Recently the Court of Appeals has addressed a director’s inspection rights, and shareholder inspection rights and the associated opportunity to recover attorney fees and other expenses incurred in securing the inspection of corporate records.
Following on the heels of the decision of Fowler v. Golden Pacific BanCorp, Inc. (2022) 80 Cal.App.5th 205, is the decision of Farnum v. Iris Biotechnologies, Inc. (2022) 86 Cal.App.5th 602. While both cases revolve around inspection rights Farnum v. Iris Biotechnologies tackles under what circumstances attorneys’ fees are recovered compelling a shareholder inspection demand.
The case of Farnum v. Iris Biotechnologies, Inc. is the second appellate case between the parties. The original source of the dispute was not so much shareholder inspection rights but instead the director and shareholder’s licensing of technology to the company and not receiving the shareholder’s fair share of corporate profits generated by the technology. The shareholder was awarded damages for not receiving his share of the profits, but the issue of whether he was entitled to a recovery of attorneys’ fees was remanded to the trial court.
After the trial court resolved the issue, once more an appeal resulted. At the trial court the shareholder moved for his attorney fees under Corporations code section 1604. This code section permits the recovery of attorneys’ fees and expenses incurred to enforce a shareholder’s inspection rights.
Specifically, the statute provides for the recovery “if the court finds the failure of the corporation to comply with a proper demand thereunder was without justification, the court may award an amount sufficient to reimburse the shareholder … for the reasonable expenses incurred by such holder, including attorneys’ fees, in connection with such action or proceeding.” Id. at 609-610. (Emphasis Added).
At issue were 31 document demands. 23 were found improper. 8 were permitted, but limited. 4 were limited to one year in 2014. 2 were allowed but subject to withholding attorney-client privileged documents because they were related to the underlying lawsuit. The final 2 appeared to be granted in full. Id. at 588-589. In other words, 2 of the 31 demands were complete wins.
The Court of Appeal then turned to the issue of whether the failure to produce records by the company was without justification. The Court also noted the fee rights permitted in the corporations code was not mandatory but discretionary. This is because the statute states – may rather than shall recover attorney fees.
Given the low rate of success on the shareholder inspection demands at issue, the Court of Appeals upheld the decision not to award fees.
This case illustrates the importance of both prevailing in full on an underlying lawsuit and then when seeking to recover for attorney fees on particular requests either tailor the requests prior to the lawsuit with an eye towards fee recovery or alternatively when making the request for fees upon the conclusion of the lawsuit the fees should be focused on those requests where the corporation withheld records without justification.
And if the corporation’s denial is based in good faith and grounded in the law then the request for fees is has a higher chance to fail.
Ultimately, if the shareholder secures a high degree of success in an underlying action and the inspection demands were related to those victories, then that will likely heavily favor the shareholder in any motion to recover fees under Corp. Code §1604.
Finally, the shareholder in this case was no longer a director. Reasonable demands for corporate records by directors who are shareholders are more likely to be successful, and therefore more likely to result in a recovery of attorneys’ fees and costs.
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