Enforcing Inspection Rights – “Absolute” Does not Mean “Absolute” in California

In Directors’ Inspection Rights Include (Almost) Anything in California, I discussed corporate directors’ inspection rights. Quoting California Corporations Code Section 1602, I noted that directors have an “absolute right” to inspect corporate records and physical properties. This post explains that in enforcing inspection rights, “absolute” is not really “absolute”.

The fundamental limitation, established in case law, is that a director may not use inspection rights to harm the corporation.

• In Havlicek v. Coast-to-Coast Analytical Services, Inc., the Court of Appeal for the Second District of California held that inspection may be denied if it will result in a tort against the corporation. An example: Inspection of trade secrets so the director may compete against the corporation.
• In Saline v. Superior Court, the Court of Appeal for the Fourth District stated the standard by which such torts should be evaluated. The court held that Havlicek should apply only “in extreme circumstances where a preponderance of the evidence establishes the director’s clear intent to use the documents to commit an egregious tort“. [Emphasis added]
• In Tritek Telecom v. Superior Court, the Court of Appeal for the Fourth District identified a conflict of interest as another reason for not enforcing inspection rights. In Tritek, a director, in his capacity as a shareholder, had sued the corporation. The director was seeking documents to which he was not entitled as a shareholder. The court held that providing those documents to the director would be adverse to the corporation’s interests and, thus, a violation of his fiduciary obligation to the corporation.

If a corporation does not comply with a director’s appropriate inspection request, the Corporations Code provides the following statutory tools for enforcing inspection rights:

• Section 1603 provides that the Superior Court may order that inspection take place.
• Furthermore, Section 1508 provides that the state attorney general may take action to enforce the corporation’s obligations.

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Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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