1002 TULANE LAW REVIEW [Vol. 16 [Excerpt from Tulane Law Review, Vol. 46, No. 5, June 1972] CORPORATIONS-SHAREHOLDER INSPECTION OF CORPORATE Petitioner, a long time opponent of the Vietnam war, discovere that a local company, Honeywell, Inc., was substantially involved in the production of fragmentation bombs for use in Indo-China. i: order to encourage the shareholders to cease the company's produ tion of munitions, petitioner purchased several shares of stock an submitted formal demands to Honeywell management requesting that it produce its original and current shareholder ledger and corporate records dealing with weapons and munitions manufacture. When the company refused, a petition was filed for writs of mandamus ordering Honeywell to produce the documents. The tri court dismissed the petition holding that the information was sought for an improper and indefinite purpose. On appeal, the Supren Court of Minnesota affirmed the dismissal and held that a stockholder who was motivated solely by social and political beliefs, and not by a concern for the economic well being of the corporation, could not compel production of a corporation's shareholder lists or business records. State ex rel. Pillsbury v. Honeywell, Inc., 191 N.W.2d 406 (Minn. 1971). The right of a shareholder to inspect the corporate records may arise in one of three contexts: as a common law right, by statute, or, in some circumstances, under the proxy rules established by the Securities and Exchange Commission. The theoretical basis of the right is that while the corporation is the legal owner of its property, the shareholders are the real and beneficial owners and as such are entitled to certain proprietary information.1 Thus, at common law it is generally recognized that a shareholder2 has the right to inspect the corporate records if he can show "proper purpose," that 1 Nationwide Corp. v. Northwestern Nat'l Life Ins. Co., 87 N.W.2d 671, 678 (Minn. 1958). As the Pillsbury court pointed out, in the large firm the inspection right is more akin to a considerably effective weapon in corporate warfare. State ex rel. Pillsbury v. Honeywell, Inc., 191 N.W.2d 406, 410 (Minn. 1971). See Cooke v. Outland, 144 S.E.2d 835, 842 (N.C. 1965). 2 Unlike many statutes, the common law does not require the person seeking inspection to be either a holder of record or own or represent any minimum percentage of outstanding stock. Levine v. Pat-Plaza Amusements, Inc., 324 N.Y.S.2d 145 (Sup. Ct. 1971). Cf. N.Y. Bus. Corp. Law § 624 (McKinney 1972] NOTES 1003 is, a purpose related to or germane to his interest as a stockholder." The right of inspection has been judicially construed as a qualified right' which requires good faith and which must be exercised at a reasonable time and place." Inspection rights may also arise from state statutory provisions, which, while similar in purpose, are by no means uniform. A common provision limits inspection to shareholders who either own some minimum percentage of the outstanding shares, or who have been shareholders for some minimum time period," or both. Some of the states place no restrictions on inspectors and extend the right 8 Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970), cert. denied, 401 U.S. 974 (1971); Weber v. Continental Motors Corp., 305 F. Supp. 404 (S.D.N.Y. 1969); Parish v. Maryland & Va. Milk Producers Ass'n, 242 A.2d 512 (Md. App. 1968); Ochs v. Washington Heights Federal Savings & Loan Ass'n, 215 N.E.2d 485, 489, 268 N.Y.S.2d 294, 299 (1966); 5 W. Fletcher, Corporations § 2218, at 799 (1967). 