California Shareholder Demanding to Inspect Corporate Records? You May Be Taking an Out of State Trip! – Innes v. Diablo Controls.
Under California Corporations Code Section 1601, a shareholder may, upon written demand, inspect the accounting books and records and minutes of a California corporation or a foreign corporation doing business in California. Shareholder inspection demands are regularly used by California shareholders, often times in connection with ongoing, or anticipated, shareholder or shareholder derivative litigation. In Innes v. Diablo Controls (2016), Case No. A145528, the First District Court of Appeal addressed where that inspection may take place, and it may not be in California!
In the Innes v. Diablo Controls case, Diablo Controls was a California corporation whose corporate books and records were kept in Illinois. The issue on appeal was whether, under Section 1601, the corporation had to produce the records for shareholder inspection in California or could do so in Illinois where they were maintained. Relying on what can only be characterized as dicta in a 2004 case, Jara v. Suprema Meat (2004) 121 Cal.App.4th 1238, and noting that the statute makes no provision that the requested records be brought in state, the Court held there was no obligation on the part of the corporation to bring the requested records to California for inspection. It need only make the records available for inspection “at the office where the records are kept”; in that case, Illinois.
So, under Innes v. Diablo Controls, if you are a shareholder making a section 1601 demand to inspect corporate records, and those records are “kept” by the corporation at a location outside of California, you could be buying an out-of-state plane ticket. The corporation has no obligation to produce the records for inspection at any location other than where they are “kept”. If that “kept” location is out-of-state, tough luck, you can be forced to go there to make the inspection.
First, isn’t this a bit old school? Aren’t most business records maintained electronically these days, especially financial and accounting records? Aren’t most business records maintained in cloud storage? Where are such records “kept” within the meaning of section 1601? Isn’t focusing on where records are physically kept as the controlling factor for shareholder inspections a bit contrived and, frankly, silly in this day and age?
Second, this opinion could place substantial financial and logistical burdens on shareholders seeking basic corporate information. One could see California corporations seeking to avoid shareholder scrutiny setting up “corporate records” offices in far away, difficult to get to, locations. “We received your demand to inspect the company’s minute book and accounting records. Those records are kept in our “corporate records” office in Nome, Alaska. They will be made available there for your inspection on reasonable notice.”
The case does seem to leave a little wiggle room on this issue of the burden placed upon shareholders seeking to inspect corporate records. Appellants argued that under a “no required in-state inspection” interpretation of the statute a corporation could avoid a section 1601 inspection by simply sending the records far away. The Court addressed this concern as follows:
We agree that maintaining the records in a remote location to intentionally impede inspection would be contrary to the purpose of section 1601. However, there is no evidence of such obstruction here. To the contrary, Diablo Controls voluntarily and at its own expense transported many of the requested documents to California for appellants’ inspection. In addition, appellants have not alleged that requiring them to inspect the records in Illinois will preclude their ability to exercise their section 1601 inspection rights.
This language seems to leave open the possibility that a demanding shareholder could compel production of the corporate records in state by showing that the corporation maintains records in a remote location to intentionally impede section 1601 inspections or that remote production would preclude shareholders the ability to exercise their section 1601 inspection rights. But, these may be difficult, and expensive, burdens to meet to compel an in-state section 1601 inspection.
Third, the California legislature should amend section 1601 to require California corporations, and out-of-state corporations doing business in California, to maintain current accounting books and records and minutes in state for inspection by shareholders. The legislature should also amend the statute to allow, as an acceptable alternative to in state production of physical records for inspection, electronic production of corporate records requested under section 1601. Corporate rights should not trump shareholder rights when it comes to the inspection of basic corporate records. It should be made easier, and not harder, for California shareholders to inspect corporate records.
Fourth, I just don’t see this result holding up for long. It seems demonstrably unfair to generally less-powerful shareholders simply seeking to see corporate records. I suspect the California legislature will address this. It certainly should! And I suspect that subsequent decisions will open up broad judicial exceptions to a section 1601 “no required in-state inspection” rule.
But, for the time being, section 1601 inspections could require significant money and travel time to complete!
