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| Utah Shareholder Law Resources |
| Resources >> Shareholder Law >>Utah |
I. Shareholder Inspection Rights
Shareholders in Utah close corporations have the same inspection rights as those in ordinary Utah corporations. See Utah
Code Ann. § 16-10a-1602 (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. § 16-10a-1602(1). The items available for inspection and copying under this section are the corporation’s
articles of incorporation, bylaws, 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, certain financial statements, names
and business addresses of current officers and directors, and the corporation’s most recent annual report. § 16-10a-1601
(5).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than
those stated above. §16-10a-1602(2). Shareholders who make a good faith demand for a proper purpose that is reasonably
related to his or her interest as a shareholder and that specifies the records to be inspected may inspect the minutes of
meetings of the board, committees thereof and shareholders, waivers of notice of these meetings, accounting records of the
corporation and the record of shareholders. § 16-10a-1602(2),(3).
The inspection right may not be abolished or limited by the corporation’s articles of incorporation or bylaws; however, a
corporation may charge a reasonable cost to cover the labor and materials involved in complying with the inspection
demand. §§ 16-10a-1602(5), 16-10a-1603(3). A corporation that fails to comply with a properly demanded inspection is
subject to an inspection under court order and the imposition of costs, attorneys’ fees and damages associated with the
shareholder’s enforcement of his or her inspection rights unless the corporation “refused the inspection in good faith because
it had a reasonable basis for doubt” about the right of the shareholder to inspect the records demanded. § 16-10a-1604.
The shareholder inspection rules and requirements apply equally to directors of a corporation seeking access to corporate
records and documents. § 16-10a-1602.
II. Shareholder Oppression
Utah law provides for judicial dissolution of a close corporation by 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.” § 16-10a-1430(2)(b).
Although the statute does not specifically define oppression and there does not appear to be any significant judicial
commentary on the subject, the dissolution remedy is closely related to the enhanced fiduciary duties owed by the majority
shareholders to the minority. McLaughlin v. Schenk, No. 20070688, slip op. at 5 (Utah Oct. 2, 2009).
McLaughlin is a Utah Supreme Court decision that has not yet been released for publication but discusses the relationship
between shareholders in close corporations in light of their differences with those in public corporations. Id. The fact that the
board of directors is likely to consist of the majority shareholders and therefore be an interested party in all corporate
decisions makes minority shareholders in close corporations more susceptible to unfair treatment. Id. As a result, Utah has
adopted the Massachusetts standard that requires shareholders in close corporations to observe a duty of utmost good faith
and loyalty to the other shareholders. Id. at 8. This approach allows an oppressed minority shareholder to pursue other
remedies besides dissolution and better protects them from the vulnerabilities to which the minority is subjected by virtue of
his or her position in the corporation. Id. at 7-8.
III. Shareholder Derivative Suits
Shareholders in close corporations are entitled to bring suits on behalf of the corporation for wrongs suffered by the
corporation. § 16-10a-740. In order to have standing to bring a derivative action, the plaintiff must adequately and fairly
represent the interests of the corporation and have been a shareholder at the time the cause of action arose or received his
shares from someone who held them at that time. § 16-10a-740(2). Additionally, the complaining shareholder must make a
written demand on the corporation seeking appropriate relief before filing suit. § 16-10a-740(3). However, if the situation is
such that making the demand would be futile, the requirement is waived provided the plaintiff alleges this futility with
particularity. Dansie v. City of Herriman, 134 P.3d 1139, 1146 (Utah 2006). The futility exception is met if the plaintiff can
show that corporate management explicitly stated that it would not pursue the claims presented or when making a demand
would be “substantively detrimental” to the claim. Id. at 1147. The shareholder is then prohibited from bringing a derivative
action until 90 days have passed after the demand was made unless the shareholder is notified that the demand has been
rejected by the corporation or waiting the full 90 day period would cause irreparable injury to the corporation. § 16-10a-740
(3). If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the
outcome of the investigation. § 16-10a-740(3)d).
A derivative suit may be dismissed upon a determination in good faith and after reasonable investigation 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. § 16-10a-740(4). However, court approval is required before a suit may be
discontinued or settled and notification of affected shareholders may be required. § 16-10a-740(5). Additionally, reasonable
expenses and attorneys’ fees may be awarded to a plaintiff if it is determined that the suit conferred a substantial benefit to
the corporation or a defendant upon a finding that the suit was brought without reasonable cause or for an improper
purpose. § 16-10a-740(6).
While Utah generally subscribes to the recognized rule that a shareholder may not individually assert a cause of action
belonging to the corporation, it has adopted the exception that allows individual shareholder action and recovery in certain
suits involving close corporations. Danise, 134 P.3d at 1144-45.
