Corporation governance and shareholder agreements: what the paper says, and who can enforce it
I am Mitchell Bisson, a Grand Rapids business lawyer. I have litigated for over 15 years. This page covers how a Michigan business corporation is run once it exists: who calls and runs meetings, how shareholders act without one, who can remove a director, what a shareholder agreement can change, and what a shareholder can do when the people in control stop following the rules. I act for shareholders, directors, officers and the corporation itself, and I take whichever side the facts put my client on. I do not promise outcomes.
The short answer. In a Michigan corporation the board manages the business unless the articles or a valid shareholder agreement say otherwise, and the shareholders elect and can remove directors. MCL 450.1501; MCL 450.1511(1). A signed agreement among all the shareholders can override much of the statute, including who sits on the board and how votes are counted. MCL 450.1488. When the people in control act illegally, fraudulently or in a willfully unfair and oppressive way, a shareholder can sue in circuit court. MCL 450.1489(1). Which of these rules applies to you depends on your articles, your bylaws and any signed agreement, so the documents come first.
Most corporation fights start with a document nobody has read in years, or with no agreement at all and one owner making every decision. The Business Corporation Act supplies default rules, and the articles, bylaws and shareholder agreement change them. MCL 450.1231 lets the bylaws contain any provision for managing the corporation that does not conflict with the law or the articles.
I read the articles, the bylaws, any shareholder agreement, the minutes and the stock records before I advise anyone. Then I tell you what the documents allow, what the statute adds, and what the other side has done or failed to do.
Corporation governance issues at a glance
The table lists the issues I handle most often, what has to be shown on each, and the rule or time limit that matters.
| Issue | What must be shown | Time limit or key rule | Authority |
|---|---|---|---|
| Act without a meeting | Every shareholder entitled to vote consents in writing, or the articles allow action by the holders of enough shares | Under the articles, consents are due within 60 days after the record date. Nonconsenting shareholders get prompt notice | MCL 450.1407(1), (2) |
| Shareholder meeting | Written notice of time, place and purposes to each shareholder of record entitled to vote | Notice not less than 10 nor more than 60 days before the meeting. A court may order an annual meeting after 90 days past the designated date | MCL 450.1404(1); MCL 450.1402 |
| Remove a director | A vote of a majority of the shares entitled to vote at a director election | With or without cause unless the articles say only for cause. The articles may require a higher vote for removal without cause | MCL 450.1511(1) |
| Enforce a shareholder agreement | In the articles or bylaws approved by all shareholders, or a written agreement signed by all and made known to the corporation | Amendable only by all shareholders at the time unless the agreement says otherwise | MCL 450.1488(1), (2) |
| Inspect books and records | Shareholder of record, written demand stating a proper purpose and the records with reasonable particularity | If the corporation does not permit inspection within 5 business days, apply to the circuit court | MCL 450.1487(2), (3) |
| Shareholder oppression | Acts of those in control that are illegal, fraudulent, or willfully unfair and oppressive to the corporation or the shareholder | Damages must be sought within 3 years after accrual or 2 years after discovery, whichever is first. Not available to holders of publicly traded shares | MCL 450.1489(1)-(3) |
| Derivative claim | Shareholder when the wrong occurred, adequate representative, still a shareholder at judgment, after a written demand | Wait 90 days after the demand unless it is rejected sooner or waiting would cause irreparable injury | MCL 450.1492a; MCL 450.1493a |
| Director or officer duty claim | Failure to act in good faith, with ordinary prudent care, and in a manner reasonably believed to be in the corporation’s interest | 3 years after accrual or 2 years after discovery, whichever is first | MCL 450.1541a(1), (4) |
| Court dissolution for deadlock | Owners cannot agree on material management matters, or are so divided they have failed to elect successors, and the corporation cannot function effectively in the interests of its creditors and shareholders as a result | Filed by a director or a voting shareholder in the circuit court where the principal place of business or registered office is located | MCL 450.1823 |
| Enforce a transfer restriction | A restriction in the articles, bylaws or an agreement of a type the statute permits | Must be noted conspicuously on the certificate or information statement, unless the person bound has actual knowledge | MCL 450.1472; MCL 450.1473 |
Meetings, notice and written consent
The annual meeting is held at the time the bylaws provide, unless the shareholders take the action by written consent. A missed meeting does not undo otherwise valid corporate acts and does not by itself give cause for dissolution, except as section 823 provides. If the annual meeting is not held within 90 days after its designated date, or no date has been designated for 15 months after organization or the last annual meeting, a shareholder can ask the circuit court to order the meeting or the election. MCL 450.1402.
