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DTCI: Representing minority shareholders

August 15, 2012
What satisfies the requirements of I.C. 23-1-52-2(c)

As to a demand for inspection, Indiana common law holds:

[w]hen the stockholder is asking the right to inspect the corporate books, records, papers, and documents, or the corporate property, such request is attended by a presumption of good faith and honesty of purpose until the contrary is made to appear by evidence produced by the officers or agents who are seeking to defeat such inspection. The burden of proof on this question should not be borne by the stockholder but should be borne by agents or officers objecting to the inspection. Indianapolis S. R. Co. v. State, 203 Ind. 534, 540, 181 N.E. 365(Ind. 1932) (citing William Coale Development Co. v. Kennedy, 170 N.E. 434 (Ohio 1930)); see also I.C. 23-1-52-2.

In addition to the above, valuation and a present need for the same is a proper purpose for I.C. 23-1-52-2. Wrights Beauty College, 576 N.E.2d 626, 630 (Ind. App. 1991). A shareholder’s interest in extricating itself from a minority stockholder position in a corporation with which it is no longer in a friendly relationship renders the shareholder’s purpose valid in fact as well as in law. Wrights Beauty College, 576 N.E.2d 626 (Ind. App. 1991) (citing Helmsman Mgmt. Services, Inc. v. A & S Consultants, Inc., 525 A.2d 160 (Del. Ch. 1987)). All of this is especially true in direct actions where, as stated, a fundamental purpose of such an action is to enforce voting rights, to compel dividends, to prevent the impression of fraud against minority shareholders, to inspect corporate record books, and to compel shareholder meetings. G&N Aircraft, 743 N.E.2d at 234.

Evidencing an entitlement to inspection rights

In any dispute over a right of inspection, a shareholder may seek the very powerful tool of a judicial order of inspection (as will be discussed below). However, a shareholder cannot merely jump to a petition for that relief upon being stalled by the corporation. As stated, a condition precedent to obtaining such an order is a demonstration that the shareholder is entitled to inspection rights. The most common aspects of a dispute are the actual meeting of the requirements of I.C. 23-1-52-2(c) and the showing of a present need for the information. Bacompt Systems, Inc. v. Peck, 879 N.E.2d 1 (Ind. App. 2008).

It is generally accepted that a Trial Rule 43(A) trial be conducted “before a factual determination as to the elements of Indiana Code section 23-1-52-2 supporting the grant or denial of the petition may be made.” Bacompt, 879 N.E.2d at 15. Likewise, a trial is also usually required for the “purpose of determining issues of fact concerning … [a shareholder’s] purpose and entitlement to inspect … corporate records” Id. at 5. Thus, it seems clear that when disputes arise over inspection rights, counsel for a minority shareholder should be prepared to evidence entitlement to such rights in an evidentiary trial and, if successful, request the remedies that necessarily flow from that petition. Failure to present at trial admissable evidence that an inspection demand was ingnored by the corporation is likely to prove fatal to a shareholder’s claim for inspection. It may also result in a mandated award of fees and costs.

A judicial order for inspection and copying under I.C. 23-1-52-4

A judicial order for inspection, when read in its entirety, mandates disclosure by the corporation of all documents that corporation is required to maintain under I.C. 23-1-52 et seq. and, arguably, I.C. 23-1-53 et seq. This is required even if the corporate documents and financials are in the possession of third parties, which is a different obligation from that under the trial rules.

If a shareholder demonstrates by trial that he is entitled to inspection rights and that the corporation has wrongfully refused the inspection, it is a mandate under I.C. 23-1-52-4(c) that, where a judicial order of inspection is entered, the court “shall” order payment of costs and fees. That is, a court is mandated by statute to order the corporation to bear the burden of both the expense of production of the documents contemplated by I.C. 23-1-52 et seq. and I.C. 23-1-53 et seq., and the shareholder’s attorney’s fees in obtaining the order. The statute states, in relevant part, as follows:

If the court orders inspection and copying of the records demanded, it shall also order the corporation to pay the shareholder’s costs (including reasonable counsel fees) incurred to obtain the order unless the corporation proves that it refused inspection in good faith because it had a reasonable basis for doubt about the right of the shareholders to inspect the records demanded. See I.C. 23-1-52-4(c).

The corporation’s “reasonable basis for doubt” defense is a burden on the corporation, but it is made more difficult by the presumption of good faith given to a minority shareholder’s request and the purpose behind the inspection rights statute, which is to protect those investors with limited voting rights and market share. Indianapolis S. R. Co., 181 N.E. 365 (Ind. 1932). This mandate of fees can be a tremendously effective tool in the conflict between a minority shareholder and a corporation. Careful use of the procedures set out by statute, asking only for what is set forth in the statute, and proper evidentiary presentation to the court can yield tremendous results against a recalcitrant majority.

Summary

There may be some who believe that a demand for inspection from a minority shareholder’s counsel is inadmissible hearsay at trial. While the author disagrees with that belief, it may be wise (out of an abundance of caution) to draft any demand with counsel’s guidance and to send it directly from the minority shareholder to the corporation. This should eliminate any hearsay or competency questions that may be raised at trial.

With these skills and a full understanding of the workings of these interwoven and complex statutes, minority shareholder clients will fare much better in a quick resolution of disputes with an obstinate majority.•

Jason M. Massaro is the owner of the Massaro Legal Group LLC in Fishers, Ind. He practices primarily in the areas of business and contract law and litigation. Jason is the vice-chair of the Business Litigation Section for DTCI as well as the chair of the Trial Tactics Section. He can be reached at 317-576-8414 or jmassaro@massarolegalgroup.com. The opinions expressed in this column are those of the author.
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