Inspection Of Books And Records

It’s been a while since the Business Court devoted a full opinion to a shareholder’s rights to inspect corporate records.  But last week, Judge Bledsoe filled that gap with his Order and Final Judgment in Sharman v. Fortran Corp., 2018 NCBC 27

Fortran?  If you are thinking that Fortran Corp. must control the rights to the Fortran computer coding language, like I was, you are wrong. This Fortran Corporation is a "telecommunications system integrator dedicated to designing, sourcing, implementing and maintaining complex communications solutions."  That’s what its last Annual Report says.

The Sharman Opinion deals with the request of multiple Fortran shareholders to inspect a wide swath of Fortran’s corporate records.  I can’t think of another area of the law where you get a statutory right to discovery before filing a lawsuit (though it’s limited to what the statute says you can get).  And you are entitled to a response in five business days!  No thirty or sixty days waiting for a response.  Plus you might be entitled to recover your attorneys’ fees.  I wonder why every claim by a shareholder against a director or officer for, say, a breach of fiduciary duty, isn’t preceded by the use of this powerful tool.

There are two "separate and distinct categories" of inspection requests.  Op. 16 (quoting Russell M. Robinson, II, Robinson on North Carolina Corporation Law § 10.0 1(7th ed.2017)).  These are generally referred to as "absolute rights of inspection" (per. G.S.§55-16-02(a), and "qualified rights of inspection (per. G.S. §55-16-02(b)).

Absolute Right Of Inspection

Section 55-16-01(e) of the General Statutes lists certain records which a corporation is required to keep.  A shareholder is "entitled" to inspect these records:

(1)  Its articles or restated articles of incorporation and all amendments to them currently in effect;

(2) Its bylaws or restated bylaws and all amendments to them currently in effect;

(3) Resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;

(4) The minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past three years;

(5) All written communications to shareholders generally within the past three years and the financial statements required to be made available to the shareholders for the past three years under G.S. 55-16-20;

(6) A list of the names and business addresses of its current directors and officers; and

(7) Its most recent annual report delivered as required by G.S. 55-16-22.

"Absolute" Doesn’t Mean Automatic

Not every shareholder has these "absolute" inspection rights. Only "qualified shareholders" can exercise them.  Only those who have held their shares for more than six months before making their demand for inspection, or who hold at least five percent of any class of the corporation’s shares are "qualified."  N.C. Gen. Stat. §55-16-02(g). 

"Qualified" Rights Are Tougher To Obtain

Those shareholders trying to exercise the "qualified rights" of Section 55-16-02(b) have to satisfy a more difficult standard.  The requesting shareholder must show that his:

Continue Reading NC Business Court On Shareholder Inspection Rights

The Plaintiff in Camacho v. McCallum, 2016 NCBC 79 has to head to Delaware to litigate her claims for inspection of the records of the LLC of which she is a member, and also to seek dissolution of the LLC.

Why, even though Plaintiff is a North Carolina resident and the Defendant LLC has business operations in North Carolina?  Because the LLC in question was a Delaware LLC.  Judge Robinson ruled that:

The Delaware Code grants exclusive jurisdiction over inspection claims to the Delaware Court of Chancery.  Op. ¶24.  (It says that in Section 18-305 of the Delaware Code).

The Delaware Court of Chancery also has exclusive subject matter jurisdiction over claims to dissolve a Delaware corporation.  Op. ¶29.

The Delaware Legislature has tried to stake out exclusive jurisdiction for its Court of Chancery in other areas.  Here’s an example: Section 145(k) of the Delaware General Corporation Law says, regarding which court may hear actions for indemnification or advancement of expenses, that:

The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise.  The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

(emphasis added).

Can Delaware Really Claim Exclusive Jurisdiction For Its Chancery Court?

