## Facts

- Barth Electric Co., Inc. was a closely held Indiana corporation with three shareholders: Michael G. Barth, Jr. (51%), Robert Barth (about 29.8%), and Barbara Neita (20%), and there was no market for the minority shares.
- Robert Barth, a minority shareholder and former employee, alleged the majority shareholder and president, Michael, used corporate control to “freeze out” Robert and reduce the value of Robert’s shares.
- Robert alleged Michael engaged in self-dealing and exclusionary conduct, including paying excessive compensation to himself and family members, diverting corporate resources to personal uses, and using corporate funds for personal investments.
- Robert alleged Michael reduced dividend payments, terminated Robert’s employment, denied access to corporate records, and barred Robert from corporate premises.
- Robert filed suit in his individual capacity (not as a derivative action) asserting claims based on misuse of corporate assets and related fiduciary misconduct.
- The trial court dismissed under Indiana Trial Rule 12(B)(6), concluding the claims had to be brought derivatively on behalf of the corporation.
- The Court of Appeals reversed, reasoning that requiring derivative procedures in this closely held setting would elevate form over substance.
- The Indiana Supreme Court granted transfer to decide whether a direct action could proceed for alleged misuse of corporate assets in a closely held corporation.

## Issues

1. Whether a shareholder in a closely held corporation alleging misuse of corporate assets may proceed in a direct action rather than a shareholder derivative action.
2. Whether Indiana should adopt the American Law Institute Principles of Corporate Governance § 7.01(d) as the standard for permitting direct treatment of derivative-type claims in closely held corporations.
3. Whether dismissal under Trial Rule 12(B)(6) was proper where the complaint alleged freeze-out conduct and misuse of corporate assets in a three-shareholder corporation.

## Decision

- The Indiana Supreme Court affirmed the Court of Appeals’ reversal of the trial court’s dismissal and remanded for further proceedings.
- The court held that direct actions are permissible in certain closely held corporation disputes and adopted ALI Principles of Corporate Governance § 7.01(d) as Indiana’s rule for this context.
- Applying § 7.01(d), the court concluded the complaint should not have been dismissed; the case could proceed as a direct action subject to the § 7.01(d) safeguards.

## Legal Principles

- The general rule remains that shareholders ordinarily may not sue in their own names to redress injuries to the corporation; such claims are typically derivative.
- In closely held corporations, a court may treat an action raising derivative claims as a direct action and order individual recovery if doing so will not:
  - unfairly expose the corporation or defendants to a multiplicity of actions;
  - materially prejudice the interests of corporate creditors; or
  - interfere with a fair distribution of recovery among all interested persons.
- Allegations of freeze-out conduct in a closely held corporation—such as diversion of corporate assets, manipulation of dividends, exclusion from employment, and denial of access to records—can support fiduciary-duty-based claims that may be permitted to proceed directly under § 7.01(d).
- The choice between derivative and direct treatment in the closely held setting is governed by equitable and practical concerns reflected in the § 7.01(d) criteria, rather than rigid procedural formalism.

## Conclusion

The Indiana Supreme Court held that, in closely held corporations, courts may permit shareholders alleging misuse of corporate assets to proceed directly when doing so does not risk multiple suits, harm creditors, or prevent fair allocation of any recovery, and it reversed the complaint’s dismissal because those standards could allow direct treatment of the claims.


Barth v. Barth, 659 N.E.2d 559 (Ind. 1995)