| Fryar Law Firm, P.C. -- 1001 Texas Ave. -- 14th Floor -- Houston, Texas 77002-3194 Tel. 888-481-9995 281-715-6396 Fax 281-715-6397 Skype: fryarlawfirm ©2010 -- Copyright Fryar Law Firm, P.C. -- All Rights Reserved -- Disclaimer/Terms of Use |
| Protecting the Rights of Business Owners |
| Subscribe to Shareholder Oppression Blog |
| Tennessee Shareholder Law Resources |
| Resources >> Shareholder Law >>Tennessee |
I. Shareholder Inspection Rights
Shareholders in Tennessee close corporations have the same inspection rights as those in ordinary Tennessee corporations.
See Tenn. Code Ann. § 48-26-102 (West 2009). 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. § 48-26-102(a). The items available for inspection and copying under this section are the
corporation’s charter, bylaws, resolutions of the board that create 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
annual report. § 48-26-101(e).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than
those stated above. § 48-26-102(b). 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. § 48-26-102(b),(c). A corporation may charge a reasonable cost to the shareholder for the
labor and material expended in complying with the inspection demand. § 48-26-103(c).
If the corporation fails to comply with a properly demanded inspection, the court may order the inspection and require the
corporation to pay the shareholder’s reasonable costs, including attorneys’ fees, incurred in enforcing the inspection right
unless the corporation had a reasonable basis to doubt the right of the shareholder to conduct the inspection. § 48-26-104(c).
Additionally, a director of a corporation has the right to full and complete access to corporate books, records and other
documents because his position as corporate fiduciary requires that he or she have as much information as possible when
making decisions on behalf of the corporation. State ex rel Oliver v. Soc. for the Preservation of Book of Common Prayer, 693 S.
W.2d 340, 343 (Tenn. 1985).
II. Shareholder Oppression
Tennessee law provides for involuntary judicial dissolution of a close corporation by its shareholders if the “directors or those in
control of the corporation have acted or are acting in a manner that is illegal, oppressive or fraudulent.” § 48-24-301(2)(B).
There is little judicial commentary on what conduct by the majority shareholders constitutes oppression. See Cochran v. L.V.R.
& R.C., Inc., 2005 WL 2217067 at *5 (Tenn. Ct. App. Sept. 12, 2005).
In one unreported case, the court held that oppressive conduct can be determined by reference to the fiduciary duties owed by
shareholders in close corporations and the reasonable expectations of the minority interest. Id. That case also cited the often
quoted definition of oppression as conduct which lacks “probity and fair dealing with 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. The fiduciary duties owed in close corporations
require shareholders to “act in good faith and fairness with regard to their respective interests as shareholders” and are
analogous to the duties of good faith and loyalty owed by partners in a partnership. Id. at *4. Additionally, the reasonable
expectations of minority shareholders that may be frustrated by majority conduct include prevention of the minority from
benefiting financially from his investment by termination of employment and withholding of dividends as well as denial of
participation in corporate management. Id.
However, although a finding of oppression does not require fraudulent or illegal acts, it does require that shareholder
expectations be objectively reasonable and an oppression action cannot be used as a mechanism to save a minority
shareholder from a poor investment decision. Id. at * 5. Furthermore, dissolution is a “drastic remedy” and courts have
discretion fashion other less permanent equitable remedies including buy-outs, ordering a declaration of dividends, appointment
of a receiver or an award of damages. Id.
III. Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. §
48-17-401. In order to have standing to bring a derivative suit, a plaintiff must 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. § 48-17-401(a). The plaintiff’
s complaint must allege with particularity the actions taken to obtain appropriate relief from the corporation or state why no such
actions were taken or why they failed to remedy the problem. § 48-17-401(b). If the corporation institutes an investigation into
the allegations, the proceedings may be stayed pending the outcome of the investigation. Id.
Court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be
required. § 48-17-401(c). Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff upon a finding
that the proceeding conferred a substantial benefit on the corporation or to a defendant upon a finding that the suit was brought
without reasonable cause or for an improper purpose. § 48-17-401(d).