Can Delaware oust other courts from deciding matters of Delaware corporate law?   And did the Delaware Legislature even really mean to do so?  My guess is probably not.  Remember that Delaware has a Court of Chancery because it divided its court system into its Superior Court, which "has statewide original jurisdiction over criminal and civil cases, except equity cases," and the Court of Chancery, which has exclusive jurisdiction over "equity cases."  So the Delaware Legislature probably meant only to make clear that inspection and dissolution actions filed in Delaware should be brought in the Court of Chancery as opposed to the Delaware Superior Court.

Delaware certainly couldn’t prohibit federal courts from ruling on this type of issue per its statutory declaration of "exclusivity."  Judge Easterbrook  of the Seventh Circuit addressed this issue in Truck Components v. Beatrice Co., 143 F.3d 1057, (7th Cir. 1998) with respect to another corporate issue: the right of an officer or director of a corporation to receive advancement for legal expenses in cases making claims regarding their service to the corporation.  He said:

No state may prevent a federal court from exercising jurisdiction created by Congress. . . . Nor do we suppose for one second that Delaware set out to contract the scope  of federal jurisdiction. Section 145(k) allocates jurisdiction among Delaware courts.  Delaware maintains separate systems of courts in law and equity.  Claims based on corporate arrangements go to the Court of Chancery rather than to the law courts, where other contracts are litigated. Such an intra-state allocation has no effect on federal litigation, which merged law and equity long ago.

Id. at 1061-1062 (emphasis added).

The NC Business Court isn’t alone in deferring to Delaware’s self-proclaimed "exclusive jurisdiction."  So have courts in Florida, Synchron, Inc. v. Kogan, 757 So..2d 564 (Fla. App. 2nd Dist.. 2000); New York:  In re Raharney Capital, LLC v. Capital Stack LLC, 25 N.Y.S.3d 217, 217−18 (N.Y. App. Div., 1st Dept. 2016)(New York court did not have jurisdiction to order dissolution of a Delaware corporation); Pennsylvania: Intertrust GCN, LP v. Interstate Gen. Media,LLC, No. 99, 2014 Phila. Ct. Com. Pl. LEXIS 434, at *7 (Phil Ct. Comm. Pl. 2014)(no jurisdiction to order dissolution of a Delaware corporation); and Vermont: Casella Waste Sys., Inc. v. GR Tech., Inc., No. 409-6-07, 2009 Vt. Super. LEXIS 14, at *7−8 (Vt. Super. Ct. 2009)(same).

California has applied its own statute regarding inspection of corporate records to a Delaware corporation.  Havlicek v. Coast-to-Coast Analytical Services, 39 Cal. App. 4th 1844  (Cal App., 2nd Dist. 1995).  And notwithstanding the Raharney case cited above, New York has done the same, in Sachs v. Adeli, 26 AD 3d 52, 55 (N.Y. App. Div., 1st Dept. 2005).

How Can North Carolina Members Of A Delaware LLC Avoid Having To Bring Claims In A Delaware Court?

It’s a good juncture to point out that the persons forming a Delaware corporation can specify in its bylaws that certain claims (those involving the internal affairs of the corporation) must be resolved exclusively in the North Carolina Business Court.  The Court of Chancery so ruled in September 2014.

So, in the absence of such a provision, claims for inspection of books and records and for dissolution (being the internal affairs types of claims that the Chancery Court said could be the subject of a forum selection clause) have to be brought in Delaware.

If you are a North Carolina lawyer creating a Delaware LLC or Delaware corporation for a North Carolina client, you may want to include a North Carolina forum selection provision in the Bylaws or Operating Agreement.  That way you won’t have to explain down the line to the client why she has to pursue her claim to inspect corporate or LLC records (or dissolution) in Delaware.

You’ll remember that North Carolina (like probably every state, has its own statute permitting LLC members the right to inspect the LLC’s records.  That statute applies "only to members of an LLC formed under the North Carolina [Limited Liability] Act."  Op. ¶22.  So a member of a Delaware LLC has no inspection rights under the North Carolina statute.





