October 27, 2021

Volume XI, Number 300

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October 26, 2021

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October 25, 2021

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The Business Judgment Rule Cannot Preclude Statutory Inspection Rights

Where a corporation’s board of directors decided to take a particular course of action that was unpopular with a shareholder, the board could not invoke the business judgment rule to prevent the shareholder’s statutory right to inspect the corporation’s books and records.  Erwin v. Myers Park, 2021 NCBC 45 (J. Robinson).  So long as the shareholder satisfied the North Carolina Corporation Act (“Act”)’s requirements to inspect the corporation’s books and records, the Business Court held, the business judgment rule did not thwart the shareholder’s right of inspection.

Defendant is a country club in Mecklenburg County, formed as a corporation pursuant to the Act.  Plaintiff has been a member and shareholder of Defendant since 2008.  In 2020, Defendant’s board of directors (“Board”) approved plans for a $27 million renovation to the club (“Project”), to be paid by assessments and fees charged to the members.  Plaintiff expressed concern about the Project and sought various records from Defendant related to the Project, invoking his statutory right of inspection pursuant to the Act.  Defendant refused to produce certain documents, and Plaintiff sought judicial assistance by filing a lawsuit.  In response to Plaintiff’s inspection demand, Defendant contended, in part, that Plaintiff’s request was for an improper purpose; namely, Plaintiff was attempting to use the inspection process as a way to second-guess the Board’s judgment to approve the Project which, Defendant contended, violated the business judgment rule.

The Business Court disagreed.  Recognizing that the business judgment rule applies a legal presumption that a corporation’s board of directors acted with the necessary due care in all of its dealings, the Business Court nonetheless held that the rule was only applicable when a court was called on to review whether a board’s actions were proper.  The business judgment rule, the Business Court held, did not apply to a situation where a shareholder requested the opportunity to inspect the corporation’s books and records, and thus the rule was not relevant to determine whether a shareholder’s inspection request was for a proper purpose. In the end, the Business Court ordered Defendant to produce many of the documents Plaintiff requested.

Based upon this decision, a business should understand that while certain rules (like the business judgment rule) might ultimately provide support for a board’s decision, the rule will not serve as a basis to deny a shareholder various rights guaranteed by the Act (like her statutory right to inspect the corporation’s books and records).

Additional Legal Points:

  • The Act merely permits a shareholder to obtain records related to the corporation’s final decision and not its interim decisions; as such, drafts, proposal and even board of director minutes which discuss interim steps but do not reflect the board’s final action are not available for inspection pursuant to the Act.  (Opinion, ¶60).

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume XI, Number 244
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About this Author

Phil Mohr Bankruptcy and Litigation Attorney Womble Bond Dickinson
Partner

Phil is a trial lawyer. Although he will search for creative legal and business solutions for his clients, his more than two decades of trial experience for both publicly traded and privately held companies in state and federal courts throughout the country have taught him that some cases simply have to be tried to verdict. Representing companies that have both been wronged and accused of wrongdoing, Phil has honed his trial skills in cases involving complex business litigation (including fraudulent transfer and equitable subordination cases in federal bankruptcy court)...

336.721.3577
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