Opinion
NOT TO BE PUBLISHED
San Francisco County Super. Ct. No. CPF-08-508945
Marchiano, P.J.
John Quinn (plaintiff), a member of the board of directors of Aechelon Technology, Inc. (defendant), obtained a writ of mandate requiring defendant to permit him to inspect corporate books and records pursuant to Corporations Code section 1602. Defendant argues that the court erred in failing to shield records covered by the attorney-client privilege from inspection, and in failing to hold a trial on the petition. We disagree with these arguments and affirm the judgment.
I. BACKGROUND
Defendant is a “provider of visual simulation image generators, associated geospecific visual and sensor databases, [and] realistic 3D models and integration services.” Plaintiff was a founder of the corporation in 1998, and owns 25 percent of its shares. He was defendant’s chief executive officer (CEO) and chairman of the board until he resigned as CEO in August 2006. His employment with defendant was involuntarily terminated in March 2007. He continued as a member of the board of directors.
Beginning in April 2008, plaintiff made repeated requests, as director of the corporation, for access to defendant’s records. The parties exchanged correspondence on the subject from June to October 2008, but reached an impasse with defendant professing to have given plaintiff “virtually unlimited access” to its documents, and plaintiff objecting that defendant had “[f]or the most part... ignored or refused his requests.”
On October 31, 2008, plaintiff filed his petition for writ of mandate to compel inspection of corporate records, and moved in August 2009 for issuance of the writ. The motion was supported by plaintiff’s declaration, which attached the 2008 correspondence pertaining to the inspection request, and other documents, including an October 1, 2008 letter from defendant’s counsel advising that they were investigating plaintiff for possible breaches of his fiduciary duty as a director. Plaintiff stated that “[i]f needed I am prepared to voluntarily release [defendant] and its current directors and officers from any actions concerning my termination or any DFEH or ADEA violation connected with my termination. As a director I simply want the documents requested to insure that [defendant] is being properly run for the benefit of all employees and shareholders.”
In opposition to the motion, defendant lodged among other things a declaration from its current CEO and board chairman, Ignacio Sanz-Pastor, that discussed plaintiff’s disputes with the company. Sanz-Pastor stated that, after plaintiff’s resignation from the board of directors, he had made “several hundred [e-mail] requests for information, clarifications, justifications and documents, in addition to many letters and phone calls, as well as repeated personal attacks on fellow board members. Most recently, on August 18, 2009 [plaintiff] sent me an [e-mail] accusing other board members of having ‘illusions of grandeur’ and implying that other board members lacked ability....” Sanz-Pastor said that “[t]he volume and frequency of [plaintiff’s e-mail] requests have become disruptive of the operation of [defendant].”
Defendant’s opposition brief requested a jury trial to the extent that the petition turned on disputed issues of fact. If, for example, “[plaintiff’s] motives raise a factual issue that must be resolved for the Court to grant or deny this motion, [defendant] asks that the Court use its discretion to grant a jury trial on this issue.”
In reply, plaintiff declared that Sanz-Pastor had exaggerated the frequency of his requests for information, and he denied disrupting defendant’s operations. Plaintiff reiterated his willingness to waive any wrongful termination claims, and said that he had offered to waive other matters “to eliminate any concerns [defendant] might have.” According to plaintiff’s reply brief, defendant had budgeted $60,000 per month for legal fees in connection with its “purported investigation” of him. Plaintiff declared that he had “offered to add other items to [the] list [of claims he would release], if they would just tell me what [defendant] was budgeting $60,000/month to defend against.” Plaintiff attached an August 2009 e-mail to Chris Blumenthal, defendant’s general counsel, which identified two claims he would release in addition to those for wrongful termination, and added: “If there are additional things you guys would like to add to the list let me know—maybe we can get to a point where [defendant] is spending less on legal fees than it is on rent.” Blumenthal responded: “[H]ow about if we put these two new allegations with the others on the ‘baseless’ and ‘outrageous’ list? Are you also not going to sue [defendant] for that parking ticket you got back in 1992?”
