In general, owners of stock in corporations are entitled to certain rights regarding inspection of corporate records. See Cal. Corp. Code,§§ 213, 1501, 1600 et seq. In general, small shareholders (under 5%) are entitled to less access — basically, the annual report, the articles of incorporation, and similar semi-public types of records. Larger shareholders have the right to inspect a larger quantity of accounting books, records, and minutes of meeting including shareholder lists and quarterly financials.

In order to trigger a shareholders’ right to inspect, a demand letter must be sent stating what information is sought, the purpose of the request, along with some connection between the request and the purpose. For example, if the purpose is to investigate whether the Chairman of the Board committed corporate waste by going on a lavish vacation on company money, then the request should state that purpose and seek the relevant financial documents including, potentially, expense reimbursements, receipts, and other records related to the alleged lavish vacation.

But what about emails? Are emails considered “corporate records”?

Like many things in the law, the answer is “maybe” and getting to “yes” may depend on the unique facts of the case being litigated. Not too long ago, Courts in Delaware held that a stockholder’s right to inspection included the right inspect emails exchanged between some members of the board of directors and between senior corporate officers. The holding was partly based on the wording of the Delaware statute, which gave a shareholder the right to inspect “other books and records.” The court held that “other books and records” included reviewing the emails was essential for satisfying the stockholder’s proper purpose of inspection. The court noted that the decision reflected the fact that books and records are now increasingly stored electronically and that board and corporate decisions are being made via the easy exchange of emails and texts. See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752 (2016).

The legal principle was followed recently in the fight between John Schnatter and Papa John’s Pizza. Schnatter has brought a derivative action and, as a very large shareholder of the company he started, Schnatter asked to inspect corporate records including emails and text messages from personal accounts and devices used by members of the board. The Delaware judge said “yes” the requests were proper and Schnatter had a right to inspect. See Schnatter v. Papa John’s International, Inc., Case No. 2018-0542-AGB (Court of Chancery of Delaware January 15, 2019). Like the court in Amalgamated Bank, the court noted that the “reality of today’s world is that people communicate in many more ways than ever before, aided by technological advances that are convenient and efficient to use.” The court refused to exclude those forms of communication from the shareholder’s right to inspect.

What about California?

So far, California has not followed Amalgamated Bank and the wording of California’s statute is different. That being said, there is plenty of California case law that has allowed broad rights of inspection. One famous case is Hobbs v. Tom Reed Gold Mining Co., 164 Cal. 497 (Cal. Supreme Court 1913). In that case, the California Supreme Court held that a shareholder was allowed to conduct an on-site visit of a mine owned by the corporation located in Arizona. The court said:

“It would . . . be a strange rule which would allow the stockholder to examine the books of a corporation to ascertain its condition and deny him an inspection of the property (or other records) to verify the statements contained in the books.” (as quoted in Farnum v. IRIS Biotechnologies, Inc., Case No. H042858 (Cal. App. 6th Dist. November 29, 2018).

Hobbs provides solid grounds for believing that, if necessary to further a legitimate investigation, California courts would permit inspection of emails and text messages between board members and corporate officers.

Contact San Diego Corporate Law

For more information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard by email or by calling (858) 483-9200. Like us on Facebook.

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