Shareholders in an Illinois corporation have a statutory right to examine the corporation’s books and records.  See 805 ILCS 5/7.75.  Minority shareholder oppression claims frequently include allegations that the corporation has violated a shareholder’s right to examine the books and records, often with the added allegation that the books and records are being withheld to cover up wrongdoing by the controlling shareholders.  Such claims, however, must be based on factual allegations showing that the shareholder’s statutory right to examine the corporation’s books and records truly is being violated.  That is the lesson of the Illinois Appellate Court’s recent opinion in Elleby v. Forest Alarm Service, Inc., 2020 IL App (1st) 191597 (filed on March 6, 2020), which affirmed the dismissal of a minority shareholder’s claim under 805 ILCS 5/7.75.

Ruth Elleby was a minority shareholder in Forest Alarm Service, Inc. (FASI).  She became interested in selling her shares to the corporation or to her fellow shareholders.  In an effort to determine the fair value of her shares, Elleby’s attorney sent a series of letters to an attorney who represented her fellow shareholders. Those letters demanded such information as "client lists, profit and loss statements, balance sheets" and certain credit card statements of her fellow shareholders.  The other shareholders’ attorney responded, pointed out that he did not represent the corporation (only the other shareholders), and indicated that Elleby’s demands were better directed to the corporation.  Elleby then sent a letter to the corporation’s president and registered agent.  That letter included a "three-page attachment listing the records the plaintiff wished produced."  Elleby demanded the production of those documents by a date certain.

On the deadline specified in Elleby’s letter, the corporation’s accountant sent an email to Elleby attaching a balance sheet and a profit and loss statement for the corporation.  Over the next ten days, the corporation’s accountant and its president emailed Elleby an additional profit and loss statement, general journal transactions, another balance sheet, and various financial reports.

Dissatisfied, Elleby filed a complaint against the corporation and her fellow shareholders.  The complaint included a count for a violation of her right to examine the corporation’s books and records under 805 ILCS 5/7.75.  The circuit court dismissed that claim with respect to the individual defendants, and granted the corporation judgment on the pleadings as to that count.

On appeal, the Illinois Appellate Court recognized that "in order to state a claim, the plaintiff was required to allege that she (1) was a shareholder of FASI (2) who made a written demand upon FASI (3) stating with particularity the records she wished to examine and (4) the purpose therefor." 

The appellate court first rejected the defendants’ argument that Elleby’s claim failed because she requested production, not examination, of the records, explaining that "we do not believe that section 7.75(b) requires shareholders to say the magic word ‘examine’ in order to be entitled to a corporation’s books and record[s]," and of course "in order for a shareholder to examine a corporation[‘]s books and records, they must first be produced in some fashion."  Therefore, Elleby’s request for the ‘production’ of the books and records was sufficient.

But Elleby’s claim was deficient in almost every other imaginable way.  First, Elleby made only one proper request for the corporation’s books and records; her other requests had been addressed to an attorney for the other shareholders, not to the corporation.  Second, Elleby failed to allege that her request was denied.  The corporation actually did produce responsive documents on the deadline Elleby had specified in her demand letter, and it produced additional documents in the days that followed.  Thus, "the facts alleged show that the plaintiff’s sole request for FASI’s books and records directed to FASI was answered on the day she set as a deadline . . . and more documents were produced in the subsequent week."  There was no violation of her statutory rights.  The appellate court distinguished another case where, in stark contrast, a shareholder’s repeated requests to examine the corporate books and records were ignored for six months.

In short, while a shareholder’s right to examine the corporation’s books and records is statutorily protected and can be enforced in litigation, litigation to enforce that right is premature (at best) if the corporation is making substantial, prompt and good-faith efforts to comply with reasonable requests to examine the books and records.