This year the Court in Fowler v. Golden Pacific BanCorp, Inc. (2022) 80 Cal.App.5th 205, expressly affirmed a director’s broad right of inspection, subject to extreme exceptions.
The source of the dispute stemmed from an underlying malpractice claim by the company against a law firm. The director seeking the records from the company was a partner in the law firm. In other words, the director had previously worn two hats – (1) a partner at law firm representing the company; and (2) a director for the company.
Besides having these dual roles, the director now had a third hat, which was as an individually named defendant in the malpractice lawsuit filed by the company. In the malpractice action there were claims of a large balance owed the law firm by the company, claims the malpractice case was pursued by the company to avoid payment of the prior law firm’s bills, and the company claimed the director unlawfully steered the case to the director’s allegedly unqualified law firm.
This also was not the first time the records had been requested in a lawsuit. Previously the inspection requests had been made in the malpractice lawsuit, but denied. What is more, the director was no longer a director due to an acquisition wherein the acquiring entity’s directors took the place of the predecessor.
Although no longer ripe due to the director’s lack of standing, the Court issued its ruling on a director’s right of inspection given the public importance of the inspection rights of a director.
To provide context as to what was at issue as to the scope of the inspection, the Director was seeking, among other things, financial balance sheets, fees and bonuses the company paid to other directors, accounting books and records, and records of the company’s payment of the president and CEO’s personal legal fees.
Starting with the Corporations Code section 1602 the Court reiterated the statutory language, which is:
“Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign.”
Id.
The statute does not mince words and provides an “absolute right” to inspect. As a result, the crux of the court’s decision rightfully focused on when an inspection could be limited. The Court characterized these situations as extreme exceptions, which are those that would produce an absurd result.
Such examples of absurd results include situations where it is clear the director will carry out an egregious tort, such as the misappropriation of trade secrets, or where the attorney-client privilege would be violated.
The Court also made clear that the public policy of construing the exception to the absolute inspection right narrowly still affords the company with a remedy for a claim against the director and limits on the inspection rights such as a protective order.
Having resolved the right to inspect, the Court then addressed whether any restrictions should be imposed, including a protective order. On this issue the Court found that the company had not demonstrated by a preponderance of the evidence that a protective order was necessary to prevent a breach of fiduciary duty by the director. The court discussed that this issue and whether an egregious tort would be committed should not be focused on prior acts, but whether the director is likely to carry out future harm as a result of having access to the information.
Finally, the Court did not decide whether the records were subject to the director’s inspection rights as a shareholder. The issue of the shareholder inspection rights was remanded to the trial court. The statutory language and factors at issue under the shareholder statute are different, but do also carry with them certain rights and remedies including the opportunity to recover attorney fees and the appointment of an inspector or accountant to audit the books. Corporations Code section 1603 and 1604.
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