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Illinois Appellate Court Reminds Directors And Shareholders On Their Rights
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Illinois Appellate Court Reminds Directors And Shareholders On Their Rights

A recent Illinois appellate court opinion discusses a topic that the Court was surprised to find had not previously been fully addressed:  the right of a corporate director to the books and records of the corporation.  In Munroe-Diamond v. Munroe, 2019 IL App (1st) 172966, the First District panel evaluated a writ of mandamus issued against two corporate directors, requiring them to provide two other corporate directors (who happened to be the sisters of the first set of directors) with access to the books and records of the corporation.  In reversing the trial court’s entry of the writ, the appellate court provides a primer on corporate law and the rights of not only directors, but also shareholders to a corporation’s books and records.  Because that law is often used in connection with other corporate forms, including partnerships, limited liability companies, and the like, the opinion provides a road map for parties on both sides of disputes regarding access to corporate information.  Perhaps most helpfully, the opinion also does this in a plain, straightforward decision that is likely to become an oft-cited opinion in the all too common disputes that arise between companies and the people or entities that own them.

After explaining the basics of the dispute before it – which are all too common and familiar, especially in family or other closely-held businesses – the Court presents a comprehensive history of Illinois law on the issues before ultimately making clear the basic rules that govern the rights that both shareholders and directors have to access the books and records of a corporation, noting the differences between the two.  For shareholders, the Court explains, a shareholder has the right to inspect the corporation’s books and records, but only for a proper purpose.  (¶ 14.)  This, the Court makes clear, places the burden on the shareholder to show that they are seeking the corporation’s books and records for such a purpose.  (¶¶ 14, 26, 37.)  Additionally, the Court notes that shareholders are only entitled to certain of the corporation’s records, quoting the statute which provides for inspection of “the corporation’s books and records of account, minutes, voting trust agreements filed with the corporation and record of shareholders.”  (¶ 38.)

For directors, on the other hand, the Court notes that there is no statute or other source for the right to inspect the books and records, meaning the source of the right comes from the relatively few court opinions discussing the issue.  The Court discusses these opinions and concludes that they demonstrate that directors do indeed have a right to inspect a corporation’s books and records.  (¶¶ 27, 37.)  Moreover, for a director, that right is presumptive, and so the burden of showing that a director should not be allowed to exercise this right falls on the corporation, which must prove that the director is seeking to do so for an improper purpose.  (¶¶ 28, 37.)  Further, the director’s right is broader, as there is no statute that limits a director to only certain identified books and records.  (¶ 39.)  All of this makes sense, the Court further explains, since “corporate directors have ‘important duties to perform’” and those duties mean that it is not just a director’s right to inspect books and records, but rather the director’s duty. (¶ 39 (quoting Illinois Non-Profit Risk Management Ass’n v. Human Services Center of South Metro-East, 378 Ill. App. 3d 713, 727 (2008) and Kunin v. Forman Realty Corp., 21 Ill. App. 2d 221, 227 (1959) (internal citations omitted).)  These differences mean that whether a shareholder or a director can exercise the right to inspect books and records will be determined based on the existence of a proper purpose, but a proper purpose for one may not be a proper purpose for the other.  (¶ 39.)  The Court then goes on to apply the standards for directors and finds that the defendant directors properly presented an improper purpose for the plaintiff’s request, such that the trial court’s ruling should be reversed and the matter remanded for further proceedings.

The Court’s full opinion can be found here.

Max Stein is a Member at Boodell & Domanskis, LLC and leads the firm’s Litigation team.

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