In an August 2009 e-mail to Sanz-Pastor, plaintiff wrote: “The legal contest between me and the board of directors of [defendant] is for access to some documents; what is strange to me is that the board of directors would budget $720,000.00/annum to prevent that access. What is it that you guys are trying to hide that is worth $720,000 per year?”
The motion for the writ was heard in September 2009, and granted in part and denied in part by order filed in February 2010. The court “[did] not find a basis for imposing restrictions on [plaintiff’s] access to documents beyond those contained herein or for a trial of this matter.” The court directed defendant to make enumerated categories of documents available for plaintiff’s inspection, including: “[E-mail] communications and related documents sent to or received by Mr. Blumenthal from December 1, 2006 to April 1, 2007, including claimed attorney-client communications involving or related to [plaintiff’s] termination or removal as an employee or officer of [defendant].” The court said that it had “considered and overruled [defendant’s] objection to producing documents relating to [plaintiff’s] termination that would otherwise be protected by the attorney-client privilege.” The order further provided that “[a]s to documents for which [defendant] claims attorney-client or work-product privilege related to [plaintiff’s] termination or removal as an employee or officer of [defendant], [plaintiff] through his counsel in court has agreed to waive any right to use such documents in support of any claims he may assert against [defendant].”
Plaintiff moved to “correct” the order “due to clerical mistake, ” arguing among other things that he had agreed to waive use of the privileged documents only with respect to wrongful termination claims, not all claims against defendant. The court denied the motion, but noted at the hearing on the motion that the waiver was limited to privileged documentation involving termination of plaintiff’s employment. The court granted defendant’s motion to stay pending appeal of the production of privileged documents related to the termination of employment.
II. DISCUSSION
A. Inspection of Privileged Documents
Defendant contends that the court erred in permitting plaintiff to examine records of its communications with counsel in connection with the termination of his employment. Under Corporations Code section 1602, directors of a corporation have “the absolute right... to inspect and copy all [corporate] books, record and documents of every kind....” “ ‘A director... has the right to inspect corporate books and records; that right is correlative with his duty to protect and preserve the corporation. He is a fiduciary and in order to meet his obligation as such he must have access to books and records; indeed he often has a duty to consult them. [Citations.]’ ” (Hoiles v. Superior Court (1984) 157 Cal.App.3d 1192, 1201; see also 2 Ballantine & Sterling, Cal. Corporation Laws (4th ed. 2010) § 272.02, p. 13-23 [absolute right of inspection is afforded to enable directors to perform their duties in an intelligent and fully informed manner].)
Notwithstanding this absolute right, which extends to documents protected by the attorney-client privilege (Tritek Telecom, Inc. v. Superior Court (2009) 169 Cal.App.4th 1385, 1387 (Tritek)), defendant submits that the attorney-client privilege should prevail here, because a contrary ruling will inhibit corporations from seeking legal advice when they fire employees who are directors. Plaintiff contends that he has an absolute right to inspection. But “an absolute right to inspect does not mean unlimited access. [Corporations Code section] 1602 must be read together with [Corporations Code section] 1603[, subdivision (a)] which is applicable to directors as well as shareholders. If the corporation determines that an unfettered inspection will result in a tort against the corporation, it may decline the request for inspection.” (9 Witkin, Summary of Cal. Law (10th ed. 2005) Corporations, § 85, p. 858.)
These arguments raise an issue of law for our de novo review. (See Saline v. Superior Court (2002) 100 Cal.App.4th 909, 913 (Saline).)
Defendant relies primarily on the Tritek case, where a corporate director sought “to enforce his inspection rights as a director after he filed [a] shareholder action against [the corporation] in his individual capacity as a shareholder to vindicate his personal rights.” (Tritek, supra, 169 Cal.App.4th at p. 1391.) The court observed that the director was seeking “documents he could not obtain via discovery in the shareholder action, ” and “conclude[d] that a corporate director does not have the right to access documents that are covered by the attorney-client privilege and were generated in defense of a suit for damages that the director filed against the corporation.” (Id. at p. 1391.) The court reasoned that the “filing of the shareholder action makes [the director the corporation’s] adversary. [The director] cannot take off his ‘shareholder’s hat’ and swap it for his ‘director’s hat’ and claim an absolute right to access all corporate documents. In this situation, a court may properly limit a director’s inspection rights because the director’s loyalties are divided and documents obtained by a director in his or her capacity as a director could be used to advance the director’s personal interest in obtaining damages against the corporation. [Citation.]” (Ibid.)
