The rights of shareholders and directors to access corporate books and records is undisputed, but what about the rights of a former Chief Executive Officer, especially when the termination was contentious?
In the United States, a recent decision by the Delaware Court of Chancery dealt with this scenario. In that case, the CEO was involved in a highly publicized controversy believed to be injurious to the company’s image. An investigation was launched, and a special committee was formed, and the relationship quickly deteriorated. The board severed contractual ties with him, and sought his resignation despite him being the chief executive officer, founder, majority stockholder, chairman of the board, and spokesman of the company. The CEO resigned of his position, and stepped down as chairman of the board, but refused to resign as a director. He then made a request to access the corporate books and records, which was largely denied by the company, claiming that his request was motivated by improper purposes.
The issue was brought in front of the Court, specifically citing Delaware General Corporation law Section 220, which states that any shareholder may request corporate records through a written demand, stating a “proper purpose”, which is defined as being one which is reasonably related to a person’s interest as a shareholder. The Court in this case, found that although the former CEO had a personal interest related to his termination in inspecting the records, this did not defeat his stated purpose which was to investigate whether or not the board fulfilled its fiduciary duty to the company and the shareholders as part of its investigation and termination of him. Therefore, it ruled in favor of the former CEO, and found he is entitled to inspect the books and records including texts, emails, and the like on personal devices.
Canadian law on the right of directors to access books and records is even broader. A director need not provide a reason for his or her inspection. If a company suspects that some improper purpose is involved, the burden lies with it to prove its objections. The presumption is that the director is exercising his or her right for a proper purpose unless there is “clear proof that the director intended to abuse the confidence to materially injure the corporation”. In Tyler v. Envacon Inc., the company suspected that the director intended to use the information in the records in support of ongoing litigation between the company and another company that she was a director of. In FlexITy Solutions Inc. v. Sotirakos, the company objected to disclosure on the basis that it was motivated by the director’s personal litigation against the company. In both cases, it was determined that a director of a corporation has an unconditional right to inspect books and records, and the director was entitled to access.
The right to access is granted by virtue of Section 20(1) of the CBCA that has analogous provisions in Canadian provincial corporate statutes, which allows, shareholders, creditors and directors with the right to inspect and take copies of records.
Implications on Corporate Governance:
As noted in a recent article, director’s nearly unfettered right to books and records poses significant concerns for corporate governance. Especially in light of the #metoo movement and the various racial scandals that have plagued several corporations, boards’ handling of director misconduct should be carried out with heightened diligence. Whether it is related to misconduct, or whether the corporation is dealing with an activist shareholder, the individual may use sensitive information to gain leverage and exert pressure over the board. The Delaware decision is particularly worrying, because the Court determined that if personal devices were used to communicate company business, that data will also become subject to the books and records disclosure requirements. This significantly broadens the scope of what could potentially be available for shareholders and directors, and escalates the dangers of having that information misused. Since the presumption lies in favor of the shareholder, corporations will certainly have a difficult hurdle to pass in showing “clear proof” arising out of even the best founded suspicions. Therefore, boards should put in place a framework that allows contentious matters involving shareholders to be dealt with promptly, while exercising enhanced vigilance in record keeping practices.
The author would like to thank Maha Mansour, articling student, for her assistance in writing this legal update.