, such shareholders also may not be able to easily sell their stock. But the law provides certain protections. Among other things, Washington law gives minority shareholders the right to inspect certain corporate records. Minority shareholders also have the right to bring a suit on behalf of the company under circumstances where the controlling shareholders can’t or won’t bring one (a “derivative” lawsuit). Perhaps most important, minority shareholders have legal rights that offer some protection against “oppression” by controlling stockholders.
The Right to Inspect Corporate Records
Shareholders have the right to inspect corporate records.[i] The law in Washington differs from some other jurisdictions in that shareholders are entitled to see certain records on five days’ notice, without explanation or justification. Those records include bylaws, shareholder meeting minutes, financial statements, shareholder communications, and annual reports. In addition, if requested in good faith and for a proper purpose, a shareholder may inspect board meeting minutes, accounting records, and a record of shareholders.
If a corporation fails to timely respond to a shareholder’s request to review records, the shareholder has a cause of action to compel compliance. A shareholder who prevails in such an action is entitled to recover attorney’s fees and costs incurred.[ii]
The Right to Bring a Derivative Claim
A derivative action is one brought by a shareholder on behalf of the corporation. A minority shareholder might bring a derivative action where, for instance, the director or officers of the corporation have breached a fiduciary duty (such as the duty of loyalty or care) to the corporation.[iii]
The shareholder bringing a derivative action must have been a shareholder at the time the action arose; the complaint must state what actions the shareholder took to attempt to get the corporation or the directors to bring the lawsuit instead; the action must present an actual case or controversy; and the shareholder bringing the suit must adequately and fairly represent the interests of all shareholders.[iv]
Protection against Oppression by Controlling Stockholders
Because minority shareholders are limited in the impact they can have on corporate financial or operational decisions, there are situations where these shareholders can bring a direct claim against the controlling shareholders. Oppression of minority shareholders may arise when the majority shareholders violate the “reasonable expectations” of the minority or in the case of “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 visible 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.”[v]
Examples of minority shareholder oppression may include situations where the controlling shareholders force minority shareholders to sell stock at below fair market value; cause the corporation to issue shares of stock to controlling shareholders at an inadequate price; or reduce the economic value of the stock shares, disproportionately affecting the value of the minority shareholders’ holdings. To be sure, not every grievance of a minority shareholder amounts to oppression: corporate management has substantial leeway to make reasonable business judgments, even those that minority shareholders may be unhappy with. But the consequences where a court finds minority oppression that is unjustified by a legitimate business purpose can be severe and include dissolution of the corporation.
In short, where shareholders are grumbling and demanding information, it is best to consult counsel before taking action that could land the corporation or management in hot water.
— Miles A. Yanick
[i] RCW 23B.16.020.
[ii] RCW 23B.16.040(3).
[iii] RCW 23B.07.400.
[iv] Gustafson v. Gustafson, 47 Wn. App. 272, 276 (1987).
[v] Scott v. Trans-System, Inc., 148 Wn.2d 701, 711 (2003).