Opinion
No. CV 06 4006199 S
July 9, 2008
MEMORANDUM OF DECISION
In this action the plaintiff, Robert E. Coleman, Jr., seeks an order permitting an inspection and copying of corporate records of the defendant, Coleman Brothers Shows, Incorporated ("Coleman Brothers"), an accounting, and attorneys fees.
The parties agreed that the court would decide this case based on facts contained in a Stipulation of Facts dated February 25, 2008. Based on that Stipulation and the allegations of the complaint which have been admitted by the defendants, the court finds that Coleman Brothers is a closely held Connecticut corporation with a principal place of business at 182 Old Mill Road, Middletown, Connecticut. The plaintiff is a ten percent shareholder of the defendant, Coleman Brothers. The defendant, Robert E. Coleman, Sr., is the president and a shareholder of Coleman Brothers. The defendants, Timothy Coleman and Mary Oakes, are the vice president and secretary/treasurer, respectively, of Coleman Brothers.
On June 14, 2005 the plaintiff requested an inspection of corporate records pursuant to Connecticut General Statutes § 33-946(a). The records requested included annual financial statements for the years 2004 and 2005, minutes of shareholders' meetings and records of actions taken by shareholders without a meeting for the last three years and minutes of directors meetings and records of actions by a committee of the directors and accounting records.
In the written request of June 14, 2005 the plaintiff's counsel stated that the plaintiff was concerned about waste of the company's assets, improper distributions to shareholders, officers and directors and the use of the funds of the corporation to purchase assets for the benefit of individual officers and directors. He further stated that the plaintiff was concerned that reports in the media about misconduct of ride operators and lack of preventative maintenance of rides could have an adverse impact on the value of the plaintiff's shares in Coleman Brothers.
By letter dated August 24, 2005 Coleman Brothers responded to the plaintiff's June 2005 request by providing annual meeting minutes for the years 2003, 2004, and 2005 and copies of tax returns for the years 2003 and 2004 in lieu of financial statements.
By letter dated October 7, 2005 the plaintiff advised Coleman Brothers that the records produced with the August 24, 2005 letter were insufficient to determine the financial status of Coleman Brothers and requested the following:
1. Weekly rent receipts for 2003, 2004, and 2005.
2. Weekly gross ride receipts for 2003, 2004, and 2005.
3. Front Gate receipts for 2003, 2004, and 2005.
4. Weekly payroll for 2003, 2004, and 2005.
5. Contracts for new purchases for 2003, 2004, and 2005.
6. All information on the settlement of the lawsuit in Elmira, New York.
7. The market value of the property located at 1 Mile Lane, Middletown, Connecticut.
8. Check ledgers for 2003, 2004, and 2005.
9. List with values of all rides owned by the Company.
10. List with values of all vehicles owned by the company, together with the location of each and the person who operates them.
11. List of all equipment, rides and vehicles sold or otherwise transferred during 2003, 2004 and 2005 together with the consideration received for the transfer or sale.
By letter of December 9, 2005 Coleman Brothers' counsel, Steven Basche, responded to the October request indicating that such request was not made in good faith and had not described with reasonable particularity the purpose of the plaintiff's inspection request. In that letter Attorney Basche also indicated that there would be "no regular business hours until April as the circus has been shut down for the season . . . [and any] inspection will take place after April 2006, when the regular business hours of the company resume."
The plaintiff responded to the foregoing with a letter dated December 13, 2005 in which the plaintiff's counsel stated that the purpose for the inspection request made in June 2005 was because "[plaintiff] believes the company is being mismanaged, wasting its assets and that the officers and directors are breaching their fiduciary duties to the shareholders."
By letter dated February 7, 2006, Attorney Basche stated:
[I]t is not that my client does not want to address the issues raised in your prior correspondence. It is that the books and records will be made available during the Company's regular business hours which, because of the nature of the business, means that they will not be available until April.
However, when April 2006 arrived, Coleman Brothers as represented by Attorney Basche took the position that it refused to allow the plaintiff to inspect the documents requested, instead asking the plaintiff to "provide with reasonable specificity the particular purpose for the inspection of the records and please indicate the particular records sought . . ." Letter of April 10, 2006.