Shareholders in Utah close corporations have the same inspection rights as those in ordinary Utah corporations. See Utah
Code Ann. § 16-10a-1602 (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. § 16-10a-1602(1). The items available for inspection and copying under this section are the corporation’s
articles of incorporation, bylaws, 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, certain financial statements, names
and business addresses of current officers and directors, and the corporation’s most recent annual report. § 16-10a-1601
(5).
Shareholders who meet additional standing requirements have the right to inspect and copy a wider range of documents than
those stated above. §16-10a-1602(2). Shareholders who make a good faith demand for a proper purpose that is reasonably
related to his or her interest as a shareholder and that specifies the records to be inspected may inspect the minutes of
meetings of the board, committees thereof and shareholders, waivers of notice of these meetings, accounting records of the
corporation and the record of shareholders. § 16-10a-1602(2),(3).
The inspection right may not be abolished or limited by the corporation’s articles of incorporation or bylaws; however, a
corporation may charge a reasonable cost to cover the labor and materials involved in complying with the inspection
demand. §§ 16-10a-1602(5), 16-10a-1603(3). A corporation that fails to comply with a properly demanded inspection is
subject to an inspection under court order and the imposition of costs, attorneys’ fees and damages associated with the
shareholder’s enforcement of his or her inspection rights unless the corporation “refused the inspection in good faith because
it had a reasonable basis for doubt” about the right of the shareholder to inspect the records demanded. § 16-10a-1604.
The shareholder inspection rules and requirements apply equally to directors of a corporation seeking access to corporate
records and documents. § 16-10a-1602.
II. Shareholder Oppression
Utah law provides for judicial dissolution of a close corporation by 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.” § 16-10a-1430(2)(b).
Although the statute does not specifically define oppression and there does not appear to be any significant judicial
commentary on the subject, the dissolution remedy is closely related to the enhanced fiduciary duties owed by the majority
shareholders to the minority. McLaughlin v. Schenk, No. 20070688, slip op. at 5 (Utah Oct. 2, 2009).
McLaughlin is a Utah Supreme Court decision that has not yet been released for publication but discusses the relationship
between shareholders in close corporations in light of their differences with those in public corporations. Id. The fact that the
board of directors is likely to consist of the majority shareholders and therefore be an interested party in all corporate
decisions makes minority shareholders in close corporations more susceptible to unfair treatment. Id. As a result, Utah has
adopted the Massachusetts standard that requires shareholders in close corporations to observe a duty of utmost good faith
and loyalty to the other shareholders. Id. at 8. This approach allows an oppressed minority shareholder to pursue other
remedies besides dissolution and better protects them from the vulnerabilities to which the minority is subjected by virtue of
his or her position in the corporation. Id. at 7-8.
III. Shareholder Derivative Suits
Shareholders in close corporations are entitled to bring suits on behalf of the corporation for wrongs suffered by the
corporation. § 16-10a-740. In order to have standing to bring a derivative action, the plaintiff must adequately and fairly
represent the interests of the corporation and have been a shareholder at the time the cause of action arose or received his
shares from someone who held them at that time. § 16-10a-740(2). Additionally, the complaining shareholder must make a
written demand on the corporation seeking appropriate relief before filing suit. § 16-10a-740(3). However, if the situation is
such that making the demand would be futile, the requirement is waived provided the plaintiff alleges this futility with
particularity. Dansie v. City of Herriman, 134 P.3d 1139, 1146 (Utah 2006). The futility exception is met if the plaintiff can
show that corporate management explicitly stated that it would not pursue the claims presented or when making a demand
would be “substantively detrimental” to the claim. Id. at 1147. The shareholder is then prohibited from bringing a derivative
action until 90 days have passed after the demand was made unless the shareholder is notified that the demand has been
rejected by the corporation or waiting the full 90 day period would cause irreparable injury to the corporation. § 16-10a-740
(3). If the corporation then institutes an investigation into the demand, the court may stay the proceedings pending the
outcome of the investigation. § 16-10a-740(3)d).
A derivative suit may be dismissed upon a determination in good faith and after reasonable investigation 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. § 16-10a-740(4). However, court approval is required before a suit may be
discontinued or settled and notification of affected shareholders may be required. § 16-10a-740(5). Additionally, reasonable
expenses and attorneys’ fees may be awarded to a plaintiff if it is determined that the suit conferred a substantial benefit to
the corporation or a defendant upon a finding that the suit was brought without reasonable cause or for an improper
purpose. § 16-10a-740(6).
While Utah generally subscribes to the recognized rule that a shareholder may not individually assert a cause of action
belonging to the corporation, it has adopted the exception that allows individual shareholder action and recovery in certain
suits involving close corporations. Danise, 134 P.3d at 1144-45.
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