716 CONNECTICUT LAW REVIEW [Vol. 4:707 as formidible as those pertaining to other books and records, some voting list statutes require, as a condition precedent to inspection. that the shareholder own a specified percentage of outstanding stock, or that he be a record owner for a stipulated period of time, or both. Absent such legislation, no minimum requirements are places! upon this right and theoretically, any record owner may be entitled to inspection through ownership of only one share. However, as the arguments in the instant case clearly demonstrate,48 even though courts will seldom specifically disqualify an applicant for reason of minimal holdings, they will be more inclined to grant inspection rights to holders of large blocks of shares. Decisions tangentially reach this result by finding that the holder of only a small interest has an "improper purpose," while allowing larger holders wider latitude of motive. Such reasoning seems unsound, since, if a proper purpose exists, it should not be vitiated by an inquiry into the degree of interest to be protected, as long as some valid interest exists. Stat utory language that accords inspection to any shareholder of record reinforces this concept. In the absence of statutory minimum ownership requirements corporations have frequently attempted to achieve the same result by placing restrictive provisions in their by-laws or certificates of incorporation. Such endeavors have normally been declared un 45. Newman, Inspection of Stock Ledgers and Voting Lists, 16 S.W. I. RE 439, 447 (1962). 46. ALI-ABA MODEL. BUS. CORP. ACT § 52 (1971) (5% requirement); FIA. SIA ANN. tit. 13 § 608.39 (1956) (1% requirement); MD. ANN. CODE art 23 § 51 (1977 (5% ownership); Mich. Stat. Ann. § 21.35 (Rev. 1963) (2% of outstanding capit. stock), upheld by Tomga v. Michigan Gas & Elec. Co., 4 Mich. App. 113. 14 N.W.2d 640 (1966); Miss. Code Ann. § 5309-111 (Rev. 1971) (1% equity ownership WIS. STAT. ANN. § 180.43(2) (1957) (5% of outstanding shares), followed by What v. Jacobsen Mfg. Co., 293 F. Supp. 1358 (E.D. Wis. 1968). 47. ALI-ABA MODEL BUS. CORP. ACT § 52 (1971) (6 months); Miss. CODE AN § 5309-111 (Rev. 1971) (6 months); WIS. STAT. ANN. § 180-43(2) (1957) (6 months 48. Brief of Appellant at 4, supra note 7, where the point is emphasized the appellant "owns and substantially controls" about $50,000 of Honeywell's stock even though he was the record owner of only one share. 49. See e.g., N.V.F. Co. v. Sharon Steel Co., 294 F. Supp. 1091 (W.D. Pa. 16, (Importance was placed on the fact that the corporation seeking inspection defendant corporation's stock records was owner of 5000 shares); Murchison v Alleghany Corp., 27 Misc. 2d 290, 210 N.Y.S.2d 153 (Sup. Ct. 1960) aff'd mem App. Div. 2d 753, 210 N.Y.S.2d 975 (1961). (Emphasis upon fact that petition and his brother owned 56,336 shares of convertible preferred stock). (ure Donaldson v. Boston Herald-Traveler Corp., 347 Mass. 274,197 N.E.2d 671 (196) (holder of 10 shares allowed inspection). 1972] RIGHT TO INSPECTION 717 enforceable since they represent little more than veiled attempts to waive by charter a right that is granted by statute.50 The prevalence of restrictive by-laws in spite of these decisions51 may be explained by their utility to corporations as devices to discourage shareholders uncertain as to the extent of their rights. In light of this opportunity for overreaching, good reason dictates that their use should be further restricted. Courts have widely split on the rights of equitable stockholders to seek inspection. A number have closely followed the statutory language requiring record ownership and denied inspection to beneficiaries of stock held in a testamentary trust52 or to holders of voting trust certificates, since they are, in reality, "strangers to the corporation."53 Consistent with this reasoning, many of the courts allow the trustee to assert a right of inspection as owner of record, although he stands merely as a nominal owner.54 As such, interested equitable owners may obtain the desired stock list indirectly by demanding that the fiduciary vindicate this right in his name. A minority of decisions, but perhaps those demonstrating the better reasoning, have looked beyond the mere form of the relationship to locate the real party at interest, and have allowed inspection by 50. Loew's Theatres, Inc. v. Commercial Credit Co., 243 A.2d 78 (Del. Ch. 1968), charter provision that corporate books would only be opened to persons holding 25% of any class of outstanding common stock declared void and unenforceable. E.g. Donaldson v. Boston Herald-Traveler Corp., 347 Mass. 274, 197 N.E.2d 671 (1964), where a bylaw provision that accorded the board of directors authority to comply with or refuse such a request unreasonably restricted the right of examina tion. 51. For an excellent analysis of bylaw and charter provisions that have restated, expanded, or restricted the right of inspection, see Koenigsberg, Provisions in Corporate Charters and By-Laws Governing the Inspection of Books by Stockholders, 30 GEO. L. J. 227 (1942). 