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Corporate Law Roundup

Sharp Thinking

No. 164 Perspectives on Developments in the Law from Sharp-Hundley, P.C. February 2019

Directors Have Presumptive Right

To Inspect Corporate Documents

By John Hundley, john@sharp-hundley.com, 618-242-0200

In Illinois, corporate directors have the presumptive right to inspect corporate books and records and
the burden falls on the corporation to show that the request for such an inspection is for an improper
purpose, the Appellate Court in Chicago has held.

Ruling in a case involving management of the Pickens-Kane Moving & Storage Co., the court rejected
the “absolute” and “unqualified” characterization of the director’s right to inspect in Semande v. Estes, 374
Ill. App. 3d 468 (2007). Munroe-Diamond v. Munroe, 2018 IL App (1st) 172966.
In Munroe, two sister directors had a minority interest in the company while their two brothers had the
controlling interest. The board commissioned a valuation of the company’s stock,
which found that the controlling shares were worth about twice the price of the
minority shares. The board then authorized redemption of the sisters’ minority
interests at the lower price. The sisters then demanded inspection of 24
categories of documents. The brothers refused to comply because “no proper
purpose was put forward as to why” the sisters needed such documents. The
sisters sued.
The brothers tendered an answer and affirmative defenses which, among
other things, alleged that the sisters “brought this action in an attempt to leverage
a buyout of their shares of the Corporation at a higher value than is appropriate”
and that they sought the documents “for the sole purpose of harassing (the
brothers) and not for a good faith purpose”. The trial court struck the affirmative
defenses and entered judgment on the pleadings for the sisters. Hundley
Surveying Illinois law back to the common law, the appellate panel said the brothers’ initial response
to the sisters’ demand got it wrong. “It is not merely the right of petitioner to
examine the records and books of account of the company in which he is a
director – it is his duty, if he has reason to think that they contain that, a
knowledge of which, if obtained by him, will be of service to stockholders, the
trust[ee] of all of whom he is,” the court said, quoting an 1895 case.
Noting that the law had changed with respect to shareholders, the panel
said that “for corporate directors, what was true in 1896 is true today.” It is “not
merely the right” of a director to examine the records and books of account of the company in which he is
a director, “it is his duty.” “The sisters have a presumptive right to inspect the corporate documents here,

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute
educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on
your particular situation, contact a Sharp-Hundley lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.