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From Securities Regulation Daily, January 8, 2019

Directors have broad, presumptive right to see books and records

By Anne Sherry, J.D.

An Illinois appellate court issued a rare decision on a director’s right to inspect corporate books, determining that while the rule for shareholder access has been statutorily modified over the years, a director’s right is still rooted in common law. Corporate directors have the presumptive right to inspect corporate books and records, and the corporation bears the burden of defeating this presumption by showing that the request is for an improper purpose. The court vacated the judgment in favor of the directors because the defendants had pleaded an improper purpose, but suggested that proving it on remand may be an uphill climb (Munroe-Diamond v. Munroe, December 28, 2018, Ellis, D.).

The director-plaintiffs are two sisters who are minority shareholders and directors of the Pickens-Kane Moving and Storage Company. The only two remaining shareholders, the plaintiffs’ brothers, own controlling shares. The brothers rejected the sisters’ demand for inspection and copying of 24 categories of books and records, and the sisters filed a mandamus action. The trial court ruled in the plaintiffs’ failure, finding they had "an absolute and unqualified right to examine the books and records of the Corporation" and rejecting the defendants’ affirmative defenses.

The trial court went too far in describing the directors’ right to access as "absolute and unqualified," the appellate court decided, going back to 1895 to determine the common-law rule. In that year, the appellate court held that a corporate director and shareholder who had "meticulously cited" reasons behind his demand had the right to inspect corporate books and records. The state high court’s affirmance the following year constituted binding authority, and although it focused more on shareholder access, it applied its reasoning to both shareholders and directors equally. "As of that decision in 1896, corporate directors had the same rights of inspection as shareholders," the appellate court reasoned.

In the interim, legislation has modified shareholders’ inspection rights, shifting the burden of proof of showing a(n) (im)proper purpose from the corporation to the shareholder, but the rule never changed for corporate directors. As no statute has abrogated the common law, and no supreme court decision has overruled the 1896 decision, the law in Illinois is still that corporate directors have the presumptive right to inspect books and records, and the burden falls on the corporation to show an improper purpose behind the request. And while shareholders are statutorily entitled only to certain records, there is no such limitation on directors’ access. This reflects the fact that directors owe fiduciary duties to the corporation and its shareholders.

Nevertheless, on de novo review, the appellate court vacated the judgment in favor of the plaintiffs. While they have a presumptive inspection right, it is not absolute, and the defendants raised the claim of an improper purpose, precluding judgment on the pleadings. The appellate court noted, though, that the defendants’ claims going to their affirmative defense of unclean hands should be related to their argument of improper purpose. The trial court was correct to strike allegations such as a plaintiff’s alleged debt to the corporation or the fact that the plaintiffs did not redeem their shares, as these are irrelevant to the plaintiffs’ right to demand corporate records in their capacity as directors.

The case is No. 1-17-2966.

Attorneys: (Di Monte & Lizak, LLC) for Barbara Munroe-Diamond and Sally Sharkey. (Clark Hill PLC) for James P. Munroe and Michael F. Munroe.

Companies: Pickens-Kane Moving and Storage Company

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers FiduciaryDuties IllinoisNews

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