The University of New Hampshire Law Review
Minority Shareholders and Direct Suits in Closely Held Corporations Where Derivative Suits Are Impractical: Durham v. Durham
[Excerpt] “Suppose A, B, and C are the sole shareholders and directors of a corporation. A and B have used corporate funds for their own personal use and such use has depleted the corporation’s assets. C now wishes to commence a legal proceeding to recover the damages. Should C be forced to recover through a derivative suit brought on behalf of the corporation just because the depletion of the corporate assets affected all of the shareholders and not just C? Not necessarily.
In Durham v. Durham, the Supreme Court of New Hampshire permitted a minority shareholder, in a closely held corporation, to bring a direct suit against a corporation’s officers, even though the injury suffered was incurred by the entire corporation. Prior to this decision, New Hampshire had only addressed the requirements for bringing a direct suit in a regular, or widely held, corporation. In allowing the direct suit, the Durham court followed a minority view and adopted a standard provided by the American Law Institute’s (ALI) Principles of Corporate Governance. Many jurisdictions have declined to take this step. Rather, those jurisdictions insist that shareholders meet derivative pleading requirements set forth by their respective state laws, reasoning that such requirements create uniformity and predictability essential to corporate decision making. In addition, many of the states that refuse to allow direct suits by a shareholder against a closely held corporation expressly reject the standard provided by the ALI.
This Note examines both the minority and majority views and justifies New Hampshire’s decision to allow minority shareholders to bypass derivative pleading requirements and bring a direct action allowing them to recover personally. This Note further suggests that in the context of closely held corporations, direct actions may provide minority shareholders their only chance to receive adequate compensation for injuries they have suffered.
The remainder of this Section explains the differences between derivative and direct suits, as well as differences between widely held and closely held corporations. Part II will set forth the facts, arguments, and holding from Durham and explain why that decision was warranted. Part III will discuss cases from jurisdictions which decline to adopt the ALI standard and refuse to allow direct actions in closely held corporations. Part IV will provide an analysis of the two conflicting views and suggest that those jurisdictions that have rejected the ALI’s proposal should reconsider. Finally, Part V will briefly conclude.”
Jason M.Tanguay, Minority Shareholders and Direct Suits in Closely Held Corporations Where Derivative Suits Are Impractical: Durham v. Durham, 5 Pierce L. Rev. 469 (2007), available at http://scholars.unh.edu/unh_lr/vol5/iss3/6