BlogBusiness LitigationBusiness-DivorceBusiness Divorce: Accessing Information and Investigating Your Claim Against Your Business Partner

July 26, 2020by Jeffrey Davis0


What happens when you have reason or substantial suspicion that your business partner is doing you or your company dirty, so to speak?

The first step in any litigation is gathering facts, documents, and all relevant bits of information. To this end, the law gives you the aggrieved business owner some significant rights. As a shareholder in a corporation you have the right to access books and records and this right is rather broad. If you, as a shareholder in a corporation, do not have access to the relevant books and records, then you can file a petition to compel access to the books and records.

Even under New York common-law a shareholder’s right to inspect a corporation’s books and records, is broad and can extend to all of the relevant corporate books and records. If the shareholder, in good faith, shows a “proper purpose” for seeking the corporate records, the corporation resisting inspection must show that the demanding shareholder’s purpose is improper or is otherwise proceeding in “bad faith”. This is a tough burden for the corporation to meet.

Non-controlling, outside shareholders of closely held New York corporations who bring books and- records proceedings typically rely on one or more of three “proper purposes”: (1) to value their shares; (2) to obtain information bearing on distributions; and (3) to investigate financial and other abuses by the controlling owners-managers.

As just noted, one of the recognized, “proper purposes” for a common-law inspection demand is to investigate potential wrongdoing and mismanagement by corporate officers and directors. The right of the shareholder to inspect the books and records outweighs the alleged inconvenience to the corporation. The Court in a very recent decision gave a shareholder who was demanding books and records much broader power than historically granted[1]. The Court held that the “stated purpose”, to investigate the corporation’s management was a “proper purpose”, “even if the inspection ultimately establishes that the board engaged in no wrongdoing.”

What does this mean for you? It means that if you don’t have all the information to make an informed decision about possibly suing your business partner, you have certain common law rights that give you broad power to inspect all of the corporate books and records so long as you remotely establish a “proper purpose”.

Business Corporation Law Section 624 also gives a shareholder in a corporation the right to inspect books and records and sets forth the types of books and records a corporation must maintain. It can be a powerful tool for an aggrieved business owner. Access to information is critical for any dispute. Before you consider an all-out war, you may want to vet your options for obtaining relevant information first.

Finally, it is worth noting that fiduciaries have a responsibility to account for the assets and liabilities of the company they manage. As such demanding an accounting from a fiduciary who has allegedly breached his/her duties to the company or its shareholders/members is a common-sense claim in most shareholder disputes or business-breakups.  A demand for an accounting is usually brought as one of several claims in a lawsuit. However, if you have the time and ability to wait, I would bring this as a separate lawsuit similar to a petition for access to the books and records.

[1] See Retirement Plan for General Employees v. McGraw-Hill Companies, Inc., 2014 NY Slip Op 06154 [1st Dept Sept. 11, 2014]).

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