Munroe-Diamond v. Munroe — Affirmative Defense Properly Asserted Improper Purpose to Deny Directors Inspection of Corporte Records– Chicago Minority Shareholder Opression Lawyers Near Naperville and Schaumburg

When two sisters, minority shareholders and directors of a moving company, were denied access to corporate books, the trial court erred in finding that, as corporate directors, they had absolute access to corporate records. Rather, they had presumptive access and the corporation was required to demonstrate that request for documents was made for the improper purpose.

Barbara Munroe-Diamond, Sally Sharkey, James P. Munroe, and Michael F. Munroe are siblings and the shareholders and directors of the Pickens-Kane Moving and Storage Company. In the winter of 2013, the board of directors hired Ft. Dearborn Partners, Inc. to provide a fair market value for the company’s stock. The next summer, a valuation of $3158 per share for controlling share and $1522 per share for minority shares was issued. Controlling shares of the company were entirely owned by James and Michael Munroe, while Barbara and Sally owned minority shares.

The board of directors unanimously authorized the company to redeem minority shares for $1522 per share. In early 2015, following negotiation, the company paid $1600 per share for minority shares. Every minority shareholder except Barbara and Sally redeemed their stock. Both sit on the board of directors. In July 2016, Barbara and Sally made a demand upon the company to make available for inspection and copying any and all documents pertaining to the corporate minutes, stock certificates, lists of assets and liabilities, and other business records. James and Michael refused to comply with the request, arguing that Barbara and Sally gave no purpose for their request or how their request related to their duties as directors.

After negotiations for the records failed, the sisters filed a mandamus action in Illinois court seeking to compel production of the records. The circuit court entered an interim order requiring the brothers to allow access to the books, finding that the sisters, as directors, had an absolute and unqualified right to examine the books and records of the corporation. The brothers then appealed.

The panel of the Illinois Appellate Court, First District, began by citing Morris v. Broadview, Inc., stating that, at common law, shareholders in a corporation had the right to inspect the records and books of a corporation, but the shareholder had to show a specific interest or proper purpose beyond mere curiosity to justify the inspection. After a statute was enacted in 1872, the panel continued, shareholders were still required to have a proper purpose for inspection, but the burden of demonstrating an improper purpose was shifted to the corporation. This burden was later returned to the shareholder in 1933, where it remains today.

However, the panel noted, there is no corresponding legislative provision for corporate directors. The panel referenced an 1895 decision of the Supreme Court of Illinois that ruled in favor of a shareholder and corporate director’s mandamus request to access the books of the corporation he was on the board of. The panel stated that though the rule regarding shareholder access to corporate books changed in 1933, no equivalent rule regarding directors’ access was changed, and, therefore, directors had a presumptive right to inspect the corporation’s books, and the burden falls on the corporation to show that the request is for an improper purpose.

The panel then noted that the trial court cited an incorrect appellate decision from 2007 which stated that corporate directors have an absolute right to inspect corporate books as the basis for its ruling. The panel found that the 2007 decision could not be reconciled with the Illinois Supreme Court precedent. The panel determined, therefore, that judgment on the pleadings in favor of Barbara and Sally was inappropriate, and that James and Michael had adequately pled an improper purpose – that Barbara and Sally were merely seeking an excessive payout for their minority shares – to survive judgment on the pleadings. The panel then noted that it expressed no opinion on the merits of James and Michael’s affirmative defenses and that the brothers still had the burden of proving that Barbara and Sally’s purpose for the inspection demand was to threaten the viability of the company in pursuit of a higher purchase price for their minority shares. The panel, therefore, vacated the decision of the circuit court and remanded the case for further proceedings.

You can view the Appellate Court decision here.

Our Chicago minority shareholder and LLC member attorneys have litigated minority oppression and breach of fiduciary duty lawsuits for decades.

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