With All Due Respect, Inspection of Books and Records Is An Internal Affair

With All Due Respect, Inspection of Books and Records Is An Internal Affair

      In a recent decision from South Carolina, in my humble opinion, the court botched the question of whether or not the inspection of books and records in a corporation is an internal affair governed by the law of the jurisdiction of organization. Gault v. Thacher, No. 9:18-CV-03157-DCN, 2019 WL 651856 (D. S.C. Feb. 15, 2019).

      In this dispute, there was before the South Carolina District Court a Georgia corporation that was qualified to transact business in South Carolina. The plaintiff, presumably a citizen of South Carolina, sought to inspect the books and records of that Georgia corporation. So far, so good. He argued, however, that he should be able to inspect those books and records under the law of South Carolina, rather than the law of Georgia. While the court cited decisions from Florida and Colorado, as well as a rather dated Pennsylvania decision, in support of its decision, the court ordered that the inspection of the books and records of the Georgia corporation would be made in accordance with the South Carolina law.

      The rule set forth in this case should be rejected. If it is not universal it is near universal the qualification to transact business in a jurisdiction does not subject a foreign corporation to the application of the laws of that state with respect to internal affairs. There is no possible reading of “internal affairs” that does not encompass the right of a shareholder to inspect the corporation’s books and records. The Restatement (Second) of Conflicts, § 302, cmt. A(1954), references “shareholders’ rights to examine corporate records” as encompassed within “internal affairs.” 

      In Sostarich v. Zirmed.com, Inc., No. 03-CI-00498 (Jefferson Cir. Ct., Div. 8), Opinion and Order March 26, 2003, a Kentucky court ordered inspection, in accordance with the Kentucky Business Corporation Act, of the records of a Delaware corporation.  The court reasoned:

(“KRS § 271B.15-050(2) specifies that a foreign corporation with a valid certificate of authority shall have the same rights and privileges as a domestic corporation of like character and, except as otherwise provided in KRS Chapter 271B, shall be subject to the same duties, restrictions, penalties, and liabilities imposed on a domestic corporation of like character.  One of these duties would be to allow inspection of corporate records to an entitled shareholder.  While subsection (3) of KRS § 271B.15-050 prevents the state of Kentucky from regulating the organization or internal  affairs of a foreign corporation authorized to transact business in the state, the Court finds that inspection of corporate records would not qualify as regulating the organization or internal affairs of ZirMed.” (emphasis in original).

      In response, language was added to several acts to make express that the right of inspection of books, records, and documents of a foreign business entity will be determined by reference to the laws of the jurisdiction of organization of that foreign business entity.  See Ky. Rev. Stat. Ann. § 271B.15-050(3); § 275.380(1)(a); § 362.495; and § 362.2-901(1). A ruling like Gault v. Thacher cannot happen (again) in Kentucky.