4 Gavin v. Purdy, 139 N.E.2d 397 (Mass. 1957); 5 W. Fletcher, Corporations 2218, at 799 (1967). The Gavin court also noted that the right of examination of corporate records cannot be exercised for mere curiosity or for speculative purposes or vexatiously. Id. at 399. It has also been held that no right to a financial statement, as distinct from inspection of the corporation's books and making of extracts, is recognized at common law. Levine v. PatPlaza Amusements, Inc., 324 N.Y.S.2d 145, 149 (Sup. Ct. 1971). By contrast, the director's right of inspection is viewed as absolute. Hausner v. Hopewell Products, Inc., 201 N.Y.S.2d 252, 254 (Sup. Ct. 1960); Goldberg v. Creative Country Day School, Inc., 201 N.Y.S.2d 243 (Sup. Ct. 1960). Aside from the right of inspection, there may also be an affirmative duty on the part of the corporation and its officers to keep stockholders reasonably informed as to corporate affairs, although this duty would not require making information public until the corporation could protect itself from possible ill effects. See Reynolds v. Texas Gulf Sulphur Co., 309 F. Supp. 548, 558 (D. Utah 1970); 15 U.S.C. 78j (b) (1970); 17 C.F.R. § 240.10 (b) (1970). Sanders v. Pacific Gamble Robinson Co., 84 N.W.2d 919 (Minn. 1957); Pilat v. Broach Systems, Inc., 260 A.2d 13 (N.J. Super. Ct. 1969). • Bishops Estate v. Antilles Enterprises, Inc., 252 F.2d 498 (8d Cir. 1958). 7 A popular formula is to allow a shareholder to inspect the books, records, and shareholder lists of the corporation if he is a six month shareholder of record or a holder of 5 percent of the outstanding shares of the corporation. Ala. Code tit. 10, § 21 (46) (Supp. 1969); Ga. Code § 22-613 (1969); Ill. Rev. Stat. ch. 32, 157.45 (Supp. 1972); N.J. Rev. Stat. § 14A:5-28 (1969); N.Y. Bus. Corp. Law § 624 (McKinney 1963); Va. Code Ann. § 13.1-47 (1964); Wis. Stat. 180.43 (2) (1957). 8 Maryland, for example, requires a shareholder to be the owner of 5 percent of the outstanding shares for six months. Md. Ann. Code art. 23, § 51 (Supp. 1971). Florida requires a would-be inspector to be the owner of 1 percent of the outstanding shares for six months. Fla. Stat. Ann. § 608.39 (1956). The Louisiana statute expressly provides that the 2 percent ownership requirement may be aggregated by two or more shareholders of six months. Additionally, the statute contains a novel requirement of 25 percent ownership in the case of "a business competitor, or a person who owns stock or is otherwise interested in a corporation which is a business competitor. . . ." La. R.S. 12:103 (1969). 1004 TULANE LAW REVIEW [Vol. 46 to "any shareholder." Typically, the material to be inspected includes books and records of account, minutes of shareholder, direc. tor, and executive committee meetings, and shareholder lists. Some states allow easier access to shareholder lists than to books, records. or minutes.10 Remedies and penalties for failure of the corporation to allow statutory inspection likewise vary. Although almost all states authorize application to a court, some also provide for a fine. system based on the number of offenses,11 the delay period, 12 or some percentage of the shareholder's stock value.18 But the shareholder's statutory right is never absolute or automatic, and almost every state requires a demand and showing of proper purpose.14 Additionally, many states are wary of extending the inspection right to a shareholder who may be contemplating selling the shareholder list to an interested concern.15 Since the common law and statutory rights of corporate inspection typically exist side by side, it is important to consider the status of one vis-à-vis the other. It is generally accepted that statutes providing for inspection rights supplement rather than abrogate See, e.g., Ariz. Rev. Stat. Ann. § 10-175 (Supp. 1972); Cal. Corp. Code 3003 (Deering 1962); Del. Code Ann. tit. 8, § 200 (1969); Mo. Rev. Stat. § 351.215 (1966); Okla. Stat. tit. 18, § 1.71 (1953); Pa. Stat. tit. 15, § 1308 (Supp. 1971); Tenn. Code Ann. § 48-308 (1964). Inspection rights also extend to agents provided the shareholder gives written authorization. See, e.g., Henshaw v. American Cement Corp., 252 A.2d 125 (Del. Ch. 1969). 10 This is normally achieved by placing the burden of proof on the shareholder to show proper purpose when books, records, or minutes are sought, and on the corporation to show improper purpose when shareholder lists are sought. See, e.g., Del. Code Ann. tit. 8, § 220 (1969); Pa. Stat. tit. 15, § 1308 (Supp. 1971). 