Notice has to be in writing and has to state the time, place and purposes, and it goes to each shareholder of record entitled to vote. It can be given personally, by mail or by electronic transmission. A shareholder who attends waives an objection to defective notice unless the shareholder objects at the start of the meeting. MCL 450.1404(1), (4). A minority owner who objects on the record at the outset keeps the argument.
Action without a meeting is where a lot of closely held corporations go wrong. Unanimous written consent works without notice or a vote. MCL 450.1407(2). Action by less than all shareholders is available only if the articles of incorporation permit it. The signed consents must be delivered to the corporation within 60 days after the record date and must be dated no more than 10 days before the record date, and the shareholders who did not consent must be notified promptly. MCL 450.1407(1). Without that authority in the articles, only unanimous consent works.
Directors, officers and the duties they owe
The board manages the corporation unless the statute or the articles say otherwise. A director does not have to be a shareholder unless the articles or bylaws require it. MCL 450.1501. Directors are elected at each annual meeting and serve until a successor is elected and qualified, or until resignation or removal. MCL 450.1505(2). Officers consist of a president, secretary and treasurer, plus any others the bylaws or the board provide, and an officer’s authority and duties come from the bylaws or a board resolution. MCL 450.1531(1), (4).
Shareholders may remove directors with or without cause unless the articles say removal is only for cause, and cumulative voting and classified boards change the arithmetic. MCL 450.1511(1), (2). A shareholder agreement can also set who the directors and officers are and how they are removed. MCL 450.1488(1)(c).
A director or officer must act in good faith, with the care an ordinarily prudent person in a like position would use under similar circumstances, and in a manner he or she reasonably believes to be in the “best interests of the corporation”. The statute allows reliance on information from other directors, officers and employees, legal counsel, accountants and committees, but not when the director or officer has knowledge that makes the reliance unwarranted. MCL 450.1541a(1)-(3). A claim for failing to perform those duties must be brought within 3 years after it accrues or 2 years after it is discovered or should have been discovered, whichever is first. MCL 450.1541a(4).
Shareholder agreements: what they can change
A properly made shareholder agreement is effective among the shareholders and the corporation even if it conflicts with the Business Corporation Act in the ways the statute lists. It can eliminate the board or limit its powers, govern distributions, name the directors and officers, change how voting power is exercised, give someone else authority to manage or to break a deadlock, require dissolution at the request of an owner or on a stated event, and otherwise govern the relationship among the owners as long as it is not contrary to public policy. MCL 450.1488(1).
The formalities are strict. The agreement must be set out in the articles or bylaws approved by all the persons who are shareholders when it is made, or in a written agreement signed by all of them and made known to the corporation. It can be amended only by all shareholders at the time, unless it says otherwise. MCL 450.1488(2). The agreement should be noted on the share certificate or information statement. Leaving that off does not invalidate it, but a buyer who did not know of it can seek rescission within 90 days after discovery or 2 years after the transfer, whichever is earlier. MCL 450.1488(3).
The Michigan Supreme Court has said that a shareholder agreement modifying statutory rights, as permitted under sections 461 and 488, may create protected shareholder interests, and that a breach of those rights may be evidence of oppression. Madugula v. Taub, 496 Mich. 685, 719-720 (2014). A right the agreement gives a minority owner, such as a board seat or a veto, can be the foundation of the whole case.
Restrictions on selling shares
A restriction on transferring shares can be imposed by the articles, the bylaws, or an agreement among holders or between holders and the corporation. A restriction adopted after shares were issued does not bind the holders of those shares unless they are parties to the agreement or voted for the restriction. MCL 450.1472(1). The statute lists the types it permits: a right of first refusal for the corporation or other holders, a duty to buy and sell under an agreement, a requirement that the corporation or holders consent to a transfer or approve the transferee, a ban on transfers to designated persons, and a restriction meant to preserve S corporation status. MCL 450.1473.
