Summary
In Farnum, supra, (Nov. 29, 2018, H042858) [nonpub. opn.], this court reversed the order denying the writ petition, holding that Farnum had a right to inspect "certain accounting and financial records."
Summary of this case from Farnum v. Iris Biotechs.Opinion
H042858
11-29-2018
DANIEL S. FARNUM, Plaintiff and Appellant, v. IRIS BIOTECHNOLOGIES, INC., Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Santa Clara County Super. Ct. No. CV280783)
Appellant Daniel S. Farnum appeals from an order denying his petition for a writ of mandate to compel respondent Iris Biotechnologies, Inc. (Iris) to allow him to inspect and copy its corporate records. Though Iris had provided Farnum with some audited financial statements, we conclude that Farnum was entitled to inspect and copy additional financial and accounting records and reverse.
I. Procedural and Factual Background
Iris is a life sciences company that is developing tests to predict the optimal treatment for various medical conditions. Iris was incorporated in California in February 1999. Since that time, Simon Chin has been the chairman of Iris's three-member board of directors as well as its president, secretary, chief executive officer (CEO), chief financial officer (CFO), and majority shareholder. Chin's sister, Grace Osborne, has also been a member of the board of directors. Farnum was a member of the board of directors from March 2003 until November 2014 and owns approximately 8 percent of Iris's stock.
Iris became a publicly traded corporation in December 2007.
In August 2014, Farnum filed an application for an order directing Iris to hold a shareholders' meeting. The superior court denied the application for failure of proof.
In September 2014, Farnum requested inspection of corporate minutes, documents relating to the acquisition of Iris's subsidiary, and monthly cash flow statements following the acquisition.
In October 2014, Farnum, as a member of the board of directors and a shareholder, filed a petition for writ of mandate in which he sought to inspect and copy all corporate records. He also filed a motion to postpone Iris's shareholders' meeting, which was scheduled for November 14, 2014, because Iris had failed to comply with his request to inspect and copy the records.
On November 13, 2014, the superior court denied the motion to postpone the scheduled shareholders' meeting. At the shareholders' meeting which was held the following day, Farnum was replaced by Douglas Hendren on Iris's board of directors.
In December 2014, Iris filed opposition to the writ petition. Iris's counsel submitted a declaration in which he stated that he had responded to Farnum's inspection and copying request by providing him with copies of various accounting records on November 19, 2014. These records consisted of: Iris's 2012 Form 10-K, 2013 Form 10-Q1, 2013 Form 10-Q2, 2013 Form 10-Q3, 2013 Form 10-K, 2014 Form 10-Q1, 2014 Form 10-Q2, and 2014 Form 10-Q3, which were available on Iris's Web site; the minutes of Iris's board of directors meetings from April 3, 2014 to November 4, 2014; and the minutes of Iris's shareholders' meeting on November 14, 2014.
The 2014 Form 10-Q1, which covered the period ending on March 31, 2014, is the only one of these documents included in the record on appeal.
The hearing on the petition for writ of mandate was held in January 2015. The superior court denied Farnum's petition pursuant to Corporations Code section 1602, because Farnum was no longer a member of Iris's board of directors. The superior court also denied the petition pursuant to section 1601 without prejudice. The order stated that the request was "overbroad and lack[ed] a statement of purpose reasonably related to his interests as a shareholder."
All further statutory references are to the Corporations Code.
A former director does not have standing to inspect corporate records, even when he or she asserted inspection rights before his or her term expired. (Wolf v. CDS Devco (2010) 185 Cal.App.4th 903, 917-919.)
A few weeks later, Farnum served a set of 31 inspection requests on Iris. Farnum sought to inspect the following documents from Iris and its subsidiary, Iris Wellness Labs, Inc. (Wellness Labs): minutes of the proceedings of the shareholders and board of directors (Request Nos. 1, 2, 4); records of corporate formation, structure, and acquisitions (Request Nos. 5, 14, 26, 27); records of patents (Request Nos. 13, 15, 31); records regarding manufacturing systems (Request Nos. 16, 24); records of production facilities (Request Nos. 18, 19); records of launching and operating a "breast cancer chip" (Request No. 20); records of Iris's evaluation of whether to proceed with the initial public stock offering (Request No. 22); communications with its attorneys and records authorizing corporate litigation (Request Nos. 10, 11, 25, 29, 30, 31); accounting records of the costs and fees of pending litigation (Request Nos. 8, 9); records of collaboration with Good Samaritan Hospital (Request No. 12); and various financial records between 2007 and 2014 (Request Nos. 3, 6, 7, 17, 21, 23, 28). Farnum stated his purpose in requesting each set of documents.