While generally shareholders may only assert a cause of action based on injury to the corporation through a derivative action,
shareholders may also individually “recover for an injury done directly to them distinct from that incurred by the corporation and
arising out of a special duty owed to the shareholders by the wrongdoer.” Franklin Capital Assocs., L.P. v. Almost Family, Inc.,
194 S.W.3d 392, 401 (Tenn. Ct. App. 2005).
Shareholders in Tennessee close corporations have the same inspection rights as those in ordinary Tennessee corporations.
See Tenn. Code Ann. § 48-26-102 (West 2009). 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. § 48-26-102(a). The items available for inspection and copying under this section are the
corporation’s charter, bylaws, resolutions of the board that create 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
annual report. § 48-26-101(e).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than
those stated above. § 48-26-102(b). 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. § 48-26-102(b),(c). A corporation may charge a reasonable cost to the shareholder for the
labor and material expended in complying with the inspection demand. § 48-26-103(c).
If the corporation fails to comply with a properly demanded inspection, the court may order the inspection and require the
corporation to pay the shareholder’s reasonable costs, including attorneys’ fees, incurred in enforcing the inspection right
unless the corporation had a reasonable basis to doubt the right of the shareholder to conduct the inspection. § 48-26-104(c).
Additionally, a director of a corporation has the right to full and complete access to corporate books, records and other
documents because his position as corporate fiduciary requires that he or she have as much information as possible when
making decisions on behalf of the corporation. State ex rel Oliver v. Soc. for the Preservation of Book of Common Prayer, 693 S.
W.2d 340, 343 (Tenn. 1985).
II. Shareholder Oppression
Tennessee law provides for involuntary judicial dissolution of a close corporation by its shareholders if the “directors or those in
control of the corporation have acted or are acting in a manner that is illegal, oppressive or fraudulent.” § 48-24-301(2)(B).
There is little judicial commentary on what conduct by the majority shareholders constitutes oppression. See Cochran v. L.V.R.
& R.C., Inc., 2005 WL 2217067 at *5 (Tenn. Ct. App. Sept. 12, 2005).
In one unreported case, the court held that oppressive conduct can be determined by reference to the fiduciary duties owed by
shareholders in close corporations and the reasonable expectations of the minority interest. Id. That case also cited the often
quoted definition of oppression as conduct which lacks “probity and fair dealing with 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. The fiduciary duties owed in close corporations
require shareholders to “act in good faith and fairness with regard to their respective interests as shareholders” and are
analogous to the duties of good faith and loyalty owed by partners in a partnership. Id. at *4. Additionally, the reasonable
expectations of minority shareholders that may be frustrated by majority conduct include prevention of the minority from
benefiting financially from his investment by termination of employment and withholding of dividends as well as denial of
participation in corporate management. Id.
However, although a finding of oppression does not require fraudulent or illegal acts, it does require that shareholder
expectations be objectively reasonable and an oppression action cannot be used as a mechanism to save a minority
shareholder from a poor investment decision. Id. at * 5. Furthermore, dissolution is a “drastic remedy” and courts have
discretion fashion other less permanent equitable remedies including buy-outs, ordering a declaration of dividends, appointment
of a receiver or an award of damages. Id.
III. Shareholder Derivative Suits
Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. §
48-17-401. In order to have standing to bring a derivative suit, a plaintiff must 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. § 48-17-401(a). The plaintiff’
s complaint must allege with particularity the actions taken to obtain appropriate relief from the corporation or state why no such
actions were taken or why they failed to remedy the problem. § 48-17-401(b). If the corporation institutes an investigation into
the allegations, the proceedings may be stayed pending the outcome of the investigation. Id.
Court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be
required. § 48-17-401(c). Additionally, reasonable expenses and attorneys’ fees may be awarded to a plaintiff upon a finding
that the proceeding conferred a substantial benefit on the corporation or to a defendant upon a finding that the suit was brought
without reasonable cause or for an improper purpose. § 48-17-401(d).
While generally shareholders may only assert a cause of action based on injury to the corporation through a derivative action,
shareholders may also individually “recover for an injury done directly to them distinct from that incurred by the corporation and
arising out of a special duty owed to the shareholders by the wrongdoer.” Franklin Capital Assocs., L.P. v. Almost Family, Inc.,
194 S.W.3d 392, 401 (Tenn. Ct. App. 2005).
 | |  | |  | |  | |  |