In an interesting and, in a warped kind of way, entertaining new opinion, Martinez v. State (2016) 238 Cal. App.4th 559, the Fourth District Court of Appeal tore into defense counsel for misconduct in the trial of a motorcycle injury case and into the trial judge who condoned such misconduct. The described acts of attorney misconduct include repeated violations of in limine orders, improper allusions to the defendants’ financial status, repeated character attacks and, get this, inflammatory references to Nazis. Though noting that “attorney misconduct is more common than reversal for attorney misconduct”, the Fourth District reversed and remanded the case for new trial based solely on attorney misconduct.
What I find interesting about the case is not so much its analysis or its holding. Rather, I find the case interesting and worthy of note because of the way it is written. The opinion is exceptionally well-written – pointed, biting, persuasive, and highly quotable. We will be seeing the boxing passage from the opinion used as the title of this piece– “The law, like boxing, prohibits hitting below the belt.” – in many motions, briefs, and opinions in the future. It’s a great line. I’m sure I will use it when the need arises.
The following passage from the opinion is an artful, nuanced, but devastating, comment on the conduct of the trial judge in the case:
While Judge Di Cesare showed the patience of Job—usually a virtue in a judge—that patience here had the effect of favoring one side over the other. He allowed Bilotti to emphasize irrelevant and inflammatory points concerning plaintiff’s character so often that he effectively gave Caltrans an unfair advantage. Imagine a football game in which the referee continually flagged one team for rule violations, but never actually imposed any yardage penalties on it. That happened here and requires reversal.
In forensics there is what has become known as “Godwin’s Law.” Broadly speaking, Godwin’s Law is that the first side in an argument to compare the other side to Hitler or the Nazis loses. Apparently unaware of this rule, Bilotti used Martinez’s damaged motorcycle to make a gratuitous, out-of-the-blue attempt to link Martinez to the Nazis.
I may be wrong, but I suspect there has never been a California appellate court decision that references “Godwin’s Law” on Nazi references!
While the case does include a nice summary of the factors to be considered in determining whether attorney misconduct is prejudicial so as to warrant reversal and a concise analysis of those factors, something that might be useful should attorney misconduct become an issue in one of your cases, that’s not why I like the opinion. I like it simply because of the way it is written!
None, really. Martinez v. State is just a fun opinion to read.
Take a few minutes – give it a read – I suspect your reaction will be similar to mine:
It Just Got Easier To Get Sanctions Under California Code of Civil Procedure Section 128.5 – San Diegans for Open Government v. City of San Diego.
In San Diegans for Open Government v. City of San Diego, 2016 WL 3162818, 16 Cal. Daily Op. Serv. 5941, the Fourth District Court of Appeal addressed 2014 revisions to California Code of Civil Procedure Section 128.5. Principal amongst the Fourth District’s holdings in the San Diegans for Open Government case is that under revised C.C.P. §128.5 an objective standard alone is to be applied to determine whether the actions or tactics at issue were frivolous or solely intended to cause unnecessary delay. This holding in San Diegans for Open Government will make it demonstrably easier to get C.C.P. §128.5 sanctions.
The case arose from a dispute between San Diegans for Open Government (“SDOG”), a non-profit organization acting as a “government watchdog” and the San Diego City Attorneys Office (“City Attorney”). SDOG submitted a public records request to the City Attorney seeking certain emails. The City Attorney refused to produce the requested emails claiming they were not public records.
SDOG sued the City of San Diego and the City Attorney for violation of the California Public Records Act (the”Act”) and sought a declaratory judgment compelling disclosure of the emails. SDOG also included a cause of action for waste. SDOG ultimately dismissed the waste claim, but secured a judgment against the City of San Diego and the City Attorney for violation of the Act and declaratory relief. The trial court awarded SDOG prevailing party attorney fees under the Act. The trial court also denied a request by the City for C.C.P. §128.5 sanctions from SDOG for filing the dismissed waste claim.
The City appealed claiming, in part, that the trial court erred by concluding the lack of evidence of subjective bad faith by SDOG required denial of the sanctions motion.
In its San Diegans for Open Government opinion, the Fourth District considered the legislative history of the 2014 revisions to section 128.5 and concluded that one purpose of the revisions was to eliminate the subjective standard and impose an objective standard.