On February 13, 2015, Iris's counsel responded to the request. He stated that since Iris and its subsidiary did "not maintain Shareholder and Board Minutes," they could not be provided. He also noted that Iris had already provided Farnum with audited financial statements from 2012 to the present. He further stated that the remaining requests were not permitted under California law and Iris would not produce these documents.
In addition to the 2014 Form 10-Q1, the 2014 Form 10-K for the period ending on December 31, 2014 is included in the record on appeal. The 2014 Form 10-K indicates that it is an audited financial statement. However, the declaration by Iris's counsel does not state that all of the financial statements provided to Farnum had been audited. The appellant has the burden of providing an adequate record on appeal. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58 (Fladeboe).) Since Farnum has not provided all of the financial statements and has not claimed that the statements were not audited, we will assume that they have been audited.
About a week later, Iris's counsel sent an e-mail in which he clarified information in his previous letter to Farnum. He stated that Iris did not hold annual shareholders' meetings from 2007 until November 14, 2014 and attached the minutes from the meeting on November 14, 2014. He also noted that the minutes from the September 29, 2014 meeting of the board of directors had previously been provided to Farnum.
In May 2015, Farnum filed a second petition for writ of mandate in which he requested judicial notice of prior pleadings and sought to compel inspection and copying of corporate records. The petition summarized Farnum's requests to inspect the records and Iris's responses. It also stated the reasons for Farnum's requests: the records were "necessary to analyze the condition of [Iris] in relation to the value of its stock as a stockholder/owner of the company; to evaluate [his] position as a stockholder in purchasing and selling of [Iris's] stock; to evaluate and assess management's performance; to evaluate and assess the basis for management's continuing representations to [him] as a shareholder, many representations that have been made for well over a decade, along with the accuracy of representations; as well as assess management, majority stockholder, president, CEO/CFO, chairman of the board, and secretary, Chin's corporate contracts, and corporate engagements."
Farnum requested judicial notice of the file in case No. 114CV269908 (application for an order directing Iris to hold an annual shareholder meeting) and the file in case No. 114CV271682 (writ petition as director and shareholder and motion to postpone shareholder meeting).
Following a hearing in August 2015, the superior court granted the request for judicial notice. The superior court found that Iris was not required to produce additional documents for inspection and denied the petition. Farnum's request for an award of attorney's fees and costs was also denied.
II. Discussion
A. Inspection of Corporate Records by a Shareholder
Farnum contends that the trial court erred when it denied his petition for writ of mandate. He asserts that he was entitled to inspect a wide range of corporate management and financial records under the common law and section 1601. Iris responds that none of the authorities cited by Farnum define the scope of a shareholder's inspection right under the common law. Iris also argues that it complied with section 1601 by providing audited financial statements from 2012 through 2014.
"In reviewing the trial court's ruling on a writ of mandate, the appellate court is ordinarily confined to an inquiry as to whether the findings and judgment of the trial court are supported by substantial, credible and competent evidence. This limitation, however, does not apply to resolution of questions of law where the facts are undisputed. In such cases, as in other instances involving matters of law, the appellate court is not bound by the trial court's decision, but may make its own determination. [Citation.]" (Rodriguez v. Solis (1991) 1 Cal.App.4th 495, 502.)
We first consider which records a corporation must make available for shareholder inspection under the common law. Relying on Johnson v. Langdon (1902) 135 Cal. 624 (Johnson), Guthrie v. Harkness (1905) 199 U.S. 148 (Guthrie), Hobbs v. Tom Reed Gold Mining Co. (1913) 164 Cal. 497 (Hobbs), Mooney v. Bartenders Union Local No. 284 (1957) 48 Cal.2d 841 (Mooney), and Most v. First Nat. Bank of San Diego (1966) 246 Cal.App.2d 425, 427, 428 (Most), Farnum contends that a shareholder has a common law right to inspect all corporate records. We disagree.
In Johnson, supra, 135 Cal. 624, the California Supreme Court held that a shareholder was entitled under former section 377 of the Civil Code to inspect "the books, records, and journals" of the corporation without stating the purpose of the inspection. (Johnson, at pp. 624-626.) The court also noted that "[a]t common law the stockholders of a corporation had the right to examine, at reasonable times, the records and books of the corporation, [citation] . . . , but it was necessary for the petitioner to show some specific interest at stake rendering the inspection necessary, or some beneficial purpose for which the examination was desired. [Citation.]" (Id. at p. 626, fn. omitted.) Since the Johnson court did not consider which records were subject to shareholder inspection under the common law, this case does not support Farnum's position.
