California Court of Appeal Reaffirms Broad Inspection Rights Accorded to Directors Under Section 1602 of the California Corporations Code
In Fowler v. Golden Pacific Bancorp, Inc., 2022 Cal. App. LEXIS 548 (Cal. App. June 23, 2022), the California Court of Appeal, Third Appellate District (Krause, J.), reinforced the near absolute right of directors of a California corporation to inspect their company’s books and records pursuant to Section 1602 of the California Corporations Code. The Court clarified that these rights hold even when the director has a conflict of interest or is involved in litigation with the corporation. Generally, directors may be denied access to books and records only in the most extreme cases, such as when evidence shows the director intends to abuse his or her rights under Section 1602 to violate fiduciary duties or commit a tort against the company.
The case sprung out of separate ongoing litigation commenced by Golden Pacific Bancorp (“Bancorp”). Fowler was a member of Bancorp’s board of directors and the chief operating officer of Bancorp’s former outside counsel. Bancorp sued its former outside counsel for various breaches of contract and duties, and also sued Fowler for negligence, breach of fiduciary duty, concealment and fraud based upon his allegedly persuading Bancorp to hire the law firm despite the firm’s inability to competently handle the litigation.
Two months after the commencement of that litigation, Fowler sought to inspect and copy various books and records of Bancorp pursuant to California Corporations Code § 1600, et seq. Bancorp denied the demand, arguing that Fowler had a conflict of interest and was seeking access the books and records for an improper purpose. Rather than try to enforce his statutory right immediately, Fowler instead attempted to acquire the same documents through discovery in the ongoing suit. Bancorp refused, and the trial court denied a motion to compel production. Only at this point did Fowler file an action against Bancorp to enforce his Section 1602 rights.
Fowler filed for a peremptory writ of mandate to enforce his rights as both a shareholder, under Setcion 1600, and as a director, under Section 1602. Bancorp responded that Fowler was seeking the records for the improper purpose of defending Bancorp’s lawsuit against him. The California Superior Court, Sacramento County (Arguelles, J.), addressed only the Section 1602 argument, and sided with Fowler.
Bancorp appealed. Soon afterward, Bancorp was acquired and had its board of directors replaced. The Court of Appeal held that the Section 1602 dispute was rendered moot because Fowler was no longer a director, but nevertheless decided to address the issue anyway because it was of “substantial public interest.”
The Court focused on the express language of Section 1602, which provides that directors have the “absolute right at any reasonable time” to examine and copy corporate records and documents “of every kind.” Although the “absolute” nature of this right must be far reaching in order to accurately reflect the legislature’s choice, Section 1602 still does have limits. For example, because inspection rights arise out of a director’s fiduciary duty, courts may curtail those rights when a director intends to invoke them to harm the corporation. See Havlicek v. Coast-to-Coast Analytical Services, Inc., 39 Cal.App.4th 1844 (1995). This exception, however, is narrow; in this case the Court saw no evidence Fowler intended to harm the corporation, and the mere possibility of harm to the corporation is not enough to limit directors’ inspection rights.
The Court explained that California adopted a policy greatly favoring an expansive right of access to allow directors to materially participate in corporate affairs. California corporations still have a remedy against directors who abuse their right of inspection through a direct action against a director for breach of fiduciary duty if he or she abuses Section 1602 to harm the corporation.
California law accords directors a broad right of inspection of corporate books and records. Fowler demonstrates that courts will uphold and affirm these rights to increase director’s supervisory capabilities unless there is convincing evidence that a director intends to misuse these rights to harm the corporation.