Nearly all shareholder and membership disputes begin with a minority shareholder or member suspecting mismanagement by the majority shareholders or controlling members. It is that suspicion – if legitimate – that gives rise to the statutory informational rights of minority members and shareholders.
In the corporation context, the Illinois Business Corporations Act entitles shareholders access to certain business information and records if such information or records are requested for a “proper purpose.” Similarly, the Illinois Limited Liability Company Act requires a member of an LLC to have a “proper purpose” for making a demand for the LLC’s records.
Not surprisingly, what constitutes a “proper purpose” and the specific “books and records” which a shareholder or member is entitled to inspect are the subject of extensive debate and interpretation. Almost universally, courts have held that while idle curiosity or a “fishing expedition” does not give rise to the statutory right to access information, actual proof of mismanagement or wrongdoing by the majority shareholders or members is not necessary to establish a proper purpose. Generally, so long as the purpose for the member or shareholder’s information demand is to protect the interests of the corporation or LLC (or the individual’s shares or membership interest), a “proper purpose” exists. If the shareholder or member can show a proper purpose, he or she will have the right to review any and all corporate records necessary to the shareholder’s or member’s investigation, including financial statements, QuickBooks files, bank statements, credit card statements and tax returns. Indeed, while the right to information is not unqualified, Illinois courts, as recently as of January 2019, have characterized those rights as “presumptive.”
What protections exist for the company or majority stakeholders? Understandably, a corporation or LLC will want to push back on a request for sensitive financial or proprietary information if the company suspects an improper motive – particularly from a shareholder or member who has seemingly become adverse to the company. In addition to judicial recognition of a defense for improper or illegitimate purpose (such as to injure the corporation) in an action seeking to compel the production of the company’s records, the LLC Act provides that a company does not need to honor a books and records demand if the company knows that the member already possesses the information requested. Also, the LLC Act permits a company to impose “reasonable restrictions and conditions” on access to information, such as a confidentiality designation or other nondisclosure obligations.
To head off time consuming and expensive litigation and the possibility that a court may believe the company has something to hide, it may appear that the best course of action is to simply produce the requested records. So often, however, it becomes a case of “if you give a mouse a cookie…,” as the production of some records begets requests for more records. Unfortunately, even the production of every single piece of paper demanded by a minority shareholder or LLC member is not a guarantee against a lawsuit; if there is mistrust and suspicion on the part of the requestor, the dispute is likely to end in litigation no matter what you do.
For more information regarding informational rights and business partner disputes, please contact Katherine A. Grosh at: (312) 368-0100 or firstname.lastname@example.org.