A written restriction can be enforced against the holder and against a successor or transferee, including a personal representative or trustee, if it is noted conspicuously on the certificate or on the information statement. If it is not noted, it is ineffective except against a person with actual knowledge of it. MCL 450.1472(2).
Books, records and what a shareholder can demand
The corporation must keep books and records of account and minutes of the proceedings of its shareholders, board and any executive committee, and a record of the shareholders with their addresses and the number, class and series of shares each holds. MCL 450.1485. On written request, it must mail a shareholder its balance sheet and income statement for the last fiscal year. MCL 450.1487(1).
A shareholder of record can inspect the stock ledger, the shareholder list and other books and records for a proper purpose, meaning one reasonably related to the person’s interest as a shareholder. The demand must be in writing, describe the purpose and the records with reasonable particularity, and be delivered to the registered office or principal place of business. MCL 450.1487(2). If the corporation does not allow inspection within 5 business days, or puts unreasonable conditions on it, the shareholder can apply to the circuit court. For the stock ledger and shareholder list, once the shareholder shows a proper demand the corporation carries the burden of proving an improper purpose. For other records, the shareholder must show the proper purpose and the direct connection. MCL 450.1487(3).
If the court orders inspection, it must also order the corporation to pay the shareholder’s costs and reasonable attorney fees of getting the order, unless the corporation proves it refused in good faith because it had a reasonable basis to doubt the right to inspect. MCL 450.1487(5). I draft demands around a stated purpose and a short list of records.
Oppression and the claims a shareholder can bring
A shareholder may sue in the circuit court of the county where the corporation has its principal place of business or registered office to establish that the acts of the directors or those in control are illegal, fraudulent, or willfully unfair and oppressive to the corporation or the shareholder. MCL 450.1489(1). The statute defines willfully unfair and oppressive conduct as a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder. It may include terminating employment or cutting employment benefits to the extent that the actions interfere with distributions or other shareholder interests disproportionately as to the affected shareholder. MCL 450.1489(3).
The Court of Appeals has said that a claim requires proof that the defendants acted with intent to substantially interfere with the shareholder’s interests as a shareholder, and that defendants can avoid liability by showing a legitimate business reason for what they did. Franks v. Franks, 330 Mich. App. 69 (2019). A shareholder with no jury right should expect the case to be tried to the judge. The Supreme Court held that there is no right to a jury trial on a claim under section 489. Madugula v. Taub, 496 Mich. 685, 714-716 (2014).
A derivative claim is different. It belongs to the corporation, and the shareholder sues on its behalf. The shareholder must have held shares when the act or omission happened (or received them by operation of law from someone who did), must fairly and adequately represent the corporation’s interests, and must remain a shareholder through judgment. MCL 450.1492a. The shareholder must first make a written demand on the corporation and wait 90 days, unless the demand is rejected sooner or waiting would cause irreparable injury to the corporation. MCL 450.1493a. Choosing between a direct claim for oppression and a derivative claim is one of the first decisions in these cases, because the remedies, the proof and the party who benefits are different.
Defenses I see most often
- The documents allowed it. The statute says oppressive conduct does not include conduct permitted by an agreement, the articles, the bylaws, or a consistently applied written corporate policy or procedure. MCL 450.1489(3). This is the first place a majority owner looks, and it is why the bylaws and any agreement matter so much.
- A legitimate business reason. Defendants can avoid oppression liability by showing one. Franks v. Franks, 330 Mich. App. 69 (2019).
- Time. A damages claim under section 489 is barred unless filed within 3 years after it accrued or 2 years after the shareholder discovered or should have discovered it, whichever is first. A duty claim against a director or officer has the same outer limits. MCL 450.1489(1)(f); MCL 450.1541a(4).
- Publicly traded shares. No oppression action may be brought by a shareholder whose shares are listed on a national securities exchange or regularly traded in a market maintained by members of a national or affiliated securities association. MCL 450.1489(2).