The Johnson court also referred to the constitutional right to inspect corporate records. (Johnson, supra, 135 Cal. 624, 625.) Former article 12, section 14 of the California Constitution provided in relevant part: "Every corporation other than religious, educational, or benevolent, organized or doing business in this state, shall have and maintain an office or place in this state for the transaction of its business, where transfers of stock shall be made, and in which shall be kept, for inspection by every person having an interest therein, . . . books in which shall be recorded the amount of capital stock subscribed, and by whom; the names of the owners of its stock, and the amounts owned by them respectively; the amount of stock paid in, and by whom; the transfers of stock; the amount of its assets and liabilities, and the names and place of residence of its officers." This provision was adopted on May 7, 1879 and repealed on November 4, 1930. Accordingly, Farnum's claim that a shareholder has a constitutional right to inspect corporate records is without merit.
In Guthrie, supra, 199 U.S. 148, the judgment required a bank in Utah to allow the shareholder to inspect its books. (Id. at p. 153.) In affirming the judgment, the United States Supreme Court stated: "There can be no question that the decisive weight of American authority recognizes the common law right of the shareholder, for proper purposes and under reasonable regulations as to place and time, to inspect the books of the corporation of which he is a member." (Id. at pp. 153, 159.) The Guthrie court did not discuss the scope of the shareholder's inspection right under the common law.
In Hobbs, a shareholder sought to inspect an Arizona gold mine operated by a corporation with its principal place of business in California. (Hobbs, supra, 164 Cal. at p. 500.) The California Supreme Court stated: "It is settled that at common law a stockholder has the right to inspect the books of the corporation. [Citations.] The reasoning on which this rule is founded is that a stockholder has an interest in the assets and business of the corporation and that such inspection may be necessary or proper for the protection of his interest or for his information as to the condition of the corporation and the value of his interests therein." (Id. at p. 501.) The Hobbs court held that this right extended to the corporate property. (Id. at pp. 502-503.) The court reasoned: "It would . . . be a strange rule which would allow the stockholder to examine the books of a corporation to ascertain its condition and deny him an inspection of the property (or other records) to verify the statements contained in the books." (Id. at p. 502.)
The Hobbs court further noted that former section 589 of the Civil Code provided that a shareholder was entitled to inspect a mine. (Hobbs, supra, 164 Cal. at p. 502.) But the court assumed that this statute did not apply to inspection of a mine in Arizona and that there was a similar statute in Arizona. (Id. at pp. 502-503.) The court then concluded: "If it should turn out that Arizona has no such law and that section 589 should be held inapplicable, substantially the same right and duty would exist under the common law, provided the inspection was desired for a legitimate purpose and good cause was shown therefor." (Hobbs, at p. 503.) Hobbs is distinguishable from the present case, since Farnum has not raised an issue as to any right to inspect corporate property. Moreover, the Hobbs court did not consider the type of books that must be made available for inspection.
In Mooney, supra, 48 Cal.2d 841, a union member sought to inspect "an itemized accounting of all income and expenses of the union" and "all financial records" for a period of seven and a half years. (Id. at pp. 842-843.) The Mooney court concluded that a member of an unincorporated association had a right to inspect these records. (Id. at p. 843.) In reaching this conclusion, the court reasoned: "At common law a stockholder had a right to inspect the books and records of the corporation at a proper time and place and for a proper purpose. [Citations.] It is provided by statute that all corporate records in this state shall be open to inspection upon the written demand of any shareholder at any reasonable time for a purpose reasonably related to his interest as such. (Corp. Code, § 3003.) The courts will also act in a proper case for the purpose of protecting the property rights of a member of an unincorporated association and will enforce, so far as applicable, the rules applied to incorporated bodies of the same character. [Citations.] It would seem clear that a member of an unincorporated labor union is entitled to inspect its financial records." (Mooney, at p. 843.)