52. Brecker v. Nielsen, 21 Conn. Supp. 33, 143 A.2d 463 (Super. Ct. 1958). 53. State ex rel. Crowder v. Sperry Corp., 40 Del. 84, 15 A.2d 661 (1940), where the court did suggest, but did not pass upon, the possibility that plaintiffs as equitable owners would be entitled to enforce this inspection right in a court of equity. Id. at 88, 15 A.2d at 664. Cf. Brentmore Estates v. Hotel Barbizon, 263 App. Div. 389, 33 N.Y.S.2d 331 (1942). See generally Note, Rights of Equitable Owners of Corporate Shares, 99 U. Pa. I.. Rev. 999 (1951). 54. State ex rel. Healy v. Superior Oil Co., 40 Del. 460. 13 A.2d 453 (1940): Tonga v. Michigan Gas & Elec. Co., 4 Mich. App. 113. 144 N.W.2d 640 (1966). where petitioner owned 71 shares in his own name and an additional 4.151 as custodian. The court allowed both holdings to be considered in order to attain the statutory 2% requirement. 718 CONNECTICUT LAW REVIEW [Vol. 4:707 equitable owners.55 Others have intimated that such equitable rights might be vindicated by a court of equity,56 based upon the common law right of inspection. In some jurisdictions the right of inspection has been statutorily extended to certain specified equitable owners. especially holders of voting trust certificates.57 The applicant's interest qua shareholder in communicating with fellow stockholders constitutes the basic requirement. Thus, where the stock has been sold after the demand but before inspection, such inspection should rightfully be denied because no ownership right requires protection. If, on the other hand, the shareholder only par tially divests himself of full ownership, as by temporarily pledging his shares, he still retains sufficient interest to be allowed inspection. III. PROPER PURPOSE A preponderance of current statutory and case law conditions in spection upon the applicant's possession of a "proper purpose." In general, the court's determination of an applicant's purpose is based upon a factual finding of actual motive regardless of petitioner s allegations. Decisions uniformly define that purpose as "germane to the interests and status as a shareholder, proper and lawful in character and not inimical to the interest of the corporation itself." Although generally recognized, this definition leads to a disconcerting range of results when applied to specific fact situations one 55. Feist v. Joseph Dixon Crucible Co., 30 N.J. Super 153, 103 A.2d 893 (1954 Brentmore Estates v. Hotel Barbizon, 263 App. Div. 389, 33 N.Y.S.2d 381 (1912 Cf. Baczkowska v. 2166 Operating Corp., 304 N.Y. 811, 109 N.E.2d 470 (1952) (votin, trust certificate holder allowed common law right of inspection of account books 56. Texas Infra-Red Radiant Co. v. Erwin, 397 S.W.2d 491 (Tex. Civ. App 1965); McGeary v. Brown, 23 S.D. 573, 122 N.W. 605 (1909). 57. CAL. CORP. CODE § 3003 (1955); N.J.S.A. § 14A:5-28 (Rev. 1968); N.Y. BUSINESS CORP. LAW § 624(b) (McKinney 1961). 58. Carthage Paper Markers v. Mutual Box Board Co., 2 App. Div.2d 175, 15. N.Y.S.2d 759 (1956); Monitor Co. v. Confianza Furniture & App. Corp., 142 NA s 2d 140 (Sup. Ct. 1955) (purchaser of pledged stock at execution sale requested inspection; inspection granted). Compare Dierking v. Associated Book Service, In 31 Misc. 2d 995, 222 N.Y.S.2d 729 (Sup. Ct. 1960) (shareholder who had contracted to sell his shares had insufficient interest to examine books). 59. Charles A. Day & Co. v. Booth, 123 Me. 443, 123 A. 557 (1924) (intended) sale of stock ledger). But see Bundy v. Robbins & Meyer, Inc., 38 Ohio Op. 77, 75 N.E.2d 717 (Ct. App. 1947) (corporation failed to establish that petitioner would personally profit as an underwriter in a corporate reorganization plan). 60. Cases cited note 12 supra. 