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).




No Wrongful Discharge Claim For Firing Of Employee/Shareholder In Retaliation For Her Exercise Of Her Statutory Inspection Rights

You probably know that North Carolina is an employment-at-will state.  That means that in the absence of any employment contract, you can be fired from your job at any time, for good reason, no reason at all, or even a bad reason.

There's a skinny exception to that rule: that an employee cannot be terminated for a purpose that contravenes public policy.  So here's a head-scratcher for you: can a company terminate an employee for exercising her statutory right as a shareholder to inspect the company's books and records?

That was an issue before the Business Court in Brady v. Van Vlaanderen, 2013 NCBC 37, in which the Plaintiff, a minority shareholder and employee of a corporation called United Tool, said she was terminated in retaliation for attempting to exercise her shareholder rights to inspect the corporation's records.

Judge Gale dismissed her wrongful discharge claim in an Order last week, relying on two out-of- state cases.  He said he would not "adopt an additional public policy exception to North Carolina's terminable at will doctrine."  Op. 31.

Knowledgeable North Carolina readers of this blog might say "but what about Meiselman?"

For non-North Carolina readers of this blog (like my dad) , and those otherwise ignorant of the North Carolina Supreme Court's important decision in  Meiselman, Meiselman v. Meiselman, 309 N.C. 279, 307 S.E.2d 551 (1983) (probably including my dad), that case holds that a shareholder may not be treated by the corporation in a manner contrary to her "reasonable expectations."

Judge Gale indeed did take Meiselman into account, and said that "Plaintiff should pursue her claim for salary and benefits, if at all, through her Meiselman claim."  Op. ¶31.

No wrongful discharge claim for being retaliated against for exercising her inspection rights, but a Meiselman claim for the same bad conduct by the corporation. So that's six of one, half a dozen of the other, right?  I'm not so sure.  Let me know what you think.

Sanctions For Derivative Action Plaintiff And His Lawyers

Egelhof v. Szulik, 2008 NCBC 2 (N.C. Super. Ct. Feb. 4, 2008)(Tennille)

It’s hard to imagine a more inadequate plaintiff than Egelhof to undertake the fiduciary responsibility of being a plaintiff in a derivative action against Red Hat, a publicly traded company. Egelhof was only 24 years old, and held only a few hundred dollars of Red Hat's stock. He had become a plaintiff in response to a solicitation on the internet. As the Court described Egelhof, "[h]e had little investing experience, no experience in litigation, no prior connection with the [his] law firm, no personal knowledge of [the corporation] and its operations, and a minor criminal record."

The Court concluded that this plaintiff "lacked any credentials to act as a fiduciary for a company in multi-million dollar litigation." Noting Egelhof’s paltry stake in Red Hat, the Court held that "[w]hile the size of ownership is not determinative of standing, a potential plaintiff's lack of a real financial stake in the litigation is a warning sign that he or she may not be willing or able to devote the time necessary to fulfill the fiduciary obligations imposed by law on a shareholder derivative plaintiff."

These factors alone would probably not have warranted sanctions, but Egelhof was completely uninvolved in his case. He relocated, more than once, and never gave his lawyers a forwarding address. He sold his stock during the course of the lawsuit, creating a significant standing issue, but never mentioned this to his lawyers. He had never even met his lawyers until the night before his deposition and had spent a total of five hours on the case by the time he was deposed.

The Court's sanction to Egelhof was to prohibit him from being a plaintiff in a class action or derivative action in North Carolina for the next five years. The lawyers came in for an equally harsh sanction.

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