Former section 128.5 is silent on whether an objective or subjective standard applies to determine whether actions or tactics are frivolous or solely intended to cause unnecessary delay. The subjective standard evaluates the motives of a party or counsel and the objective standard looks at the merits from a reasonable person’s perspective. (In re Marriage of Flaherty (1982) 31 Cal.3d 637, 649, 183 Cal.Rptr. 508, 646 P.2d 179.) Many courts interpreting former section 128.5 required a showing of subjective bad faith in addition to frivolousness. (Shelton v. Rancho Mortgage & Investment Corp. (2002) 94 Cal.App.4th 1337, 1346, 115 Cal.Rptr.2d 82 [listing cases].)
Section 128.5 is similarly silent on whether an objective or subjective standard applies. The question presented is whether the Legislature intended section 128.5 to be interpreted similar to former section 128.5. Our review of the legislative history shows one purpose of section 128.5 was to eliminate the subjective standard and impose an objective standard.
The court remanded to the trial court to reevaluate the sanctions motion under the legal standard of “objective unreasonableness”.
The Fourth District in San Diegans for Open Government also held that current C.C.P. §128.5 applies to all cases pending as of January 1, 2015 and that the safe harbor waiting period in C.C.P. §128.7 does not apply to C.C.P. §128.5 sanction motions. The court also addressed the respective burdens on the parties to a C.C.P. §128.5 sanction motion, holding that the party seeking sanctions must first tender “some evidence showing potentially sanctionable conduct” which shifts the burden to the opposing party to refute the moving party’s prima facie showing. The court noted that the moving party may rely upon “factually devoid discovery responses” by the party opposing the motion to raise a reasonable inference the opposing party lacks facts supporting its claim and thereby shift the burden.
First, it is now much easier to apply for and obtain section 128.5 sanctions. No longer will the moving party be required to present evidence of the subjective intent or motive of the opposing party or counsel. The court will only look at the merits of the alleged bad faith actions or tactics from a reasonable person’s perspective. This will make C.C.P. §128.5 sanction motions a more effective tool for litigators to address frivolous actions and tactics and for the court to police such actions and tactics.
Second, litigators have to more closely scrutinize their claims, answers, actions and tactics to ensure adequate factual support. While, even under an objective standard, the burden is high on the moving party bringing a C.C.P. §128.5 sanctions motion, counsel can no longer save themselves by arguing their objectively frivolous actions were not prompted by subjective bad faith. Conversely, the court can no longer save counsel from a sanctions order by finding there was no evidence of subjective bad faith.
Third, I foresee future uncertainty about application of the San Diegans for Open Government “objectively unreasonable” standard to the parts of C.C.P. §128.5. The statute contains two separate grounds for an award of sanction – bad faith actions/tactics that are frivolous or “solely intended to cause unnecessary delay”. Further, the definition of “frivolous” in the statute is “totally and completely without merit” or “for the sole purpose of harassing an opposing party”. The objective standard enunciated in San Diegans for Open Government works well with the merit, or absence of merit, determination in consideration of a C.C.P. §128.5 motion. But, how does an objective standard apply to determining whether a party or counsel “solely intended to cause unnecessary delay” or acted “for the sole purpose of harassing an opposing party”? These determinations seem, on their face, to require some inquiry into the intent of the party or counsel to be sanctioned. Can the court properly conclude solely from an objective finding that an action was completely without merit that the party or counsel taking that action “solely intended to cause unnecessary delay” or acted “for the sole purpose of harassing an opposing party”? If that were the case, wouldn’t that render the “solely intended to cause unnecessary delay” and “for the sole purpose of harassing an opposing party” language in the statute meaningless and superfluous? The statute, even after the 2014 revisions, seems to require, by its express language, some consideration of the bad actor’s intent to cause delay or harass. It remains to be seen from future cases how a solely objective standard for consideration of C.C.P. §128.5 motions can be applied to determine the intent of the party or counsel to be sanctioned for taking the bad faith action.
