Thursday, January 8, 2009
C.A. Limits ‘Absolute Right’ to Inspect Corporate Documents
By SHERRI M. OKAMOTO, Staff Writer
The Fourth District Court of Appeal yesterday clarified that a corporate director’s right to inspect general corporate documents does not encompass those protected by the attorney-client privilege that were generated in defense of a suit the director filed against the corporation.
Div. One directed the trial court to vacate its order compelling Tritek Telecom Inc. to disclose its case files and communications with counsel to Chik-Lun Mak, one of the company’s two shareholders and directors, after Mak filed a shareholder action seeking return of his $410,000 investment and damages.
Mak later filed a complaint seeking the removal of Andre Rerolle as a director for Tritek and a separate petition for the appointment of a provisional director. Mak also filed a petition seeking to enforce his right as a director of Tritek to inspect Tritek’s books and records.
In opposition to the inspection demand, Tritek argued the petition sought attorney-client privileged documents generated by Tritek and Rerolle in defense of Mak’s related actions.
San Diego Superior Court Judge Yuri Hofmann issued a peremptory writ of mandate ordering the corporation to produce case files relating Tritek’s involvement in any litigation, and all communications between counsel and the corporation.
The parties settled the underlying case while Tritek’s appeal was pending, but they requested a decision to resolve the application of the attorney-client privilege to a director’s right to inspect corporate documents.
Writing for the appellate court, Justice James A. McIntyre noted that under Corporations Code Sec. 1602, corporate directors have an “absolute right,” to “inspect and copy all [corporate] books, records and documents of every kind.”
However, he cautioned, this right is subject to certain exceptions based on the director’s fiduciary duty of care owed to the corporation and its shareholders.
The right to inspection reflects a legislative judgment that directors are better able to discharge their fiduciary duties to the corporation, he explained.
Although Mak was a Tritek director, his filing of the shareholder action made him an adversary to the company, McIntyre wrote.
“Mak cannot take off his ‘shareholder’s hat’ and swap it for his ‘director’s hat’ and claim an absolute right to access all corporate documents,” the justice said.
McIntyre reasoned that limiting Mak’s inspection rights was justified because Mak’s loyalties were divided between the corporation and his own interests and any corporate documents he obtained in his capacity as director could be used to advance his personal interest in obtaining damages against the corporation.
Enforcing Mak’s inspection rights also would have been “problematic” because doing so would have given him access to documents he could not obtain via discovery in the shareholder action, McIntyre added.
The justice further noted that the shareholder action, the petition to remove Rerolle as a direction, the petition for the appointment of a provisional director and the petition for inspection were assigned to three different judges at the trial court, which created the possibility of conflicting rulings on discovery matters.
Joined by Justices Richard D. Huffman and Cynthia Aaron, McIntyre directed the presiding judge of the San Diego Superior Court to transfer the matter to one judge to determine which documents were protected by privilege.
The case is Tritek Telecom, Inc. v. Superior Court (Mak), 09 S.O.S. 153.
Copyright 2009, Metropolitan News Company