Relying on Goldstein v. Lees (1975) 46 Cal.App.3d 614 (Goldstein), Iris argues that Mooney does not support Farnum's position that he was entitled to inspect all corporate records. In Goldstein, the Court of Appeal stated: "Mooney v. Bartenders Union Local No. 284, 48 Cal.2d 841, 843 contains the statement that 'It is provided by statute that all corporate records in this state shall be open to inspection upon the written demand of any shareholder . . . .' (Italics added.) We do not take this to mean that a shareholder has a right to inspect corporate documents of every kind. Such a reading would contradict the language of [former] section 3003 (set forth supra). Rather, we take the sentence to mean that the categories of documents described in [former] section 3003 comprise the formal records of the corporation and that the shareholder (assuming the other requisites of the statute are met) is entitled to inspect all of the formal records of the corporation." (Goldstein, supra, at p. 621, fn. 6.) The Goldstein court did not discuss the common law.
More recently, the California Supreme Court considered the scope of a shareholder's spouse's right to discover corporate records in a marital dissolution proceeding. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 708 (Schnabel). In resolving this issue, the court acknowledged that a shareholder has a common law right to inspect corporate records. (Id. at pp. 715-716.) It also referred to the holding in Mooney, supra, 48 Cal.2d 841, but noted that it had not defined the term " 'financial records'. . . ." (Schnabel, at p. 716.) The Schnabel court further stated that it "need not precisely define the shareholder right of inspection in all situations." (Id. at p. 717.)
These authorities recognize that a shareholder has a common law right of inspection of corporate records for a "specific interest at stake" or "beneficial purpose . . . ." (See Johnson, supra, 135 Cal. at p. 626.) None of the cases relied upon by Farnum support his argument that a shareholder is entitled to inspect all corporate records. In dicta in Mooney and Schnabel, our Supreme Court recognized that a shareholder is entitled to inspect a corporation's financial records under the common law. (See Mooney, supra, 48 Cal.2d at p. 843; Schnabel, supra, 5 Cal.4th at pp. 715-716.) This court may defer to dicta in a California Supreme Court decision. (People v. Godwin (1996) 50 Cal.App.4th 1562, 1571.) We find this dicta persuasive, because a shareholder's inspection of financial records serves the purpose of protecting his or her interest in determining the financial condition of the corporation. Thus, here, Farnum was entitled under the common law to inspect corporate financial records.
Farnum's reliance on Most, supra, 246 Cal.App.2d 425, is misplaced. That case involved a shareholder's right to inspect the shareholders' list. (Id. at p. 426.) The case before us does not involve this issue.
We next consider a shareholder's statutory right to inspect and copy corporate records.
When we interpret a statute, our task is to " 'ascertain the intent of the lawmakers so as to effectuate the purpose of the statute.' [Citation.] '[W]e begin by looking to the statutory language. [Citation.] We must give "the language its usual, ordinary import and accord[ ] significance, if possible, to every word, phrase and sentence in pursuance of the legislative purpose. A construction making some words surplusage is to be avoided. The words of the statute must be construed in context, keeping in mind the statutory purpose, and statutes or statutory sections relating to the same subject must be harmonized, both internally and with each other, to the extent possible." [Citation.]' " (Carmack v. Reynolds (2017) 2 Cal.5th 844, 849-850.)
Moreover, " '[a]s a general rule, "[u]nless expressly provided, statutes should not be interpreted to alter the common law, and should be construed to avoid conflict with common law rules." ' [Citation.] 'Accordingly, "[t]here is a presumption that a statute does not, by implication, repeal the common law. [Citation.] Repeal by implication is recognized only where there is no rational basis for harmonizing two potentially conflicting laws." ' [Citation.]" (Verdugo v. Target Corp. (2014) 59 Cal.4th 312, 326 (Verdugo).)
Section 1601 provides in relevant part that "[t]he accounting books and records . . . shall be open to inspection upon the written demand on the corporation of any shareholder . . . at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder . . . . The right of inspection created by this subdivision shall extend to the records of each subsidiary of a corporation subject to this subdivision." (§ 1601, subd. (a), italics added.) This right also includes the right to copy the records. (§ 1601, subd. (b).) At issue here is which records a shareholder has a right to inspect, that is, whether "accounting" modifies both "books and records" or only "books." If "accounting" modifies only "books," "records" could be interpreted as referring to all corporate records. Since the statute is reasonably susceptible of either interpretation, we consider other indicia of the Legislature's intent.
Since the parties agree that Iris was required to provide "the minutes of proceedings of the shareholders and the board and committees of the board of a corporation" under section 1601, subdivision (a), we do not discuss this portion of the statute. We note, however, that Iris provided the minutes of only one shareholders' meeting and two board of directors' meetings which were held after Farnum's inspection request, because it had not previously maintained such records. Iris's subsidiary did not hold board of directors' meetings.