Another interesting post from my partner, Doug Lytle. This time on Assignment of Intent-to-Use (ITU) Trademark Applications. Follow his blog, Takes on Law. Always interesting and timely. Jim
In a recent Q&A session published in Legal Feeds ( http://bit.ly/1X2YFob ), legal writers Richard and David Suskind speak about coming change or, perhaps more precisely, impending technological disruption in the ways we, as lawyers, work. It’s an interesting read. My daughter will become a lawyer this year – (very proud of her, by the way!) If the Suskinds are anywhere near correct, over the course of her career, she will practice law in ways dramatically different from the way I have.
The Suskind Q&A session largely addresses the concept that attorney work will increasingly be broken down into specific tasks, some of which will continue to be done by attorneys, but others of which will come to be handled by other technology-based providers, or even technology alone. And that will cause turmoil. In a striking comment, Richard Suskind says:
I think if you’re wanting to give your readers the hope of a soft landing, I think that would be to mislead them. . . . The looming nightmare, I suppose, for traditional lawyers is that an Amazon in law comes along and does to law what Amazon did to bookselling. My gut tells me it’s unlikely to unfold in as simple a way as that because the market is far more complex . . . but we should expect that large parts of legal practice will be done very differently, and that these new techniques are unlikely to come from the mainstream traditional providers.
“Amazon in law” – now that’s ominous!
The Suskinds offer up a task-based approach to the work of professionals, including lawyers – the notion that what lawyers do is not a big basket of stuff of professional-level difficulty. Rather, it is composed of a lot of different activities of differing levels of difficulty, and that some of those activities will be handled in the future by people using technology or technology alone. David Suskind states:
One of the unhelpful things we do when we talk about the future of work is, we tend to talk about jobs. So we talk about traditional lawyers, legal secretaries, things of that sort. Why is that unhelpful? Because it encourages us to think of the work that professionals do as monolithic indivisible lumps of stuff, whereas in actual fact when you take any professional’s job and look under the bonnet, they perform lots of different tasks, lots of different activities in their job.
Even for the most prestigious professionals, when you break down their work into their component tasks, it transpires that many of those tasks can be done differently — either by other people using technology or by technology alone. And this task-based approach, trying to recognize that professional work isn’t a lump of stuff of a given difficulty, and instead is composed of lots of different activities and tasks is I think quite an important thing to do.
The Suskinds believe these coming changes to the work of lawyers will be “gradual” but “relentless” and that success in this changing environment will depend on “one’s adaptability”. Daniel Suskind says:
It’s not the case that people are going to wake up tomorrow and find an algorithm sitting there and your job has been replaced by a robot. What we’ll see is tasks here and tasks there — a gradual change driven by technology. A relentless change but a gradual change.
It’s not really about a declining profession. I don’t think. Rather, it’s about inevitable, inescapable change in the profession. The Suskinds simply argue that the work of lawyers, like the work of all other professionals, will be increasingly dissected into more discrete tasks, some of which will come to be handled, at lower cost and, presumably, with greater efficiency by non-lawyers using technology or technology alone. And this dissection is inevitable. Richard Suskind states:
We can have other providers in the game, but being regulated in different ways. But, again, we want a task-based approach to this. Some tasks are so crucial that they require deep expertise and they require maximum client protection. Others are fairly routine and repetitive, and we think that, although they still need to be regulated to some extent, you don’t need the same severity of regime.
First, the coming changes to the way we work as lawyers will be tumultuous and those who don’t adapt will suffer. We have long had the benefits, both professional and financial, of a sealed-off club resistant to change; in particular, resistant to change that affects the bottom line. Competition and technology are prying open the doors to that club, it is inevitable, and we will need to adapt. Those who don’t will lose to those who do. Is that a good thing? I think, on balance, it is!
Second, the ethical challenges arising for this opening up of the work done by lawyers will be significant. If portions of the work traditionally done by lawyers will increasingly be handled by people using technology or technology alone, how we will insure that privileges are protected and standards of practice are met? Look at predictive coding in large case document review, and the associated commentary and court consternation, as reflective of coming ethical and professional challenges as competition and technology pry open the work we do.
Third, does this all mean lawyers will make less money in the future than they have in the past? Perhaps, perhaps not. Clearly, if we continue to do business as we have always done it and a portion of the work we have traditionally done and billed for comes to be done by non-lawyers using technology or technology alone – i.e., by somebody other than us, we will make less money. That is self-evident. But, presumably, those who adapt and embrace these coming changes, embrace technology and provide their clients with better, faster, more-efficient, more cost-effective, more responsive legal services will get more business and make more money.