1972] RIGHT TO INSPECTION 719 The test of proper purpose is stated so frequently and explained so seldomly that it begins to resemble a ritual incantation. However, an underlying rationale to the decisions does emerge in varying degrees of clarity. If the petitioner is seeking to communicate with other stockholders in order that they may collectively exercise their prerogatives as stockholders, the courts will grant inspection. On the other hand, if petitioner's purpose fails to promote any right or obligation enjoyed as a result of his status as shareholder, but rather aids him personally, either in his capacity as investor or as an individual, inspection will generally be denied.01 Most decisions interpreting proper purpose may be reconciled by realizing that they are aimed at facilitating the shareholder's role in the corporation. The precise limits of this role emerge ill-defined. Rights and obligations derived from statute would comprise the core of the role sought for stockholders. To meet these responsibilities and to exercise the privileges of stock ownership, shareholders require reasonable access to information contained in corporate records, and, equally important, must have extensive rights to stock ledgers to enable communication between stockholders. One obligation conferred by statute grants the shareholder the right and duty to elect directors.62 Inherent in this obligation lies the responsibility of electing the most competent directors. In order to intelligently elect directors, and incidentally to protect his investment, the shareholder must be placed in a position to determine whether the company is being properly managed. Inspection will be granted where there exists any indication of mismanagement. Additionally, courts recognize that to give the right of inspection for the purpose of determining mismanagement, while at the same time declaring ... that it can be enforced only when they have ascertained in some way without the books, that their affairs have been mismanaged, or that their interests are in danger, is practically to deny the right in the majority of cases. . . The books are not 61. State ex rel Thiele v. Cities Service, 31 Del. 514, 521, 115 A. 773, 776 (1922): 62. See eg., Conn. GEN. STAT. § 33-448 (Rev. 1958, Rev. to 1968). 1 720 CONNECTICUT LAW REVIEW [Vol. 4 70% the private property of the directors or managers, but are the records of their transactions as trustees for the stockholders.** In the few cases where a claim of mismanagement has been made and the request for inspection nevertheless denied, the courts sect. convinced that the claims were motivated by idle discontent rather than any true interest in the corporation's affairs.65 The courts an perhaps treading on dangerous grounds when they deny such quests on the basis that they are motivated by curiosity or other personal motives, since it is difficult to distinguish well-founded, bar as yet unproven, claims of mismanagement, from idle challenges .. corporate management. An example of this reasoning may be foun in Sawers v. American Phenolic Corp.,66 where the shareholder lieved that royalty payments were too high, yet lacked any knowledge of the prevailing level of royalty payments, the legal obligation to make such payments, or even the effect of such payments on the corporation. Quite simply, he sought larger dividends through t curtailment of these payments, and was not motivated by any broade: interest than his own personal level of return. Occasionally the election of directors embroils the shareholder an a full-fledged proxy contest. Inspection of the stock list often serves as a preliminary step to the initiation of a proxy contest under the Federal Rules.67 To effectively conduct such a campaign, those oppos ing management need access to the stock ledger as a basis for the solicitation of proxies, unless the corporation is required itself 1. send out the solicitation materials. Even in such a case a stockholde: will be unable to present an informed position on the issues unless he has access to corporate records. Inspection of such records places the shareholder on a more equal footing with management. 64. Woodworth v. Old Second Nat'l Bank, 154 Mich. 459, 117 N.W. 893. (1908). 65. Gavin v. Purdy, 335 Mass. 236, 139 N.E.2d 397 (1957) (accusations by pc: tioner vague and indefinite in the extreme). 66. 404 Ill. 440, 89 N.E.2d 374 (1949). Similarly Adler v. Oppenheim Collins Co., Inc., 81 N.Y.S.2d 293 (Sup. Ct. 1948), where the stockholder was concer. about a decrease in dividends but the court felt that the matter had been a quately explained by the management to the satisfaction of all other shareholde 67. The legitimacy of simultaneous use of federal and state law to reach goal has been recognized. Federal proxy rules do not preempt the exercise of nigh under a state inspection statute and an applicant need not elect which right t assert. Wood, Walker & Co. v. Evans, 300 F. Supp. 171 (D. Colo. 1969). 68. 17 C.F.R. § 240.14a-7 (1970). |