When "the Legislature has chosen to include a phrase in one provision of the statutory scheme, but to omit it in another provision, we presume that the Legislature did not intend the language omitted from the first to be read into the second. (Cornette v. Department of Transportation (2001) 26 Cal.4th 63, 73 . . . ['When one part of a statute contains a term or provision, the omission of that term or provision from another part of the statute indicates the Legislature intended to convey a different meaning.']." (Walt Disney Parks and Resorts U.S., Inc. v. Superior Court (2018) 21 Cal.App.5th 872, 879.)
Section 1602, which was enacted at the same time as section 1601, defines the scope of a corporate director's right to inspect and copy corporate records and is thus relevant to our interpretation of section 1601. Section 1602 provides that a director "shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation . . . ." (Italics added.) In contrast to section 1602, section 1601 authorizes shareholder inspection of only "accounting books and records . . . ." The failure to use the phrase "all books, records and documents of every kind" in section 1601 is a strong indication that the Legislature intended to restrict shareholder inspection to accounting records.
Prior to the effective date of section 1601 in 1977, former section 3003 provided for shareholder inspection of "the books of account . . . for a purpose reasonably related to his interest as a shareholder . . . ." (Stats. 1947, ch. 1038, § 3003.) When Assembly Bill No. 376 was introduced, section 1601, subdivision (a) included the same language. However, in the first amended version of the bill, section 1601, subdivision (a) stated that shareholders were entitled to inspect "[t]he accounting books and records . . . ." (§ 1601, subd. (a).) One commentator explained that "[t]he change from 'books of account' [(to accounting books and records)] was made in response to a recommendation by the Los Angeles County Bar Association: [¶] We also recommend that some consideration by given to changing the description of the accounting records that may be inspected by a shareholder. [(Italics added.)] We are advised that the phrase 'books of account,' which appears in this Section, does not have a generally accepted definition in either legal or accounting circles. Perhaps the phrase 'accounting books and records' should be substituted for 'books of account' in line 5 of page 110 of the Bill. [¶] Memorandum to Members of the Executive Committee of the Section on Business and Corporation Law of the Los Angeles County Bar Association from Alan J. Barton, Charles E. Stimson, Jr., and Richard E. Sobelle (Jan. 7, 1975)." (See Keith Paul Bishop (June 1, 2016) The Scope of Stockholder Inspection in California and Delaware, National Law Rev., https://www.natlawreview.com/article/scope-stockholder-inspection-california-and-delaware.) In making this recommendation, the bar association stated its understanding that the shareholder's right of inspection extended only to accounting records. The subsequent inclusion of the suggested language in section 1601 is some indication that the Legislature agreed with this statutory interpretation.
Former section 3003 stated in relevant part: "The share register or duplicate share register, the books of account, and minutes or proceedings of the shareholders and the board of directors and of the executive committees of the directors of every domestic corporation and of foreign corporations keeping such records in this State shall be open to inspection upon the written demand of any shareholder . . . at any reasonable time, for a purpose reasonably related to his interest as a shareholder . . . , and shall be exhibited at any time when required by the demand at any shareholders' meeting of 10 percent of the shares represented at the meeting."
Professor Harold Marsh, Jr., noted the limited scope of section 1601 in his treatise on California corporate law: "It is clear from this provision that the Legislature did not intend to permit a shareholder to inspect, for example, the contract files or property files of the corporation or any files other than the accounting records." (Marsh, et al., 2 Marsh's California Corporation Law (4th ed. 2017) § 15.09[B].) Professor Marsh was the principal draftsman of the revision of the Corporations Code (Preface to the First Edition of Marsh's California Corporation Law (2017-1 Supp.) xlv-xlvi). Thus, his view of the scope of section 1601 is entitled to deference. (See Reiner v. Washington Plate Glass Co. (D.C. Cir. 1983) 711 F.2d 414, 417, fn. 8; Kamen v. Lindly (2001) 94 Cal.App.4th 197, 203, fn. 2.)
Other commentators have concluded that shareholders' statutory inspection right extends "only to the 'accounting' records and shareholder and director minutes of the corporation or any subsidiary. There is no statutory right to inspect other corporate records or physical property. [See Corp. Code, § 1601(a); also see Bezirdijan v. O'Reilly (2010) 183 Cal.App.4th 316, 328 . . . .]" (Friedman., Cal. Practice Guide: Corporations (The Rutter Group 2018) § 6:508.)