There’s nothing better than winning a case or a motion in Court and to then follow that up with an award of attorneys’ fees.  On that subject, two rulings in the Business Court last week addressed the award of attorneys’ fees.  In one, the party requesting fees received them.  In the other, fees were not awarded.

Fees For An Inspection Request

If you are moving for the inspection of corporate records for a shareholder, don’t forget that the statute provides for your clients to be paid their fees.  Section 55A-16-04 of the General Statutes provides that the Court "shall also order the corporation to pay the member’s cost (including reasonable attorneys’ fees) incurred to obtain the order unless the corporation proves that it refused inspection in good faith because it had a reasonable basis about the right of the member to inspect the records demanded."

The Plaintiffs in Allcorn v. Bradley Creek Boatominium, Inc. — previously successful on a motion to obtain inspection of the Defendant’s corporate records — moved for an award of attorneys’ fees.

In an unpublished Order last week, Judge McGuire agreed that the Defendant had lacked a reasonable basis to withhold the records, and he awarded the Plaintiffs $14, 620.16 for their fees, the full amount they requested.  The Defendant corporation claimed that it had a good faith basis for refusing to produce its records — that it was concerned that the Plaintiffs would misrepresent the contents of the records — but Judge McGuire did not find that concern to excuse its failure to produce the documents.

Fees For A Voluntarily Dismissed Trade Secrets Case

The outcome wasn’t as positive for the Defendant moving for attorneys’ fees in a trade secrets case, Velocity Solutions, Inc. v. BSG, LLC, 2015 NCBC 51. Section 66-145(d) allows for reasonable attorneys’ fees to be awarded to the "prevailing party" in a trade secrets case "if a claim of misappropriation is made in bad faith or if willful and malicious misappropriation exists."

There have not been any previous decisions in the Velocity case to write about, because Velocity took a voluntary dismissal without prejudice of its case, which included claims for misappropriation of trade secrets, in December 2014.

Whoa.  Are you a prevailing party if the other side takes a voluntary dismissal?  Judge Gale specifically declined to answer that question, finding other reasons to deny the Motion.  Op. ¶44 & n.2.

But Judge Gale did wade into the question of what constitutes "bad faith" under the statute, which the statute does not define.  The courts of other states that have enacted the Uniform Trade Secrets Act (on which the NC law is based), have looked for both "objective speciousness" and "subjective bad faith."  Op. ¶45.  Judge Gale, looking at appellate construction of the term "bad faith" under the unfair and deceptive trade practices statute concluded "there was no indication that our appellate courts would require a determination of subjective bad faith."  Op. ¶47.

The fee request boiled down to the issue of specificity, which is always an issue in pleading a trade secrets claim.  While the Court considered its recent opinions dealing with whether a pleading described the allegedly misappropriated trade secret with enough specificity to avoid a dismissal under Rule 12 (the second DSM Dyneema decision) or to allow discovery to move forward under Rule 26 (the first DSM Dyneema decision), it found that a "third standard" should be applied in considering whether fees are warranted:

whether the pleading was, when filed, devoid of factual or legal sufficiency or was brought or maintained in bad faith for an improper purpose.

Op. ¶51.

Judge Gale found that the Plaintiffs had "an adequate factual and legal basis to form a reasonable, good faith belief in the merits of their claim." and that this reasonable and good faith belief precluded the imposition of sanctions under G.S. §66-154(d).

That good faith belief was supported by Plaintiffs’ affidavits attesting to twenty interviews before filing the Complaint, their review of publicly available information about the Defendant’s product and other investigation.  Op. ¶24.

This probably won’t be the last time that you hear about the Velocity case on this blog.  The Plaintiff has refiled its case, though its new Complaint makes no trade secrets claims.



