When a minority shareholder in a corporation seeks financial and management records, the shareholder must make a statutory “books and records” request or rely on provisions in a shareholder agreement or corporate by-laws. A recent appellate court case upheld yet a third way for aggrieved shareholders to obtain corporate books and records. It is called a “bill of discovery.” This is a lawsuit purely designed to obtain information about a possible lawsuit. Its a lawsuit about a possible lawsuit.
In the case of Nowak v. Environmental Energy Services, Inc., the shareholder brought a petition against the company and majority shareholder for a bill of discovery. The plaintiff alleged probable cause to support claims for breach of fiduciary duty, an accounting, and shareholder oppression. In other words, the plaintiff claimed she might have a lawsuit and needed records to explore the lawsuit. The plaintiff sought seventeen different categories of records, claiming they were material and necessary for her to bring an action on her substantive claims. The court granted her petition as to eleven of the seventeen categories of documents.
This case was somewhat unique because at some point the plaintiff commenced the actual lawsuit. Therefore, the bill of discovery was no longer a lawsuit about a lawsuit. There was a pending lawsuit with the actual claims. The defendants argued that the plaintiff could pursue the records in the newly filed case. The court rejected this argument noted that under prior caselaw, a bill of discovery can co-exist with a separate action concerning the same subject matter. The plaintiff countered by arguing the discovery was no readily available in the other lawsuit. The court distinguished the rights to discovery in each type of case and noted there was a delicate balance the court needed to evaluate. Ultimately, the court gave the plaintiff rights to seek most of the records requested.
For shareholders, and management, this case offers an example of yet another method of obtaining access to records. When deciding whether to produce records, management has to take into consideration the scope of the request, and the potential that a shareholder will prevail in court on any of the available methods to obtain records and the legal fees required to defend each action. In this particular case, the shareholder obtained access to fairly broad categories of records. That may not be the case in every situation. On the shareholder side, careful consideration must be given to the scope of the request as it relates to the possible claims at issue. The broader the request, the more scrutiny the request will receive by a court.