Shareholder requests for books and records pertaining to corporations in which they own shares can be valuable tools, particularly in the context of closely held companies.  Such companies can be dominated by a small group of people who may restrict the flow of financial information to shareholders without much oversight.  A shareholder books and records request forces the corporation to provide certain information pursuant to the Illinois Business Corporation Act ("BCA") and provides the shareholder a cause of action in court in the event of a failure to comply.  There are technical requirements that must be followed, however, as a recent Illinois First District Appellate Court case illustrates, Elleby v. Forest Alarm Service, Inc., 2020 IL App (1st) 191597.

There, the plaintiff, Ruth Elleby, was a 33.5% shareholder in Forest Alarm Service, Inc. (“FASI”), an Illinois corporation that provides security alarm sales, service, installation, and monitoring.  Elleby alleged that FASI is a “family-owned, closely held corporation.”  Id. ¶3.  Elleby sued her fellow FASI shareholders, Linda Lichtenauer, Mark Coyle, and Ron Lyngen as well as FASI itself.  Coyle was the only defendant alleged to be involved in FASI’s management, as its President and Secretary.

Elleby claimed that defendants violated her rights under Section 7.75 of the BCA, the books and records provision.  805 ILCS 5/7.75.  Section 7.75 requires corporations to keep “(1) correct and complete books and records of account;” (2) minutes of shareholder and board of directors meetings and committees thereof; (3) a list of its shareholders, including names and addresses and number and class of shares.  Id. at 5/7.75(a).

The Section also provides corporate shareholders the right to examine those records, as well as voting trust agreements, “but only for a proper purpose.”  Id. at 5/7.75(b).  “In order to exercise this right, a shareholder must make written demand upon the corporation, stating with particularity the records sought to be examined and the purpose therefor.”  Id. 

If the corporation refuses, the shareholder may file suit to compel compliance with the request to the extent it is proper.  Id. at 5/7.75(c).  In that regard:

If a shareholder seeks to examine books or records of account the burden of proof is upon the shareholder to establish a proper purpose. If the purpose is to examine minutes or the record of shareholders or a voting trust agreement, the burden of proof is upon the corporation to establish that the shareholder does not have a proper purpose.  Id.

If the shareholder prevails, the corporation, or any officer or agent thereof, who refused to permit the books and records examination, is liable to the shareholder, “in a penalty of up to ten per cent of the value of the shares owned by such shareholder, in addition to any other damages or remedy afforded him or her by law.”  Id. at 5/7.75(d).

To state a claim under Section 7.75, a plaintiff must allege that she: (1) was a shareholder of the corporation; (2) who made a written demand; (3) stating with particularity the records she wished to examine; and (4) the purpose therefor; but (5) the corporation refused to comply.  Elleby, 2020 IL App (1st) 191597 ¶¶27, 32.  The circuit court in Elleby found that no such claim was stated.  The appellate court affirmed.

Defendants argued that Elleby failed to make a proper request under Section 5/7.75 because she demanded the books records be “produced” rather than seeking to “examine,” them, the language used in the statute.  The appellate court rejected that argument, holding that the statute does not “require[] shareholders to say the magic word ‘examine’ in order to be entitled to a corporation’s books and record[s].”  Id. ¶30.  Nevertheless, the court found Elleby’s request deficient in other ways.

Section 7.75(b) expressly provides that “a shareholder must make written demand upon the corporation.”  805 ILCS 5/7.75(b).  Elleby did not do that.  Her first two demands, dated November 14, 2017 and August 17, 2018, were sent to the individual defendants’ attorney who, on the latter occasion, indicated that he was not responding to any records requests because he did not represent FASI.  Only Elleby’s final demand was directed to FASI’s registered agent, Coyle. 

Although the final demand was sent to the correct party, the court held that Elleby’s complaint failed to allege that FASI refused her request.  Indeed, Elleby’s complaint alleged that FASI produced its balance sheet and a profit and loss statement on October 1, 2018, the very day by which she requested compliance with her only books and records request sent directly to FASI.  Then, on October 3 and October 10, 2018, FASI sent two sets of additional financial records.  Elleby nonetheless filed her complaint on October 11, 2018.

The court reasoned that “the facts alleged show that the plaintiff’s sole request for FASI’s books and records directed to FASI was answered on the day she set as a deadline (October 1, 2018) and more documents were produced in the subsequent week. Evidently unhappy with the content of the production, she filed this lawsuit.”  Elleby, 2020 IL App (1st) 191597 ¶ 32.  Absent a refusal, Elleby had no cause of action under Section 7.75.  In reaching its holding, the court distinguished Hagen v. Distributed Solutions, Inc., 328 Ill. App. 3d 132 (1st Dist. 2002), where the court found a books and records request was refused even though it was not “explicitly refused.”  Instead, the Hagen plaintiff’s repeated records requests were completely ignored before the suit was filed.  Elleby, 2020 IL App (1st) 191597 ¶33.

Elleby shows just how technical books and records requests can be.  The court found that two records requests delivered to Coyle’s individual attorney over nine months were not “refused” because they were not directed to FASI.  That was so even though Coyle was FASI’s president and registered agent.  Only a request directed to Coyle himself, in his FASI capacities and wearing his FASI hat, was effective.  Shareholders and practitioners need to closely follow all books and records request requirements closely if they seek to use this remedy effectively.