A. No action shall be brought in this state by a shareholder in the right of a domestic or foreign corporation unless:

(1) the plaintiff was a shareholder of record or the beneficial owner of shares held by a nominee or the holder of voting trust certificates at the time of the transaction of which he complains, or his shares or his beneficial ownership of shares held by a nominee or voting trust certificates thereafter devolved upon him by operation of law from a person who was a holder of record at such time;

(2) the complaint be verified; and

(3) the complaint alleges with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors and the reasons for his failure to obtain the action or for not making the effort. If the corporation undertakes an investigation upon receipt of a demand by plaintiff for action, or following commencement of suit, the court may stay any action commenced as the circumstances reasonably require.

B. In any action hereafter instituted in the right of any domestic or foreign corporation by the person or persons described in the above paragraph, the court having jurisdiction, upon final judgment and a finding that the action was brought without reasonable cause, may require the plaintiff or plaintiffs to pay to the parties named as defendant the reasonable expenses, including fees of attorneys, incurred by them in the defense of such action.

C. An action authorized by this section shall not be discontinued, compromised or settled without approval by the court having jurisdiction of the action. If the court determines that the interest of the shareholders or of any class thereof will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the shareholders or any class thereof whose interests it determines will be so affected.

History: 1953 Comp., § 51-24-45.1, enacted by Laws 1975, ch. 64, § 24; 1983, ch. 304, § 41.

The 1983 amendment, effective June 17, 1983, added "Provisions relating to" at the beginning of the catchline; designated part of former Subsection A as present Paragraph (1) of Subsection A; in Paragraph (1) of Subsection A substituted "shareholder of record or the beneficial owner of shares held by a nominee or the holder" for "holder of record of shares or," deleted "therefor" following "voting trust certificates," and inserted "his beneficial ownership of shares held by a nominee or"; added Paragraphs (2) and (3) of Subsection A; substituted "person or persons described in the above paragraph" for "holder or holders of record of shares of such corporation or of voting trust certificates therefor" near the beginning of Subsection B; and added Subsection C.

Standing to bring individual action. — Where plaintiffs and defendant were equal shareholders in a closely held corporation; the corporation purchased residential property were defendant could reside and run the corporate business; defendant made all payments on the purchase price of the residential property; the corporation ceased to operate, but the corporation was not dissolved and the assets were not divided among the shareholders; defendant, as president of the corporation, executed a deed conveying the residential property to defendant, and defendant took cash out of the residential property through the refinancing of the residential property, plaintiffs had standing to sue defendant individually for a breach of fiduciary duty in the sale of corporate assets in violation of 53-15-1 NMSA 1978. Clark v. Sims, 2009-NMCA-118, 147 N.M. 252, 219 P.3d 20, cert. denied, 2009-NMCERT-009, 147 N.M. 421, 224 P.3d 648.

A stockholder who directly attacks the fairness or validity of a merger alleges a direct injury to the stockholders, not the corporation, and has standing to pursue the shareholder's direct claims. Rael v. Page, 2009-NMCA-123, 147 N.M. 306, 222 P.3d 678, cert. denied, 2009-NMCERT-009, 147 N.M. 421, 224 P.3d 648.

Where plaintiff, who was a shareholder in a corporation that had been merged out of existence, claimed that the merger was unfair and resulted in an unfair share price paid to shareholders because the directors of the corporation breached fiduciary duties by engaging in self-interested negotiations with potential buyers of the corporation, devaluing the corporation for personal gain, and conducting unfair and misleading voting processes, plaintiff alleged a direct injury to the shareholders and plaintiff had standing to pursue plaintiff's direct claims against the directors for damages. Rael v. Page, 2009-NMCA-123, 147 N.M. 306, 222 P.3d 678, cert. denied, 2009-NMCERT-009, 147 N.M. 421, 224 P.3d 648.

Attorney's fees. — Where defendant and plaintiffs were equal shareholders in a closely held corporation and defendant transferred the corporation's sole asset to defendant and took cash out of the asset through the refinancing of the asset, attorney's fees were not recoverable by plaintiffs. Clark v. Sims, 2009-NMCA-118, 147 N.M. 252, 219 P.3d 20, cert. denied, 2009-NMCERT-009, 147 N.M. 421, 224 P.3d 648.