11 In Oklahoma and Florida, for example, a $50.00 penalty is incurred for each improper refusal by a corporation officer, agent, or director. Okla. Stat. tit. 18, 1.71 (1953); Fla. Stat. Ann. § 608.39 (1956). In Missouri the penalty is $250.00 for each offense of refusal. Mo. Rev. Stat. § 351.215 (1966). 12 Tennessee authorizes a $50.00 penalty for each day of improper refusal. Tenn. Code Ann. § 48-308 (1964). 13 In addition to the normal legal remedies including mandamus, Alabama and Illinois provide for a fine of 10 percent of the value of the demanding shareholder's shares. Ala. Code tit. 10, § 21 (46) (Supp. 1969); Ill. Rev. Stat. ch. 32, 157.45 (Supp. 1972). Wisconsin has a similar provision but sets $500.00 as the maximum amount of the fine. Wis. Stat. Ann. § 180.43 (4) (1957). 14 See, e.g., Ala. Code tit. 10, § 21(46) (Supp. 1969); Ariz. Rev. Stat. § 10175 (Supp. 1971); Calif. Corp. Code § 3003 (Deering 1962); Del. Code Ann. tit. 8, § 220 (1969); Ill. Rev. Stat. ch. 32, § 157.45 (Supp. 1972); La. R.S. 12: 103 (1969); Minn. Stat. Ann. § 300.32 (1969); Pa. Stat. tit. 15, 1308 (Supp. 1971); Va. Code Ann. § 13.1-47 (1964); Wis. Stat. Ann. § 180.43 (1957). 15 Thus some statutes provide that a corporation has no obligation to reveal records or shareholder lists if it can be shown that the stockholder has previously sold or offered for sale a shareholder list of the corporation. Ala. Code tit. 10, § 21 (46) (Supp. 1969); Fla. Stat. Ann. § 608.39 (1956); Ill. Rev. Stat. ch. 32, § 157.45 (Supp. 1972); N.Y. Bus. Corp. Law § 624 (McKinney 1963). 1972] NOTES 1005 the common law right.16 Also, an inspection statute can have an important evidentiary aspect in that it frequently serves to shift the burden of proving "proper purpose" from the shareholder to the corporation. This is especially true in the case of shareholder lists.17 19 The third context in which the inspection right may arise is under section 14a-7 of the federal proxy rules.18 The section provides that if the management of a corporation intends to make a proxy solicitation, it must, if requested by an opposing shareholder, either mail the outsider's proxy solicitation, or furnish a current list of names and addresses of shareholders of record. Because the rule is applicable only to certain corporations,20 and requires a proxy solicitation and corporate refusal to mail the outsider's material, it is a seldom used shareholder device to effect inspection."1 Although the petitioner in Pillsbury claimed the inspection right under the Minnesota statute while the respondent contended that Delaware law was applicable, the supreme court found the choice of law question immaterial because the determinative test in either state was identical: whether shareholder had a "proper purpose."22 The concept of "proper purpose," which is integral to the common 16 See G.S. & M. Co. v. Dixon, 188 S.E.2d 662 (Ga. 1964); Levine v. PatPlaza Amusements, Inc., 824 N.Y.S.2d 145 (Sup. Ct. 1971); Leisner v. Kent Investors, Inc., 807 N.Y.S.2d 293 (Sup. Ct. 1970). 17 Mite Corp. v. Heli-Coil Corp., 256 A.2d 855 (Del. Ch. 1969). Cf. Crane Co. v. Westinghouse Air Brake Co., 288 N.Y.S.2d 984 (Sup. Ct. 1968). In Oregon, it has been held that the statute creates two classes of shareholders that may examine corporate records. For the first class, shareholders of six months or of 5 percent of the outstanding shares, the burden of proving improper purposes is on the corporation, while all other shareholders carry the burden of proving proper purposes themselves. Ore. Rev. Stat. # 57.246 (2) (1969); Rosentool v. Bonanza Oil & Mine Corp., 352 P.2d 188 (Ore. 1960). 18 17 C.F.R. § 240.14a-7 (1970). 19 In such a situation, the outsider will bear the postage expense, and the mailing usually must take place no later than the date of management's first solicitation. 20 17 C.F.R. 240.14a-2 (1970) restricts the SEC proxy solicitation rules to shares listed with the SEC or shares of any company having more than 500 shareholders and $1 million in assets. 21 The outsider proxy proposal is an increasingly popular method employed by political reformers to effect change in corporate activity. See, e.g., Medical Committee For Human Rights v. Securities & Exch. Comm'n, 432 F.2d 659 (1970), vacated as moot,--U.S.