Sunday, September 20, 2015

Common sense still applies, even to Maryland shareholder disputes.

It's been the law in Maryland since the 1800's that corporate shareholders have an absolute right to inspect the books and records of the company. It is set down in our statute books and is akin to a Bill of Rights for shareholders. But a request for inspection is often the first skirmish in conflict between shareholders and the governing board and its members. The request is not always an innocent search for information, but often is an attempt to harass or even to gain competitive advantage. And if not handled properly by both sides, this initial request can birth lengthy and costly litigation.
On August 28, 2015 Maryland's Court of Special Appeals gave voice to common sense when it slapped down an minority shareholder's request for unfettered access to corporate records where he also owned a stock in a direct competitor. The initial request for information was innocent enough-- the minority shareholder sought only the information and records described in the Maryland corporations statutes. The corporation, however, asked that the requesting shareholder sign a confidentiality agreement before certain information was released, and that is where the litigation grew out of control. The request was made because the requesting shareholder also owned a separate and competing business.
The trial court judge heard argument on the requesting shareholder's demand that access under the corporation statute must be unfettered, and not subject to any limitations. He took the hard stand that his status as a potential competitor was not enough to require his written promise of confidentiality, to which the trial judge replied:
My ruling is based on a reasonable interpretation of the statute. And that is I cannot let a stockholder go into a company just because they own more than 5 percent of the stock and take the confidential records and books to a competing company. Not gonna let it happen
The unhappy shareholder appealed and received a second dose of common sense when the panel wrote:
We agree with the trial court’s “exercise [of] sound discretion” in requiring that appellant sign a confidentiality agreement. ..... A corporation may not deny a stockholder the right to inspect the books of account... A corporation may, however, require the stockholder to sign a confidentiality agreement where the confidentiality agreement and its terms advance the purpose of “protect[ing] the corporation against disclosure and misuse of confidential documents and information by the stockholder.” ...Here, the confidentiality agreement advances that purpose, because the requesting stockholder is also the owner of a company that is in competition with the corporation.
A request for corporate books and records is a powerful tool for the minority shareholder, but Maryland's courts will not close one eye when the requesting party seeks only access to competitive information. Common sense can still apply, even in the hand-to-hand combat of daily business life.