The Illinois Business Corporation Act, Section 7.75, gives shareholders the right to inspect a company’s records, “but only for a proper purpose.” The Illinois Business Corporation Act was amended in 1984, requiring shareholders to make their demand in writing, “stating with particularity the records sought to be examined and the purpose therefore.” 805 ILCS 5/7.75.
The plaintiffs in this case, Sunlitz Holding Co. (and three of the company’s shareholders) appealed from an order that dismissed its complaint for mandamus against Trading Block Holdings Inc., which claimed that it had satisfied the “proper purpose” and “particularity” requirements.
The lawsuit complaint contained exhibits attaching two letters the plaintiff sent to Trading Block. In an April 1, 2013 letter, plaintiff Sunliz said it wanted to inspect the corporation’s records “to determine the financial condition of the company, the character of the management of the company and whether the company’s financial practices were appropriate.” In another letter dated May 17, 2013, the plaintiff said he was worried that the corporation was being used “as a piggy bank for the insiders and the board of directors.”
The plaintiff was concerned that the directors allegedly approved the stock option plan, which “resulted in the dilution of both common and preferred stock to the detriment of common stock shareholders and preferred stock shareholders.” Second, the company reportedly continued to show net losses despite substantial increases in revenue because of a vague category the firm referred to as “other operating expenses.” And last, there were increases in the company’s “receivables” for commissions, which allegedly suggested that directors were not paying commissions they owed to the company.
A Cook County judge ruled that the April 2013 letter was deficient because “it failed to identify any particular purpose” and “speculation” and the May correspondence did not establish “the existence of a proper purpose.”
The Illinois Appellate Court reversed the trial judge and concluded that the complaint alleged a proper purpose under Section 7.75 because “plaintiffs’ demands showed that they possessed a good faith fear of mismanagement, which they sought to confirm or refute by examining Trading Block’s books and records.”
In the Illinois Supreme Court case of Doggett v. North American Life Insurance Co., 396 Ill.354 (1947), it was stated that a shareholder has a proper purpose in requesting records where the request is made “in good faith for a specific and honest purpose, not to gratify curiosity or for speculative or vexatious purposes, providing also the interest is as a stockholder and is lawful in character and not contrary to the interest of the corporation.”
In this case, the plaintiffs had not been able to confirm or deny their fears that Trading Block has been mismanaged. It was the defendants’ argument that the plaintiffs should state the details of the alleged mismanagement, which plaintiffs were not certain had even occurred.
Plaintiffs do not need to establish “actual mismanagement or wrongdoing.” Good faith fears of mismanagement are sufficient. Weigel v. O’Connor, 57 Ill.App.3d 1017 (1978).
Plaintiffs specified that they wanted records to determine whether the June 2012 stock option plan, unidentified expenses and increase in commission’s receivable were due to mismanagement. The court concluded that the plaintiffs’ letters were sufficient to notify the defendants of the reason they sought access to Trading Block’s books and records. Accordingly, the Illinois Appellate Court reversed the decision of the circuit court judge and stated that taking plaintiffs’ allegations as true, concluded that plaintiffs have sufficiently pleaded their entitlement to inspect records under Section 7.75.
Kreisman Law Offices has been representing shareholders, corporations and individuals in business litigation and corporate shareholder disputes for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Justice, Inverness, Schaumburg, Schiller Park, Des Plaines, Glencoe, Rosemont, Tinley Park, Wood Dale, Lansing, Winnetka, Palos Heights, Calumet City, Naperville, Chicago (Wicker Park, Lincoln Park, Rogers Park, Jefferson Park), Evanston and Richton Park, Ill.
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