Discussion of the Law
Connecticut General Statutes § 33-946(b) provides:
(b) A shareholder of a corporation is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation if the shareholder meets the requirements of subsection (c) of this section and gives the corporation written notice of his demand at least five business days before the date on which he wishes to inspect and copy: (1) Excerpts from minutes of any meeting of the board of directors, records of any action of a committee of the board of directors while acting in place of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders and records of action taken by the shareholders or board of directors without a meeting, to the extent not subject to inspection under subsection (a) of this section; (2) accounting records of the corporation; and (3) the record of shareholders.
Connecticut General Statutes § 33-946(c) provides
(c) A shareholder may inspect and copy the records described in subsection (b) of this section only if (1) His demand is made in good faith and for a proper purpose; (2) he describes with reasonable particularity his purpose and the records he desires to inspect; and (3) the records are directly connected with his purpose.
"Statutes providing for inspection by shareholders should be liberally construed in favor of shareholders." Pagett v. Westport Precision, Inc., 82 Conn.App. 526, 531, 845 A.2d 455 (2004). In Pagett the trial court ordered the defendant corporation to allow the plaintiff a minority shareholder who was a former employee currently engaged in litigation against the defendant, to inspect and to copy certain corporate financial records and tax returns. The defendant corporation appealed.
The decision of the appellate court in Pagett involved an interpretation of Connecticut General Statutes §§ 33-946(b) and (c). The court noted that the language of 33-946(b) was clear:
The plain meaning of what, when and where records may be inspected is clear from the statutory language. Five days after filing a written request, at a place the corporation designates, a shareholder is entitled to inspect accounting records. The plain and ordinary meaning of these terms is clear, and the parties have not disputed their meaning.
The court then addressed the meaning of the language of 33-946(c) which was disputed in Pagett as it is in this case. The parties disagreed as to the meaning of the phrases "proper purpose, "good faith." "reasonable particularity," and "reasonably connected." Noting that the statute did not define those phrases, the court stated that "In construing this language, we consider the statute's remedial purpose and give it a liberal construction." 82 Conn.App. at 531. It further stated:
We are persuaded by authority from sister states that have construed similar statutes and concluded that a shareholder's status as an owner is the spring from which statutory inspection rights flow. "The basis of a shareholder's right to inspect the books and records of a corporation is his ownership of the corporate property and assets through his ownership of shares; as an owner, he has the right to inform himself as to the management of the corporate property by directors and officers who are his trustees in direct charge of the property." Tucson Gas Electric Co. v. Schantz, 5 Ariz.App. 511, 513, 428 P.2d 686 (1967). A corporation is not an entity that can be separated from its members, for in reality those running the corporation "are merely the agents of the [shareholders] . . ." Cooke v. Outland, 265 N.C. 601, 610, 144 S.E.2d 835 (1965); see also Bank of Giles County v. Mason, 199 Va. 176, 181, 98 S.E.2d 905 (1957). Furthermore, "[a shareholder] in a corporation has, in the very nature of things and upon principles of equity, good faith, and fair dealing, the right to know how the affairs of the company are conducted and whether the capital of which he has contributed a share is being prudently and profitably employed." (Internal quotation marks omitted.) State ex rel. Fussell v. McLendon, 109 So.2d 783, 786 (Fla.App. 1959).
89 Conn.App. at 531-32.
Noting that "good faith has been defined as honesty of purpose, lack of intent to defraud and honest intent to refrain from taking unconscientious advantage of another," the court in Pagett held that the trial court's implicit finding that the plaintiff's request for inspection was made in good faith was not clearly erroneous.
In Pagett the plaintiff was engaged in litigation with the defendant corporation when he made his request for inspection. Arguably, the availability of pretrial discovery obviated the plaintiff's need for inspection of the defendant's records under § 33-946, thereby creating an argument that the plaintiff lacked the requisite "good faith." The defendant apparently advanced this argument to no avail.
In the present case there was no litigation pending between the parties at the time the plaintiff requested inspection and the defendants failed to identify to the plaintiff and have failed to identify to the court any colorable basis for their claim that the plaintiff was not acting in good faith. The defendant's refusal to allow inspection of the records based on the plaintiff's lack of good faith is without merit. Moreover, the defendants' responses to the plaintiff's requests for inspection and their tortured interpretation of the relevant statutes constituted bad faith conduct by the defendants.