The Defendant in Allcorn v. Bradley Creek Boatominium, Inc. sought an injunction against the Plaintiffs in the midst of a proxy fight as to their allegedly defamatory statements in connection with the election of the Defendant’s board of directors.  In an (unpublished) Order yesterday,  Judge McGuire denied a Motion for a Temporary Restraining Order.

The Defendant operates a non-profit "recreational boating marina" in Wilmington, NC.  The Plaintiffs, members of the Defendant and owners of boat slips at the marina (a boataminium) were involved in a disagreement with the existing board of directors of the Defendant.

Plaintiffs, exercising their statutory inspection rights, sought the current financial statements of the Defendant corporation and the minutes of its recent Board of Directors meetings (per G.S. §55A-16-04).  Plaintiffs were entitled to this information "if [their] demand was made in good faith and for a proper purpose, (b) [they] describe[d] [the] purpose for which they seek the minutes ‘with reasonable particularity,’ and (c) the records are directly connected to the proper purpose."  Order ¶12.

What are "proper purposes"?  They include determining stock value, determining the financial condition of the corporation, or investigating the conduct of management.  Order ¶12  A requesting member or shareholder enjoys a "presumption of good faith" in a request for corporate records, and the burden falls to the corporation to overcome the presumption.  Order ¶12.

Although the corporation conceded the request for the board minutes was for a proper purpose, it disputed that the request had been made in good faith.  Since the corporation was seeking ratification of previous actions of its board of directors at an upcoming meeting, and there therefore was a close relationship between the request and the upcoming board agenda, the Court found insufficient evidence to rebut the presumption of good faith and ordered the corporation to produce the requested records.

You are wondering by now how a temporary restraining order plays into this basic request for corporate records.  The Defendant expressed concern on how the Plaintiffs might use the records that it was ordered to produce.  It sought an injunction prohibiting the Plaintiffs from "engaging in or disseminating any defamatory or otherwise false, disparaging or misleading communications about [the corporation’s] financial health and/or its Board of Directors, or management to any person or entity."  Order ¶16.

After stating several times that a TRO was an "extraordinary measure"  (Order ¶17), Judge McGuire denied the motion for a TRO.  He said that even assuming that the Defendant had established a likelihood of success on any of its claims, it had not established that it would suffer irreparable harm if the TRO was not issued.

The Judge also pointed out the difficulty that the Court would have in monitoring and enforcing such an injunction:

Particularly significant in this case is that Defendant’s requested relief would require the Court to restrain Plaintiffs’ rights to communicate with the Marina’s membership
immediately prior to a vigorously contested board of director’s election. While the Court recognizes that genuinely defamatory speech does not have absolute constitutional protection, the relief requested by Defendant[] goes far beyond protecting it against defamatory statements or communications by Plaintiffs and, effectively, asks the Court to insert itself into Defendant’s upcoming Board elections as a referee. Defendant is now requesting that the Court prohibit Plaintiffs from making "incomplete" and "misleading" communications, from "interpretation of the records produced" by Defendant, and from "harassing" Defendant’s employees. Such a prohibition on Plaintiffs’ conduct would be both overly broad and would not adequately apprise Plaintiffs of the conduct from which they were prohibited in engaging. In addition, as a practical matter, such an order would be nearly impossible to enforce.

Order ¶19.

Judge McGuire also noted that the Defendant’s hands were not entirely clean in expressing its concern about false statements possibly being made in the upcoming election of the board of directors of the Defendant.  He said that the Defendant had said in a newsletter to its members that the Plaintiffs’ request for corporate records was improper, "despite the fact that North Carolina law clearly entitles Plaintiff[s] to this exact information upon request."  Order ¶20.

They say that "he who seeks equity must do equity."  It has also been said that the two happiest days of a man’s life are when he buys a boat and when he sells it.  The current members of the board of directors of the Defendant have undoubtedly had better days.


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).




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.

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.

Continue Reading Sanctions For Derivative Action Plaintiff And His Lawyers