In Munroe-Diamond v. Munroe, 2019 IL App (1st) 172966, the First District addressed the right of a corporate director to demand inspection of corporate books and records in Illinois. Unlike shareholders’ inspection rights, no statute addresses the issue and the case law is surprisingly sparse. The First District held that corporate directors have a presumptive -- but not absolute -- right to inspect the corporate books and records, and the corporation bears the burden of overcoming this presumption by showing the demand for inspection is for an improper purpose.
The case pitted siblings against each other who were the shareholders and directors of the Pickens-Kane Moving and Storage Company. Defendants (the Brothers) owned controlling shares; plaintiffs (the Sisters) owned minority shares. The Brothers refused to comply when the Sisters demanded, as directors, the inspection and copying of corporate books and records. The Sisters filed suit. The Brothers claimed that “this litigation was commenced for the sole and exclusive purpose of forcing the Defendants to either purchase the Plaintiffs’ stock at an excessive premium, or forcing the Corporation to liquidate, close its doors and put over 100 employees out of a job.” Id. ¶ 8. The Brothers also alleged the requests were “overbroad, unduly burdensome and disproportionate requests for documents for the sole purpose of harassing Defendants and not for a good faith purpose in their role as Director of the Corporation.” Id. ¶ 8.
The circuit court found in favor of the Sisters, holding that “directors have an absolute and unqualified right to examine the books and records of the Corporation,” and rejected the Brothers’ affirmative defenses. Id. ¶ 9. The First District found this to be inconsistent with common law and vacated the judgment in favor of the Brothers and remanded for further proceedings. Although the Sisters had a presumptive right to inspection, the Brothers had raised the claim of an improper purpose in their unclean hands affirmative defense, precluding judgement on the pleadings.
In its decision, the First District traced common law back to a persuasive 1895 decision. In Stone v. Kellogg, 62 Ill. App. 444, 463 (1895), the appellate court held that a corporate director and shareholder had the presumptive right to inspect corporate books and records unless the corporation could show that the inspection was for an improper purpose. A year later, the Illinois Supreme Court affirmed the decision, devoting most of its substantive discussion to shareholder inspection rights but applying its reasoning to both shareholders and directors.
In 1896, legislation limited shareholders’ right to inspect by requiring shareholders to establish a proper purpose as a precondition to inspection, and placing the burden of proving a proper purpose in court on the shareholders. But there is no corresponding legislation for corporate directors abrogating Stone, which has not been overruled. Thus, the inspection right of corporate directors in Illinois remains the same as it was in 1896. Corporate directors have the presumptive right to inspect corporate books and records, and the burden falls on the corporation to show that the request is for an improper purpose.
Circling back to Monroe-Diamond, this holding meant that the Sisters were in a better position as directors than as shareholders with respect to their inspection rights. In their former capacity, the Corporation had to prove their purpose for seeking inspection was improper. In their latter capacity, the Sisters had the burden to prove their purpose. This difference could prove key in Monroe-Diamond, and any other case in which a party seeking inspection has both capacities.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact Dana Taylor at 312.419.6900 or firstname.lastname@example.org.