Breach of fiduciary duty. — A fiduciary duty is a duty of utmost good faith, trust, confidence, and candor owed by a fiduciary such as a corporate officer to a beneficiary such as a shareholder, and involves a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person; a breach of duties imposed by contract may also constitute a breach of the fiduciary duties of loyalty, good faith, inherent fairness and the obligation not to profit at the expense of the corporation. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Where appellant shareholder overpaid himself by hundreds of thousands of dollars, failed to inform other shareholders of bonuses paid to himself without appropriate basis, controlled the shareholder allocation sheets that the shareholders used to track their compensation, failed to inform other shareholders of material facts and information relating to business and financial affairs, knowingly submitted incorrect information about his bonuses at shareholder meetings, and knowingly and intentionally paid himself bonuses to the substantial economic detriment of the other shareholders and the corporation itself, there was sufficient evidence to support the district court's decision that appellee breached his fiduciary duties. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Punitive damages for breach of fiduciary duties. — Punitive damages are appropriate when an actor willfully breaches fiduciary duties; where punitive damages are requested, it must be determined whether the actor acted with a culpable mental state. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Where appellant shareholder, without the knowledge of other shareholders, modified his shareholder employment agreement, putting in place a more generous deferred compensation package than the other shareholders, overpaid himself by hundreds of thousands of dollars, failed to inform other shareholders of bonuses paid to himself without appropriate basis, controlled the shareholder allocation sheets that the shareholders used to track their compensation, failed to inform other shareholders of material facts and information relating to business and financial affairs, knowingly submitted incorrect information about his bonuses at shareholder meetings, and knowingly and intentionally paid himself bonuses to the substantial economic detriment of the other shareholders and the corporation itself, the award of punitive damages was appropriate. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Contract reformation is a remedy for fraud and may form the basis for an award of punitive damages. — Contract reformation is an equitable remedy by which a court will modify a written agreement to reflect the actual intent of the parties, usually to correct fraud or mutual mistake in the writing; where a plaintiff has established a cause of action in equity and the wrongdoer's misconduct is willful, wanton, malicious, reckless, fraudulent and in bad faith, punitive damages are allowable to do complete justice. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Where appellant shareholder, without the knowledge of other shareholders, modified his shareholder employment agreement, putting in place a more generous deferred compensation package than the other shareholders, overpaid himself by hundreds of thousands of dollars, failed to inform other shareholders of bonuses paid to himself without appropriate basis, controlled the shareholder allocation sheets that the shareholders used to track their compensation, failed to inform other shareholders of material facts and information relating to business and financial affairs, knowingly submitted incorrect information about his bonuses at shareholder meetings, and knowingly and intentionally paid himself bonuses to the substantial economic detriment of the other shareholders and the corporation itself, appellees request to make all the shareholder agreements equal fell squarely within the definition of the equitable remedy of contract reformation, and the award of punitive damages was appropriate. Jones v. Aug , 2015-NMCA-016, cert. denied, 2015-NMCERT-001.

Standing for shareholder action. — The contemporaneous ownership requirement also includes a continuous ownership rule, requiring contemporaneous and continuous ownership of stock throughout the duration of litigation to maintain standing in a derivative action. White ex rel. Banes Co. Derivative Action v. Banes Co., 1993-NMSC-078, 116 N.M. 611, 866 P.2d 339.

Subsection B sanction appropriate if action "groundless." — The phrase "without reasonable cause" means "groundless", and the subjective standard should be used. Under this interpretation, for the plaintiff to be sanctioned with attorney's fees, a showing must be made that he or she subjectively knew at the time the suit was filed that the complaint was groundless. A "groundless" claim is one in which the allegations in the complaint are not in good faith discoverable through litigation. White ex rel. Banes Co. Derivative Action v. Banes Co., 1993-NMSC-078, 116 N.M. 611, 866 P.2d 339.

Law reviews. — For article, "1975 Amendments to the New Mexico Business Corporation Act," see 6 N.M.L. Rev. 57 (1975).

Am. Jur. 2d, A.L.R. and C.J.S. references. — 19 Am. Jur. 2d Corporations §§ 2243 to 2252, 2272, 2326 to 2352, 2487, 2491, 2495.

Statute of limitations in stockholder's derivative suit against directors or officers, 123 A.L.R. 346.

18 C.J.S. Corporations §§ 397 to 413.