You Aren't Entitled to "Original" Corporate Records When Making A Shareholder Inspection Request

When is the last time that you needed an "original" document for a trial?  Maybe never.  The Rules of Evidence permit the admissibility of "duplicates."  Rule 1003 of the North Carolina Rules of Evidence says that:

A duplicate is admissible to the same extent as an original unless (1) a genuine question is raised as to the authenticity of the original or (2) in the circumstances it would be unfair to admit the duplicate in lieu of the original.

But the Plaintiff in Beam v. Beam Rest Home, Inc., 1014 NCBC 46, decided in the NC Business Court last week by Judge Bledsoe, raised a stink about getting the original corporate records of the Defendant.  Plaintiff, a shareholder and director of Beam Rest Home, Inc., had made inspection requests as allowed by N.C. Gen. Stat. §§55-16-02(a) and -05(a).  Although the Defendant had already produced copies of all those records, the Plaintiff demanded to see the original records.

Neither statute requires that the corporation allowing inspection must produce its "original" records, and originals are not ordinarily produced when an inspection request is made.

As Judge Bledsoe observed, the "modern practice" is that:

shareholders, directors and their counsel typically receive duplicate copies of requested documents, either in hard copy or digital form, and, absent illegibility or good cause to suspect that the copies are not a true and accurate reproduction of the original records, do not insist on a visit to the corporation’s principal office for a physical inspection of the corporation’s original records.

Op. ¶20.  So, the Judge denied the request for "original corporate records."

Why was this Plaintiff insisting on "original" records when he already had the copies?  It may have been to obtain an  order compelling production of the originals, which might have provided a basis for the recovery of attorneys' fees, said Judge Bledsoe.  Op. ¶21.  The inspection statutes (G.S. §§55-16-04 and -05) allow for an award of fees if a shareholder or director is improperly refused the right to inspect and copy a corporation's records.

A corporation can avoid having to pay attorneys' fees for refusing an inspection request by a shareholder if it has a reasonable belief that the shareholder has not made the request for a "proper purpose."  A proper purpose is any "purpose that is reasonably relevant to the demanding shareholder's interest as  shareholder."  Op. ¶16.  The NC Court of Appeals has found a proper purpose by a shareholder to include: "1) determin[ing] the value of his stock; (2) investigat[ing] the conduct of the management; and (3) determin[ing] the financial condition of the corporation" Carter v. Wilson Constr. Co., 83 N.C. App. 61, 65, 348 S.E.2d 830, 832 (1986).

Given a past history of inspection requests by the Plaintiff, and another, previous lawsuit to obtain corporate records, coupled with the threat of another, the Court ruled that the Defendant had a reasonable basis to believe that the Plaintiff lacked a proper purpose in his request and was attempting to harass the Defendant into offering a buyout of his shares.

Judge Bledsoe, quoting a Delaware Chancery Court opinion, said that shareholder inspection requests "can become an effective and troubling tool for harassment and other mischief" if "not properly monitored by the Court."  Op. ¶22 (quoting Shamrock Activist Value Fund, L.P. v. iPass, Inc., 2006 Del. Ch. LEXIS 212, *10 n. 18 (Del. Ch. 2006).

 

 

 

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