Appellate Victory in Arkansas Case of First Impression Regarding Shareholder Request to Inspect Corporate Records

December 17, 2017 | Client Results

In a case of first impression interpreting Arkansas Code Annotated §4-26-715, Jackson Walker partner Richard Griffin together with local counsel Gregory M. Hopkins of Hopkins Law Firm recently secured a victory for shareholders of Ashley Bancstock Company (ABC) from the Arkansas Court of Appeals affirming the right of the shareholders to inspect all corporate records as requested.

In November 2014, shareholders Paul Meredith, Richard Meredith, and John Posey demanded to inspect and copy records of ABC, its subsidiary, First National Bank of Crossett (FNBC), and its former subsidiary, First Community Bank of Crawford County (FCBCC), over a nine-year period during which ABC had reported significant losses and incurred substantial expenses which the shareholders believed were attributable to the acquisition, operation, and sale of FCBCC and significant loan write-offs by FNBC. ABC responded with a suit seeking declaratory relief regarding the nature and extent of the records the shareholders were entitled to inspect and copy under Arkansas Code Annotated §4-26-715. The circuit court held that the shareholders had a proper purpose for their demand, that they made the demand in good faith, and that they were qualified and entitled to inspect and make copies of all requested documents. The Arkansas Court of Appeals affirmed the circuit court’s judgment and resolved all additional issues presented on appeal in favor of the shareholders.

Interpreting Arkansas Code Annotated §4-26-715 for the first time, the appellate court held that the burden of proof fell to the shareholders to establish they had a proper purpose in requesting the records in order to be entitled to inspect and copy such records. ABC insisted the stockholders must include specific allegations of wrongdoing in order to establish the “proper purpose” required by the statute. The court disagreed, holding that shareholders need only have a good-faith belief in mismanagement to establish a proper purpose for inspection.

The court agreed with the shareholders on three additional claims: 1) that there is no implicit limit on the time-period for which records may be requested; 2) that the statute also requires the production of records for a corporation’s subsidiaries given they are assets of a corporation; and 3) that a corporation must provide records it possesses for a subsidiary, even if those records are from before the corporation acquired the subsidiary. Finally, looking at case law from several jurisdictions, the court agreed with the shareholders that a broad definition of the term “books and records of account” that can be requested for inspection was proper under the statute and would include liability-insurance policies. ABC argued that a proper purpose for inspection of liability-insurance policies could not be established in a declaratory judgment case that did not involve damages. The court disagreed, noting that the presence or absence of liability-insurance may be pertinent to issues of fiduciary duty and that such policies were not limited to production in matters in which a judgment must be satisfied. The appellate court likewise rejected ABCs several arguments in favor of reversal based on errors in the proceedings.

Richard Griffin commented:

Now that the court has affirmed our right to inspect these records we are able, at last, to review the actions of the directors, officers, and others to determine whether the losses, estimated to be in excess of $15 million, were a result of mismanagement or breach of legal duties that warrant legal action so as to recover lost assets on behalf of the shareholders.

Richard E. Griffin is a partner in our Houston office and a member of the Litigation practice group. He is admitted to practice before all courts, both state and federal, in Arkansas and Texas. As a fellow in the American College of Trial Lawyers, he has had the privilege of being lead counsel in major litigation in Texas, Arkansas, Oklahoma, and Louisiana. His trial experience includes commercial litigation, products, professional and environmental liability, industrial accidents, insurance, surety, aviation, truck and auto liability, and major energy-related litigation.

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Richard E. Griffin
Partner, Houston