Inspection Rights of Directors and Shareholders

Corporations Code section 1602 provides that: “Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind … of the corporation of which such person is a director….” [Emphasis added.] That right of inspection would include the right to inspect documents prepared by counsel for the corporation that are protected by the attorney-client privilege from compulsory disclosure.  Presumably, when the director inspects corporate documents, it is to carry out his role as a director.

What happens, however, if the director has filed suit against the corporation (in his individual capacity as a shareholder)and demands to inspect and copy documents were generated in defense of that suit, which are protected by the attorney-client privilege?  In Triktek Telecom, Inc., v. Superior Court (2009) 169 Cal. App. 4th 1385, the court answered that question.

Although the statute describes the right of the director as being “absolute,” prior case law had construed the right of the director as not being absolute. In Havliceck v. Coast-to-Coast Analytical Services, Inc. (1995) 39 Cal. App 4th 1844, the court held that a disgruntled director who announced his intention to violate his fiduciary duties to the corporation, such as using inspection rights to learn trade secrets to compete with the corporation, could be denied the right to inspect corporate documents.

In a similar case involving an action by the Oakland Raiders against the National Football League (not discussed by the Triktek Telecom court), the court denied the right of a shareholder, asserted by its representative who was a director, to inspect corporate documents that were protected by the attorney-client privilege. National Football League Properties, Inc. v. Oakland Raiders (1998) 65 Cal. App. 4th 100. That case was an easier one for the court to decide since the statutory right on inspection granted to a shareholder by Corporations Code section 1601 does not purport to be “absolute” but instead is limited to “a purpose reasonably related to such holder’s interests as a shareholder.”

The Triktek Telecom court noted that although the plaintiff was still a director, his filing of the shareholder action made him the corporation’s adversary. In this situation, a court could properly limit a director’s inspection rights because the director’s loyalties were divided, and documents obtained by a director in his capacity as a director could be used to advance the director’s personal interest as a shareholder in obtaining damages against the corporation. In other words, he could not take off his “shareholder’s hat” and swap it for his “director’s hat” and still claim an absolute right to access all corporate documents.

Lessons Learned

In construing a statute, it is important to research the case law to see how it has been interpreted by the courts. On its face, the right of a director of a California corporation would appear to be absolute, but the case law shows that plain wording of a statute can not always be taken a face value.