Remedies a court can order
If a shareholder establishes grounds under section 489, the circuit court may make any order it considers appropriate, including dissolution and liquidation of the assets and business, cancellation or alteration of a provision in the articles, an amendment to the articles or the bylaws, cancellation, alteration or an injunction against a resolution or other act of the corporation, a direction or prohibition of an act by the corporation, shareholders, directors or officers, the purchase of the shareholder’s shares at fair value by the corporation or by the officers, directors or other shareholders responsible for the wrongful acts, and damages to the corporation or the shareholder. MCL 450.1489(1)(a)-(f).
The other remedies are narrower. A court can order a shareholder meeting or election that has been missed. MCL 450.1402. It can also dissolve the corporation on the application of a director or a voting shareholder when the directors, or the shareholders if a section 488 agreement is in effect, cannot agree on material management matters or the shareholders are so divided that they have failed to elect successors to a director whose term has expired, and as a result the corporation cannot function effectively in the interests of its creditors and shareholders. MCL 450.1823.
Deadlock and buyouts
Two owners who each hold half the shares can freeze a corporation. Without an agreement that says how to break the tie, the statute offers a court-ordered meeting, an oppression claim if the facts support one, or dissolution. A shareholder agreement can do more: it can give a third person authority to resolve a deadlock, require dissolution on a stated event, or set a buy-sell process. MCL 450.1488(1)(f), (g).
How I handle a corporation governance dispute
- Collect the documents. I start with the articles, the bylaws, any shareholder agreement or buy-sell agreement, the stock ledger and certificates, the minutes and consents, and the tax filings. The first question is what the documents say.
- Map who holds what. I work out the share counts, the voting arithmetic, who sits on the board, who the officers are, and whether the articles allow action by less than unanimous consent.
- Identify the claim or the defense. Is this a records dispute, a removal, an oppression claim, a derivative claim, a duty claim or a deadlock? Each has its own proof and its own deadline, and I calendar the 3-year and 2-year limits at the outset.
- Make a proper demand. Where a demand is a prerequisite, I send it in the form the statute requires: a records demand with a stated purpose, or a written demand on the corporation before a derivative claim.
- Try to fix it without a court. A corrected set of minutes, a negotiated buyout, an amended agreement or a documented resignation is often faster and cheaper than a lawsuit. If the other side will not deal, I file.
- File in the right court with the right claims. I plead the direct and derivative claims separately, ask for the specific relief the statute allows, and plan the case knowing there is no jury on an oppression claim.
- Prepare for trial. I build the record from the corporation’s own documents and from the witnesses who made the decisions, and I prepare you for testimony.
Ways a corporation dispute may end without a trial
- Buyout. The corporation or the other owners buy the shares at an agreed price, often funded in installments and backed by a security interest.
- Amended documents. The owners sign a new shareholder agreement or amend the bylaws to settle who runs the company and how deadlocks are broken.
- Corrected governance. The board ratifies the past action in proper form, or shareholders sign the written consents that should have been signed.
What I need from you
Bring the articles of incorporation, the bylaws, any shareholder agreement, buy-sell agreement or stock restriction, and your stock certificates or information statement. Bring the minutes, consents and resolutions you have, the last three years of financial statements and tax returns, and any email or letter in which an owner made a decision or a demand. Write out the timeline: when you became an owner, what you paid, and what changed for you. Do not sign a buyout, a resignation or an amended agreement until I have read it, and do not take records from the company’s systems without talking to me first.
Where your Kent County corporation case will be heard
The statutes in this area put the main claims in the circuit court of the county where the corporation has its principal place of business or registered office. That is true of an oppression claim, a records application, a deadlock dissolution and an order for a missed annual meeting. MCL 450.1489(1); MCL 450.1487(3); MCL 450.1823; MCL 450.1402. For a Kent County corporation, that is the 17th Judicial Circuit, which consists of Kent County. MCL 600.518. The district court has exclusive jurisdiction in civil actions when the amount in controversy does not exceed $25,000. MCL 600.8301(1). Michigan law sets the Kent County district courts by municipality: the 61st District Court serves the city of Grand Rapids, the 59th serves the cities of Grandville and Walker, the 62A serves the city of Wyoming, the 62B serves the city of Kentwood, and the 63rd serves the rest of Kent County. MCL 600.8128a; MCL 600.8130.