Fourth, if standards of practice are maintained and the work that should be done by trained, experienced lawyers continues to be done by lawyers so that clients, in turn, continue to be fully represented and fully protected in their legal matters, these coming changes to our profession, the dissecting of the work we do, this task-based approach to the work of lawyers, is nothing but good for the clients! Competition and the inevitable unbundling of the services we provide should make legal services less costly for clients.
It is an interesting time to be a lawyer. The profession is changing – more open, more competitive, faster, more demanding and challenging than ever. If the Suskinds are anywhere near correct in their vision of the future of our business, it’s only going to get more interesting going forward. And, for my part, I think that’s good!
So, my new mantra – change is good, embrace the change!
I like this direct language from the introductory paragraph of a new Ninth Circuit case – Arizona v. Tohonto O’odham Nation, 2016 WL 1211834:
“This appeal requires us to consider whether sophisticated, represented parties really meant what they wrote in a gaming compact that was duly executed after years of tedious negotiations. Like the district court, we hold the parties to their words, and affirm the district court’s orders……”
Illustrates a simple, direct and effective way to argue breach:
Defendants negotiated and signed a contract – they should be held to their words.
Henderson Caverly Pum & Charney LLP Attorneys Tsu, Mardian and Baggett Pass State Bar Specialty Certification Exams.
Henderson Caverly Pum & Charney LLP (HCPC) attorneys Brian Tsu, Robert Mardian and Eric Baggett have just passed the State Bar of California legal specialist exams in two HCPC core practice areas.
Tax and estate planning partner Brian Tsu has passed his California legal specialist exam in California Estate Planning, Trust and Probate Law. Tsu currently holds a legal specialist certification in Taxation Law, which will soon make him a member of the small group of California attorneys holding multiple specialist certifications.
Probate and trust litigation senior counsel Robert Mardian has also passed his California legal specialist certification exam in California Estate Planning, Trust and Probate Law.
Tax and estate planning associate Eric Baggett passed his California legal specialist certification exam in Taxation Law.
Congratulations to Tsu, Mardian, and Baggett!
Attorneys Tsu, Mardian, and Baggett are not alone at HCPC with respect to legal specialist certification. Other HCPC attorneys hold legal specialist certifications as follows:
Partners Adryenn Cantor and Richard Hyatt – Family Law.
Partners Nancy Henderson, Kristen Caverly, Shirley Kovar and Debra Vella – Estate Planning, Trust and Probate Law.
Partner Clancy Wilson – Taxation Law.
The legal specialist certifications held by HCPC attorneys are reflective of the significant experience and expertise of the firm’s attorneys and the sophistication and quality of its legal representation.
P.S. – I think I need to go back to school. I am starting to look like a slacker around this place. Jim.
Henderson Caverly’s Growing Litigation Practice Group – Trust/Probate and Business/Commercial/IP Litigation.
Henderson, Caverly, Pum & Charney, LLP (HCPC) is no longer only an estate planning and trust/probate litigation firm.
HCPC has long been known for its estate planning and trust/probate litigation expertise. Partners Nancy Henderson (planning), Kristen Caverly (litigation), and Shirley Kovar (litigation) are well known and highly sought-after San Diego lawyers in these fields.
But, with the addition of partner James Crosby in late 2014 and partner Doug Lytle in late 2015, the utilization of current HCPC senior counsels and associates, and expected new admittee hirings late this year and in 2017, HCPC’s expertise and capacity in complex and general business, commercial and IP litigation is rapidly expanding. Crosby brought 30+ years of business litigation experience and an active trial practice to the firm. The addition of Doug Lytle, a 20+year litigator with an intellectual property practice emphasis, served to further expand the firm’s business litigation expertise and capacity.
HCPC has long been known for the experience and expertise of its attorneys and the sophistication and quality of its legal representation. Those same firm traits are guiding and informing the rapid expansion of its litigation department from its trust/probate litigation roots into business/commercial/IP litigation and trial representation.