Though not presented with the issue before us, the court in Thomas v. Gordon (2000) 85 Cal.App.4th 113 (Thomas) stated: "Even a shareholder has only a limited right to access to corporate financial records. Shareholder inspection of accounting books and records or corporate minutes is available only during usual business hours and after a written demand has been made. (Corp. Code, § 1601.) 'Although shareholders have some rights to corporate information which are not enjoyed by the general public, "shareholder status does not in and of itself entitle an individual to unfettered access to corporate confidences and secrets." [Citation.]' [Citation.]" (Thomas, at p. 122.)
As previously stated, a shareholder has the right to inspect financial records, not all records, under the common law. There is no indication that the Legislature intended to alter the common law when it enacted section 1601. Thus, an interpretation of section 1601 authorizing shareholder inspection of accounting records, not all records, avoids a conflict with the common law. (Verdugo, supra, 59 Cal.4th at p. 326.)
Farnum argues, however, that Bezirdjian v. O'Reilly (2010) 183 Cal.App.4th 316 (Bezirdjian) supports his interpretation of section 1601. Bezirdjian involved a shareholder derivative suit against various members of the corporation's board of directors for, among other things, breach of fiduciary duty in connection with illicit payments for Iraqi oil. (Bezirdjian, at p. 319.) The trial court granted the corporation's motion for judgment on the pleadings. (Id. at p. 320.) The Court of Appeal affirmed the judgment after it concluded that the plaintiff had failed to allege facts to rebut the presumption created by the business judgment rule and thus he could not prevail. (Id. at pp. 325, 328.) The Bezirdjian court also rejected the plaintiff's argument that he was entitled under Delaware law and section 1601 to discovery of "the Committee's report and the materials that the Committee relied on in refusing his demand" to commence legal action. (Bezirdjian, at pp. 326, 328.) The court held that section 1601 did not authorize discovery when there was an ongoing lawsuit. (Bezirdjian, at p. 328.) It also stated that the plaintiff never attempted to access the records under section 1601 to assemble the facts to support his case. But the Bezirdjian court did not hold that section 1601 entitled the plaintiff to inspect any records other than the " 'accounting books and records . . . .' " (Bezirdjian, at p. 328.)
We conclude that Farnum was entitled under the common law and section 1601 to inspect and copy Iris's financial and accounting records. Financial records are those that include the "pecuniary affairs or resources of a . . . company." (Webster's 3d New Internat. Dict. (1993) p. 851.) "Accounting" is defined as "the system of classifying, recording, and summarizing, business and financial transactions in books of account and analyzing, verifying, and reporting the results." (Id. at p. 13.)
Under the common law and section 1601, Farnum also had the burden to establish that he sought inspection of these records for a "specific interest at stake" or "beneficial purpose" (see Johnson, supra, 135 Cal. at p. 626) or one "reasonably related to [his] interests as a shareholder . . . ." (§ 1601.) A shareholder's purpose in seeking to determine the value of the stock or the condition of the corporation would meet these standards. (See Schnabel, supra, 5 Cal.4th at pp. 715-716.)
Here, Farnum sought inspection of several categories of corporate records that were neither financial nor accounting records. These included: corporate formation documents of Wellness Labs (Request No. 5); records authorizing litigation in federal and state court (Request Nos. 10, 11); records of Iris's collaboration with Good Samaritan Hospital (Request No. 12); records of Iris's transfer of its patents to Wellness Labs (Request No. 13); records of the evaluation process in the formation of Wellness Labs (Request No. 14); records relating to all corporate patents (Request No. 15); records regarding manufacturing systems as to medical products (Request No. 16); records of Iris's physical production facilities and those of Wellness Labs (Request Nos. 18, 19); records of launching and operating a breast cancer chip (Request No. 20); records of Iris's evaluations as to whether to proceed with an initial public stock offering (Request No. 22); records of Iris's "manufacturing system of breast cancer chip, colon cancer chip, comprehensive chip, neuro chip, cardio chip, and metabolic chip, since January 2010" (Request No. 24); records of any litigation (Request No. 25); records of Iris and Wellness Labs regarding the acquisition of Aeron Biotechnology, Inc. in 2014 (Request Nos. 26, 27); and "[w]ritings" and "information" exchanged between Chin and three attorneys, who handled Iris's patent and corporate matters (Request Nos. 29, 30, 31). Since none of these records could reasonably be characterized as financial or accounting records, Farnum had no right as a shareholder to inspect and copy these records.
