The officers and directors of a corporation are vested with broad protection in the management the entity’s affairs. This broad discretion can make it difficult for minority shareholders to ensure that those with majority control, often serving as the corporation’s management, are operating the entity to maximize value as opposed to promoting individual self-interest. However, the August 2014 decision by an Illinois Appellate Court in Sunlitz Holding Company v. Trading Block Holdings, Inc.1 shows that shareholders of Illinois corporations are not without protection. Shareholders are entitled to inspect an Illinois corporation’s books and records without proof of wrongdoing or mismanagement. Instead, assuming that a shareholder can articulate a “proper” purpose underlying the demand that goes beyond what may be termed “curiosity,” such review can be obtained – and on an expedited basis - even when the shareholder is not possessed of evidence of improper conduct by the officers and directors .
In Sunlitz, shareholders without evidence of malfeasance by management but with a rational basis for concern about self-dealing, to demanded access to the corporation’s books and records. Their demand for review articulated concerns that the corporate defendant’s officers and directors were engaged in insider deals to the detriment of the corporation, falsely reporting losses and failing to make payments due to the corporation. The directors and officers objected to the inspection contending that the shareholders were, in essence, second-guessing their decisions and had offered nothing more than conjecture to support the demand. In arguing against the inspection, they contended that the demand lacked the “particularity” required by the Illinois Business Corporation Act because the demand failed to identify the specifics of the putative self-dealing. Rejecting that argument, the Court found that the particularity requirement is satisfied if it is sufficient to identify to a person of ordinary intelligence the reasons that access to the records was sought. The Court concluded that shareholders are not required to establish actual mismanagement or abuse or evidence of the same in order to gain access to the records and recognized that access to those records was likely necessary to close the loop. Assuming shareholders can establish more than mere “curiosity” but can articulate a legitimate rationale, they are entitled to broad access including all books and records necessary to making an intelligent and searching investigation sufficient to protect the shareholder’s interests.
The takeaway for shareholders in Illinois corporations is that they do not need to develop evidence of self-dealing to justify access to the corporation’s books and records. And unlike statutes in other jurisdictions, the Court found that the Illinois’ Business Corporation Act provides shareholders with broad inspection rights rather than piecemeal access. Consequently, judicial enforcement of the right of inspection as opposed to broader litigation may offer shareholders with the most expeditious and cost-effective means of establishing abuse by officers and directors.