Why people hire me for a corporation dispute
You work directly with me, the lawyer who will argue your case. I read the documents before I give you an opinion, I tell you what the statute allows and where your position is weak, and I tell you what each path is likely to cost in time and money. I do not promise outcomes. I act for owners on either side of these disputes, which means I know how each side builds its case and what the other side will say. My fee depends on the work involved and how far the dispute goes, and we talk about it at the consultation before you decide to hire me.
Questions I hear from people with a Michigan corporation dispute
Can the shareholders of my Michigan corporation approve something by signing a written consent instead of holding a meeting?
Yes, in two ways. If every shareholder entitled to vote consents in writing, the action can be taken without a meeting, notice, or vote (MCL 450.1407(2)). If the articles of incorporation allow it, holders of enough shares to pass the action at a meeting can act by written consent, but the consents must reach the corporation on time and nonconsenting shareholders must be notified promptly (MCL 450.1407(1)).
Can the shareholders of my Michigan corporation remove a director, and do they need a reason?
Yes. Under MCL 450.1511(1), shareholders may remove one or more directors with or without cause unless the articles say directors can be removed only for cause. Removal takes a majority of the shares entitled to vote at an election of directors, and the articles may require a higher vote for removal without cause. Cumulative voting and director classes change how the vote works.
What can a shareholder agreement do in a Michigan corporation?
A signed shareholder agreement can override parts of the Business Corporation Act. It can restrict or eliminate the board, govern distributions, set who the directors and officers are, change voting power, and require dissolution on a stated event. To qualify under the statute, it must be in the articles or bylaws approved by every shareholder, or in a written agreement signed by every shareholder and made known to the corporation.
Can a Michigan corporation restrict who shareholders can sell their shares to?
Yes, within limits. Michigan allows restrictions such as a right of first refusal for the corporation or other holders, an agreement to buy and sell the shares, a requirement that the corporation or holders consent to a transfer, a ban on transfers to designated persons, and restrictions meant to preserve S corporation status.
How does a shareholder get to see a Michigan corporation’s books and records?
A shareholder of record may inspect the stock ledger, shareholder list, and other books and records for a proper purpose by making a written demand that describes the purpose and the records with reasonable particularity. If the corporation does not allow inspection within 5 business days, the shareholder may ask the circuit court to compel it.
Can I sue the directors over a business decision that turned out badly for the company?
Courts are reluctant to second-guess business decisions. Under the business judgment rule, as the Court of Appeals described it in Franks v Franks, courts refrain from interfering with directors’ or officers’ business judgment unless they are guilty of willful abuse of their discretionary powers or act in bad faith. The rule does not protect fraud or misconduct, and a shareholder who proves the elements of an oppression claim under MCL 450.1489 overcomes it.
What legal duties do directors and officers of a Michigan corporation have?
A director or officer must act in good faith, with the care an ordinarily prudent person in a like position would use, and in a manner the director or officer reasonably believes most benefits the corporation. They may rely on information from qualified people unless they know it is unwarranted. A claim for breach must be filed within 3 years after it accrued or 2 years after discovery, whichever is earlier.
Does a Michigan corporation have to pay a director’s or officer’s legal fees?
Sometimes. A corporation has the power to indemnify directors, officers, employees, and agents in third-party suits if the person acted in good faith and reasonably believed the conduct was in, or not opposed to, what most benefits the corporation or its shareholders. The corporation must indemnify a director or officer for reasonable expenses, including attorney fees, to the extent the person succeeds in the defense.
Related Michigan pages
- Michigan business formation attorney
- Corporation formation
- Annual reports and good standing
- Operating agreements and managing an LLC
- Breach of fiduciary duty
- Corporations, S corporations and foreign companies
- Running an LLC, owner exits and dissolution
- Forming an LLC and operating agreements
- Michigan legal FAQs
I advise and represent shareholders, directors and officers in Michigan corporation disputes in Kent County and West Michigan. Contact me 24/7 by phone or email. Your Rights, My Fight! Call for a free initial consultation.
Big-Firm Power. Street-Level Grit.
Law Offices of Mitchell S. Bisson, 2828 Kraft Ave SE, Suite 295, Grand Rapids, MI 49512, serving Kent County and West Michigan.
This page provides general information about Michigan law and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and every case turns on its own facts. Consult a licensed attorney about your specific situation.