According to Chin's declaration, Iris has never acquired another company.
Farnum also sought inspection of certain financial and accounting records. Iris claims that Farnum failed to show a proper purpose for the inspection, since it is "a public company, its shares are publicly traded, its value is publicly known and not in dispute." However, Farnum sought record inspection not only to determine the value of his shares, but also to determine Iris's financial condition, to evaluate management's performance, and to assess the accuracy of management's representations to him.
Iris also asserts that " '[c]ourts may be reluctant to compel shareholder inspection of corporate accounting records if the corporation has recently furnished audited financial statements. Some showing would probably have to be made to suggest that the audited statements were erroneous or incomplete.' " (Friedman, Cal. Practice Guide: Corporations, supra, § 6:514; see Schnabel, supra, 5 Cal.4th pp. 711 [accountant's declaration stated reasons requested information was necessary to verify information that had previously been provided].) Thus, Iris contends that since Farnum made no such showing, it was required to provide Farnum with only the audited financial statements from 2012 through 2014.
As Farnum points out, however, Iris did not follow generally accepted accounting principles. The 2014 Form 10-K discusses Iris's internal control of financial reporting: "Our management is responsible for establishing and maintaining adequate internal control over financial reporting. . . . Based upon this assessment, our management concluded that, as of December 31, 2013, the internal controls over financial reporting were not effective. . . . Specifically, certain key financial accounting and reporting personnel had an expansive scope of duties that allowed for the creation, review, approval and processing of financial data without independent review and authorization for preparation of schedules and resulting financial statements and disclosures. We did not maintain a sufficient depth of personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of Generally Accepted Accounting Principles commensurate with financial reporting requirements. . . . Accordingly, management has determined that this control deficiency constitutes a material weakness. This material weakness could result in material misstatements of significant accounts and disclosures that would result in a material misstatement to our interim or annual financial statements would not be prevented or detected. In addition, due to limited staffing, the Company is not always able to detect minor errors or omissions in reporting." Thus, Iris recognized that its audited statement for 2014 was incomplete.
As previously noted, Farnum failed to include the 2012 Form 10-K and 2013 Form 10-K in the record on appeal. Since he has not met his burden of providing an adequate record on appeal, this court cannot presume that these audited statements were incomplete. (Fladeboe, supra, 150 Cal.App.4th at p. 58.)
In Request Nos. 3 and 7, Farnum sought the inspection of the accounting records regarding the costs and professional fees incurred by Iris in creating Wellness Labs as well as the assets and liabilities of Wellness Labs. The stated purpose was to determine management performance and the value of shares. Wellness Labs was formed on April 9, 2014. The 2014 Form 10-K states that Wellness Labs had no significant assets or liabilities since its formation. It further states: "The consolidated financial statements include the accounts of [Iris] and [Wellness Labs]. All significant intercompany balances and transactions have been eliminated in consolidation." The current assets and liabilities of both Iris and Wellness Labs and the accounting fees are also included in the 2014 Form 10-K. Given that the 2014 Form 10-K was incomplete, however, Farnum was entitled to inspect these records to determine the costs, assets, and liabilities associated with Wellness Labs. This determination would have allowed Farnum to evaluate management's performance in forming the subsidiary and the effect on the value of his shares.
In Request No. 6, Farnum sought the inspection of the accounting records of "all benefits paid to . . . Chin since December 2007." Farnum stated the purposes in general terms: "[p]ayment structuring, what benefits have been received, in comparison to corporate SEC filings, stock dilution, all board actions, as well as corporate management being in conformance with corporation legal requirements. All necessary as to corporate management, corporate condition, and [e]ffect on shareholder values." Here, Chin was chairman of the board of directors, president, secretary, CEO, CFO, and majority shareholder of Iris. Given Chin's almost complete control of Iris, Farnum's purpose in seeking the amount of benefits paid to Chin was reasonably related to his interest as a shareholder. Since the audited statements provided to Farnum did not include the period between December 2007 and December 2011, he was entitled to inspect these records as to the benefits paid to Chin. He was also entitled to inspect the accounting records for 2014 based on Iris's acknowledgement that its 2014 Form 10-K was incomplete. However, Farnum was not entitled to inspect records for the period from 2012 to 2013, since he has made no showing that these records of benefits paid to Chin were erroneous or incomplete.
