Corporate Directors: Can You Look at the Books?

Written by: Samuel Tallman

On January 16, 2019, the First District Appellate Court of Illinois issued its decision in Munroe-Diamond v. Munroe, 2019 IL App (1st) 172966 and held that, unlike corporate shareholders, corporate directors have a presumptive (and much broader) right to inspect corporate books and records. This presumptive right can only be curtailed if and when the corporation carries the burden of proving the director's request for inspection is improper.  In reaching this conclusion, the Court considered whether a corporate director has the unqualified right to examine corporate books and records, or whether that right is qualified by the director having a “proper purpose” for doing so -- and if it’s the latter, which party bears the burden of proof?

Relying on century old precedent, Justice Ellis delivered the opinion of the Court and held that corporate directors (as opposed to corporate shareholders) have an unqualified right to inspect their company’s documents and only if such a request for inspection is proven to be for an improper purpose, can such a request be denied and/or curtailed.  In arriving at this holding, the Court provided a lengthy history analyzing various Illinois appellate and Supreme Court cases discussing the rights of corporate directors and shareholders with regard to the inspection of corporate documents.

While taking the reader through this history, the Court provides a thorough analysis of Stone v. Kellogg, 62 Ill. App. 444 (1895).  The Court quoted Stone, for the following proposition:

It is not merely the right of petitioner to examine the records and books of account of the company in which he is a director -- it is his duty, if he has reason to think that they contain that, a knowledge of which, if obtained by him, will be of service to stockholders, the trust of all of whom he is.

***

The fact that a director is suspicious that affairs are not properly or judiciously managed, is a reason why he should investigate; nor are we able to perceive any good reason why a suspicious stockholder can be turned aside with the answer that his suspicion is a mere caprice or his motives bad.

Id. at 463.

The Court’s analysis then contrasts a corporate director’s right to inspect documents with that of a corporate shareholder.  The Court initially noted that there was no statutory provision which limited a corporate director’s right to inspect documents.  Comparatively, a corporate shareholder’s rights to inspect documents has been specifically delineated within the Illinois Business Corporation Act of 1983 (“BCA”) – 805 ILCS 5, et seq.  In citing to the BCA, the Court made clear that to inspect corporate documents, shareholders must establish a proper purpose as a precondition to inspection, and they carry the burden of proving a proper purpose in any subsequent court action.  See 805 ILCS 5/7.75(b), (c) (West 2016) (emphasis added).  The Court then goes on to make a further distinction that shareholders are only entitled to review (if deemed for a proper purpose) certain corporate records, specifically: books and records of account, minutes, voting trust agreements filed with the corporation, and record of shareholders.  See 805 ILCS 5/7.75(b).

 



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