The defendants also argue that the plaintiff's request to inspect corporate documents was not made for a proper purpose. In his December 13, 2005 correspondence, the plaintiff's counsel indicated that "[plaintiff] believes the company is being mismanaged, wasting its assets and that the officers and directors are breaching their fiduciary duties to the shareholders."
The investigation of corporate mismanagement is clearly a proper purpose for inspection of corporate records under § 33-946. In Pagett, the court cited a 1998 decision of the Vermont Supreme Court which held that "ascertaining the possibility of mismanagement and determining the performance and condition of the company" was a proper purpose for a shareholder's inspection of corporate records. Pagett v. Westport Precision, Inc., supra, at 535, citing Towle v. Robinson Springs Corp., 168 Vt. 226, 228, 719 A.2d 880 (1998). "If a stated purpose is not unreasonable or improper on its face, a corporation is not justified in refusing the request for inspection." Pagett, supra, at 535.
"[T]he particularity requirement directs a shareholder to express his purpose with sufficient particularity so that the reason for the inspection can be ascertained by the corporation, but that minute detail of purpose is not required." Pagett, supra, at 538. The purpose must be stated with only enough particularity so that "[a] person of ordinary intelligence could understand the . . . Purpose in requesting access to the financial documents." Id.
The plaintiff has satisfied the "reasonable particularity" standard. The June 2005 request indicated that the plaintiff was concerned about waste of the Coleman Brothers' assets and improper distributions to shareholders, officers and directors. This alone would have been sufficiently descriptive of the plaintiff's purpose to permit inspection. But the plaintiff articulated additional reasons, including his concern that the company's misapplication of its funds and its failure to do preventative maintenance on its rides could negatively impact the value of the plaintiff's shares in Coleman Brothers.
The defendants concede that determining the value of stock does constitute a proper purpose for a request for financial information. However, they argue that the plaintiff first articulated such purpose in his Memorandum of Law. The defendants are mistaken. The plaintiff's first request for inspection of June 14, 2005 articulated the plaintiff's concern about the value of his interest in the company.
The records sought by the plaintiff are directly related to his stated proper purpose for demanding inspection: determining whether there is corporate mismanagement and determining whether the value of his shares are negatively affected. Requests one through four listed in the October 2005 letter seek income and payroll expenses for a three-year period. Request five seeks contracts for new purchases, clearly related to the issue of whether the corporation is purchasing assets for the personal use of certain officers and directors. Request eight seeks check ledgers. Request ten seeks a list of all vehicles owned by Coleman Brothers with the value of the vehicles and the person who operates the vehicle. The foregoing documents clearly pertain to the issues of corporate waste and mismanagement.
Requests six, seven, nine and eleven relate to the lawsuit concerning an injury on a ride, and the conditions and values of the rides and other equipment owned by Coleman Brothers. The foregoing information is related to the value of the plaintiff's shares in the company.
The plaintiff's requests satisfied each of the requirements set forth in Connecticut General Statutes §§ 33-946(b) and (c) and, therefore, pursuant to § 33-948(b) the court hereby orders the defendants to permit inspection and copying of the records requested and set forth above on pages one and two of this memorandum of decision at the expense of Coleman Brothers on or before August 1, 2008. The court further orders that the defendants pay to the plaintiff his reasonable costs and attorneys fees incurred to obtain the foregoing order for inspection. If the parties cannot agree on the amount of reasonable costs and fees, the court will hold a hearing to permit the plaintiff to present evidence of the amount of his costs and fees on August 4, 2008 at 11:30 a.m.
The plaintiff has requested an order for an "accounting for any information contained in the requested documents, updated to the present, which have not been kept or have been lost." Accordingly, on or before September 1, 2008 the defendants shall provide the plaintiff with a sworn affidavit in which they 1) account for any information requested as set forth on pages one and two hereof if such information has not been provided to the plaintiff in some document for inspection, 2) explain when, where and how any information not produced was lost, and 3) for all information which the defendants never kept in any form, explain why they failed to do so.