-(1972). It is entirely possible that a shareholder who is attempting to aggregate the required percentage of shares in order to be entitled to state statutory provisions may find himself within the purview of the SEC proxy rules because he will be considered as engaged in the "soliciting" of proxies. See, e.g., Studebaker Corp. v. Gittlin, 360 F.2d 692 (2d Cir. 1966). 22 191 N.W.2d at 409. 1006 TULANE LAW REVIEW [Vol. 46 law right28 and to almost every statutory right,24 has never been susceptible of exact definition. Although it is frequently described as a purpose reasonably related to a person's interest as stockholder,25 such a description adds little substantive clarification and begs for a definition of "interest as a stockholder." Courts, unperturbed by semantic difficulties, have found a variety of purposes to be proper, including offers to purchase stock of other shareholders, 20 solicitations of proxies," determination of stock value,28 and investigation of improper transactions" or other suspected mismanagement of the corporation.80 Similarly, "improper purpose" was evident when the stockholder's intention was illegal, vexatious,82 speculative, or prompted by mere curiosity. Because the deter 28 See note 3 supra. 24 See note 14 supra. Interpreting an earlier statute, Wisconsin cases have held that motive or purpose is irrelevant in a stockholder demand for inspection and that the stockholder has an absolute right of inspection. Pick v. Wesbar Stamping Corp., 298 N.W. 58 (Wis. 1941); State ex rel. Mandelker v. Mandelker, 222 N.W. 786 (Wis. 1929). See generally 1942 Wis. L. Rev. 292. 25 See, e.g., Willard v. Harrworth Corp., 258 A.2d 914, 915 (Del. Ch. 1969), aff'd, 267 A.2d 577 (Del. 1970); Mite Corp. v. Heli-Coil Corp., 256 A.2d 855 (Del. Ch. 1969); State ex rel. Theile v. Cities Service Co., 115 A. 773, 776 (Del. 1922); State ex rel. G.M. Gustafson Co. v. Crookston, 22 N.W.2d 911, 918 (Minn. 1946); Ariz. Rev. Stat. § 10-175 (Supp. 1971); Cal. Corp. Code 3003 (Deering 1962); Del. Code Ann. tit. 8 § 220 (1969). 26 Mite Corp. v. Heli-Coil Corp., 256 A.2d 855, 856 (Del. Ch. 1969). In NVF Co. v. Sharon Steel Corp., 294 F. Supp. 1091 (W.D. Pa. 1969), an offer to purchase stock of other shareholders was held to be a proper purpose even though the offeror was a conglomerate seeking control of the corporation and offering shares in its own company rather than cash for the stock. Id. at 1094. 27 Western Air Lines, Inc. v. Kerkorian, 254 A.2d 240, 241 (Del. 1969). See also Susquehanna Corp. v. General Refractories Co., 250 F. Supp. 797, 801 (E.D. Pa. 1966) (influencing vote at shareholders' meeting held proper purpose); Crane Co. v. Westinghouse Air Brake Co., 288 N.Y.S.2d 984, 986 (Sup. Ct. 1968) (enlisting support for opposition to merger held proper purpose). 28 Guthrie v. Harkness, 199 U.S. 148 (1905); Bishop's Estate v. Antilles Enterprises, Inc., 252 F.2d 498, 500 (3d Cir. 1958); State ex rel. Rogers v. Sherman Oil Co., 117 A. 122 (Del. Super. Ct. 1922). 29 Nodana Petroleum Corp. v. State ex rel. Brennan, 123 A.2d 243 (Del. 1956). 80 Guthrie v. Harkness, 199 U.S. 148 (1905) (shareholder apprehensive about financial condition of corporation); Weber v. Continental Motors Corp., 305 F. Supp. 404 (S.D.N.Y. 1969) (shareholder dissatisfied with management decision to discontinue payments of dividends); Varney v. Baker, 80 N.E. 524 (Mass. 1907); State ex rel. Watkins v. Cassell, 294 S.W.2d 647 (Mo. App. 1956); Martin v. Columbia Pictures Co., 133 N.Y.S.2d 469, 474 (Sup. Ct. 1953) (shareholder objected to employee stock options and wanted to know of management's plan to reduce excessive corporate expenses). See also De Rosa V. Terry Steam Turbine Co., 214 A.2d 684 (Conn. Super. Ct. 1965), where shareholder's intention to communicate ideas and suggestions about the labor relations of the corporation was found to be a proper purpose. 31 Alabama Gas Corp. v. Morrow, 93 So. 2d 515, 517 (Ala. 1957). 82 Wolozyn v. Begarek, 878 P.2d 1007, 1010 (Okla. 1963). 84 Sawyers v. American Phenolic Corp., 89 N.E.2d 374, 379 (Ill. 1949). |