Some attorneys believe that a shareholder seeking books and records from the corporate entity they own shares of is an effective use of time and resources. I’m not one of them.
Traditionally in a books and records action, a shareholder will argue that they are entitled under the law of the state where a corporate entity was incorporated to access the entity’s books and records. (In Pennsylvania, that’d be 15 Pa.C.S. § 1508 for corporations and § 8850 for LLCs). Often, they’re making a request because they’re investigating a potential breach of fiduciary duty claim.
But rarely do entities respond to books and records requests. And even when they do—surprise!—their responses are usually woefully inaccurate.
That’s why I generally find books and records actions to be monumental wastes of time. Why should shareholders waste precious time and money hiring an attorney to pursue a books and records request (which could include filing multiple motions in court to compel the production of those books and records) when they could spend that time and money pursuing the breach of fiduciary duty claim that probably prompted the books and records request in the first place?
After all, if a shareholder “wins” their books and records action, their prize—access to documents—is the same prize they’d receive during the discovery process in a breach of fiduciary duty lawsuit. In Pennsylvania, the availability of pre-complaint discovery pursuant to Pa.R.C.P. 4003.8 makes the case for the books and records action even less compelling. Filing a writ of summons and engaging in pre-complaint discovery has the added benefit of tolling the statute of limitations on the inevitable breach of fiduciary duty claims; making a books and records demand or filing an enforcement action does not.
That being said, there are some circumstances where requesting books and records could be necessary or helpful for a would-be shareholder-plaintiff. The most common example we see is when close personal or family ties exist between the plaintiff and potential defendants. Filing a lawsuit feels like crossing the Rubicon for many plaintiffs and some try to avoid it with the seemingly less aggressive books and records request. “Mom – I’m not accusing you of anything, really, I just want to see the Quickbooks file.”
This might have been the situation Brian Edenfield found himself in when he sought books and records from ECM Energy Services and AdTrak 360, two companies he was a minority shareholder of. Unfortunately for Edenfield, the Pa. Superior Court, in Edenfield v. ECM Energy Services, Inc., 300 A.3d 506 (2023), denied his requests.
The court’s bases for doing so—at the time he made his requests, he wasn’t a shareholder of ECM and AdTrak was no longer doing business in Pa.—show the importance of shareholder status and location in books and record actions in Pennsylvania. In light of Edenfield, current and former shareholders of Pa. and foreign corporate entities contemplating a books and records action should plan their legal strategies accordingly.
Pa. Superior Court says only shareholders get access to books and records, but not necessarily ones stored in the cloud
Edenfield v. ECM Energy Services is about as straightforward of a case as you’ll come across. Edenfield, claiming to be a minority shareholder of ECM and Adtrak, filed formal demands for their corporate books and records. Three months later, he filed a petition in court to compel the inspection of the companies’ corporate records because they either ignored his initial requests or insufficiently responded.
The trial court denied Edenfield’s petition regarding ECM’s books and records because he was not a shareholder at the time he served it with his formal demand.
The court did, however, grant Edenfield’s petition regarding AdTrak, but only to records located in Pennsylvania. But after an AdTrak representative in Pennsylvania retrieved cloud-based documents from QuickBooks for production to Edenfield, the trial court determined, under Pennsylvania law, a corporate entity’s electronic records stored in the cloud that weren’t physically located in Pennsylvania couldn’t be deemed to be located in the state, and thus couldn’t be compelled to be produced by a Pennsylvania court.
Edenfield appealed the trial court’s decision to the Pa. Superior Court—unsuccessfully.
First, the Pa. Superior Court agreed with the trial court that Edenfield couldn’t obtain ECM’s books and records because he wasn’t a shareholder of it when he made his request.
The relevant Pennsylvania statute, 15 Pa.C.S. § 1508, permits only “shareholders” to lodge books and records requests against corporate entities. Edenfield didn’t argue that he was a shareholder at the time he made his books and records request. Instead, he argued that section 1508’s language allows former shareholders to make such requests.
Though section 1508 doesn’t define “shareholder,” 15 Pa.C.S. § 1103 does. It defines a shareholder as a “record holder or record owner of shares of a corporation.” The Pa. Superior Court held that sections 1103 and 1508 refer only to current shareholders and say nothing about former shareholders. Thus, as a former ECM shareholder, Edenfield couldn’t obtain its books and records.
Second, the appellate court determined Edenfield couldn’t obtain AdTrak’s books and records because it was neither operating in nor storing records in Pennsylvania even though the relevant documents were stored in the cloud, and as Edenfield argued, there were Pennsylvania representatives of AdTrak who could access the documents while within the state.
By way of background, AdTrak was a Delaware LLC that previously had offices in Pennsylvania, but they closed over two years before Edenfield requested the company’s books and records. Pennsylvania courts typically won’t interfere with the internal affairs of a corporate entity registered in another state, but they don’t consider compelling such an entity to produce books and records located in Pennsylvania to constitute interference. Thus, if AdTrak had corporate books and records in Pennsylvania, Edenfield would likely be entitled to inspect them.
But because AdTrak wasn’t incorporated in the state, didn’t have a principal place of business in the state, and wasn’t registered to do business in the state, the Pa. Superior Court held it didn’t have jurisdiction to compel AdTrak to access the relevant records and allow Edenfield to inspect them. Even though the relevant records were located in the cloud via QuickBooks, according to the court they were out of reach for Edenfield because there was no sufficient link between AdTrak and Pennsylvania. The court noted that had it held otherwise, Pennsylvania courts could compel any corporate entity that uses cloud software or storage to produce records in Pennsylvania even when they had no connection to the state, which is not a principle supported by Pennsylvania law.
Shareholder, know thyself (and the corporate entity you’re seeking books and records from)
Edenfield v. ECM Energy Services is a straightforward case with a straightforward court ruling that provides notable lessons to shareholders of Pennsylvania corporate entities or shareholders of corporate entities that were or are doing business in Pennsylvania.
First, if you want to make a books and records demand, you need to be a shareholder at the time you make the claim. This is not, in my opinion, a surprise given the plain text of the statute but it is another reason to think carefully about divesting shares of a corporate entity. (Stay tuned for a future article on the pros and cons of divestiture and dissociation). Prospective plaintiffs should consider retaining at least one share to ensure they have access to the entity’s books and records.
Second, shareholders of corporate entities that aren’t incorporated in Pennsylvania, don’t have a principal place of business in the state, and aren’t registered to do business in the state will probably not be able to obtain or inspect those entities’ books and records pursuant to 15 Pa.C.S. § 1508 or § 8850 unless those books and records are located physically in the state. Even books and records that are seemingly within reach because they’re stored in the cloud will remain out of reach.
This limitation is another reason I favor the discovery rules over the books and records action. Pa.R.C.P. 4009.1 requires a party to produce documents in their “possession, custody or control.” In Edenfield, it appears that AdTrak had possession, custody and control of the cloud-based Quickbooks files as they could be retrieved from anywhere. Assuming the Court could exercise personal jurisdiction over AdTrak, it would have been required to produce the records in response to a plain ol’ request for production of documents. The location of the records, whether out of state or in the cloud, would have been irrelevant if AdTrak had control over them. By opting to use the books and records action rather than the discovery tools, Edenfield found himself wrangling with an interesting jurisdictional issue that I suspect he might have preferred to avoid.