In Request Nos. 8 and 9, Farnum sought the accounting records of costs and fees in two cases: Iris Biotechnologies, Inc. v. Heller Ehrmann LLP, Ninth Circuit case No. 13-16827, and MacDonald Fernandez LLP v. Iris Biotechnologies, Inc., Santa Clara Superior Court case No. 1-14-CV-261635. The first case was initiated in 2012 and the second in 2014. "[T]he contents of an invoice [for legal services] are privileged only if they either communicate information for the purpose of legal consultation or risk exposing information that was communicated for such a purpose. This latter category includes any invoice that reflects work in active and ongoing litigation." (Los Angeles County Bd. of Supervisors v. Superior Court (2016) 2 Cal.5th 282, 300.) Thus, Farnum had a right to inspect the records regarding the costs and fees in these two cases provided they did not contain privileged communication between attorney and client.
In Request No. 17, Farnum sought "[r]ecords of sales utilized by [Iris] to capitalize on the market for [Iris's] products since January 2010." The stated purpose was "[t]he establishment of sales of products, are a foundation to value in market, condition of corporation, and shareholder value." The 2014 Form 10-K states that Iris "currently [has] no products ready for commercialization, [has] not generated any revenue from operations and expect[s] to incur substantial net losses for the foreseeable future to further develop and commercialize [its] technology." It also states that Iris had not generated any revenues to date and that it intended "to launch [its] nano-biochip products in less than a year." Farnum did not make any showing that Iris had sold any products since January 2010. Thus, this request was properly denied.
In Request No. 21, Farnum sought records of corporate royalties paid since January 2010. He stated the purposes of the inspection: "Payments establish foundation as to stockholder value, to compare to corporate representations, and shareholder value equities." The audited statements did not include the period between January 2010 and December 2011. Accordingly, Farnum was entitled to inspect these records to determine the amount, if any, of royalties paid during this period. He was also entitled to inspect the records of any royalties paid in 2014, because the financial statement for this period was incomplete. As to the period from 2012 to 2013, Farnum made no showing that the information provided was erroneous or incomplete and thus he had no right to inspect these records.
In Request No. 23, Farnum sought the cash flow statements from January 2010 to the present. The stated purposes were to "[s]how viability of creating a subsidiary, corporate management, shareholder equity, condition of operation, in relationship to corporate representations and requirements, and shareholder value." These purposes were reasonably related to his interest as a shareholder. The audited statements provided to Farnum did not include the period between December 2007 and December 2011, and thus he was entitled to inspect these records. Since the 2014 Form 10-K was incomplete, Farnum was entitled to inspect the cash flow statements for 2014. But having failed to show that the audited statements for 2012 and 2013 were erroneous or incomplete, Farnum was not entitled to inspect these records for this period.
In Request No. 28, Farnum sought the "[c]orporate accounting records showing each individual, and/or entity, monetary compensation and other benefits received, for the following years: 2012, 2013, and 2014." Farnum's stated purposes were to "[e]valuate corporate condition, asset expenditures, equity and shareholders values. Corporate procedures followed compared to requirements as well as corporate representation in public documents." Farnum's purpose in seeking the amount of compensation and benefits received by each individual and/or entity to determine the condition of the corporation was reasonably related to his interest as a shareholder. Since Iris acknowledged that its 2014 Form 10-K was incomplete, Farnum was entitled to inspect these accounting records for 2014. However, Farnum has not shown that the audited statements for 2012 and 2013 were erroneous or incomplete, and thus he was not entitled to inspect these records.
Iris reported in its 2014 Form 10-K that it had seven full-time and part-time employees and six full-time and part-time consultants. --------
In sum, we conclude that Farnum had a right to inspect certain accounting and financial records. Thus, the superior court erred when it denied his petition for writ of mandate.
B. Attorney's Fees
Farnum also contends that he is entitled to his expenses, including attorney's fees, in seeking inspection of Iris's records.
Section 1604 provides: "In any action or proceeding under Section 1600 or Section 1601, if the court finds the failure of the corporation to comply with a proper demand thereunder was without justification, the court may award an amount sufficient to reimburse the shareholder . . . for the reasonable expenses incurred by such holder, including attorneys' fees, in connection with such action or proceeding."
Here, on remand, the superior court may award an amount to reimburse Farnum for his expenses incurred before the superior court and on appeal. (Valtz v. Penta Investment Corp. (1983) 139 Cal.App.3d 803, 810.)
III. Disposition
The order is reversed. Farnum shall recover his costs on appeal.
/s/_________
Mihara, J. WE CONCUR: /s/_________
Elia, Acting P. J. /s/_________
Bamattre-Manoukian, J.