Tritek is distinguishable because, unlike the director in that case, plaintiff has not sued defendant for wrongful termination of his employment, or for any other reason. Thus, he is not trying an end run around discovery restrictions that would apply in such a suit. (Compare also National Football League Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 109−110 [inspection request denied, attorney-client and work product privileges upheld, where director had sued corporation in his capacity as a shareholder].) Moreover, under the terms of the order, by agreement plaintiff is barred from using any of the privileged documents against defendant. (See Corp. Code, § 1603, subd. (a) [right to inspect corporate documents may be enforced “with just and proper conditions”].) While defendant asks us to extend Tritek to cover what it calls “pre-complaint privileged communications” (see Roberts v. City of Palmdale (1993) 5 Cal.4th 363, 371 [attorney-client privilege applies to advice in anticipation of litigation]), that extension is unnecessary to protect defendant’s right to counsel in this particular situation.
Defendant rests its case on Wolf v. CDS Devco (2010) 185 Cal.App.4th 903 (Wolf), in addition to Tritek. The corporate director in Wolf was removed as a director shortly after he filed suit to inspect the corporation’s records. Before being removed, the director had inadvertently sent the corporation a copy of a complaint to enforce his inspection rights. The court concluded that, by virtue of his removal as a director, he lost standing to enforce his inspection rights. (Wolf, supra, at pp. 917−919.) In the course of explaining the former director’s lack of standing, the court expounded on Tritek, and read into that opinion a rule that a director could be denied the right to inspect corporate documents based on the director’s “potential adversary status to [the corporation], ” as illustrated by the inspection request. (Id. at p. 919.)
This aspect of Wolf is erroneous dictum. It is dictum because the court was discussing a former director’s lack of standing to inspect corporate documents, which made the director’s potentially adversarial posture irrelevant. (See also Wolf, supra, 185 Cal.App.4th at p. 908 [stating that the court’s decision was confined to issues of standing and ability to plead a ground for inspection rights].) It is erroneous because a request to inspect corporate documents cannot create an adversarial relationship that justifies denial of the request; if that were true, then an inspection request would be self-defeating. Wolf is, in any event, distinguishable because plaintiff’s standing as a director to seek inspection of corporate documents is not at issue as it was in Wolf.
To preclude a director from inspecting corporate documents merely because, as defendant puts it, “[f]uture litigation between the parties remains a distinct and real possibility, ” would eviscerate a right that is supposed to be “absolute.” Since a director will not be forced to take legal action to obtain access to corporate documents unless he or she is at loggerheads with the corporation, the corporation will likely be able to point to the potential for further litigation as a justification for denying the request. The right would thus be largely illusory whenever it required enforcement.
We are not suggesting that a director’s inspection rights will necessarily override the corporation’s attorney-client privilege as to prelitigation communications. There may be critical situations where the likelihood of litigation between the director and the corporation is so great that Tritek’s reasoning should apply. In this case, however, an insufficient showing has been made that the parties were in such an adversarial position that litigation between the parties was imminent at the time of the communications in question.
Apart from cases where the director and the corporation are actually involved in litigation, California courts have recognized an exception to directors’ record-inspection rights only where “[a] disgruntled director unambiguously announces his or her intention to violate his or her fiduciary duties to the corporation and the shareholders by using inspection rights to... commit a tort against the corporation.” (Havlicek v. Coast-to-Coast Analytical Services, Inc. (1995) 39 Cal.App.4th 1844, 1855−1856 (Havlicek).) Directors were granted inspection rights in Havlicek, even though “[l]itigation between the parties [was] extant, ” but the court postulated limits to the “absolute” right of inspection, such as where a director admitted a desire “to learn trade secrets, gain access to confidential customer lists, and compete with the corporation.” (Id. at pp. 1850, 1855.) No such improper purpose is conceded here where plaintiff waived his rights to use the documents in any wrongful termination claim, nor is there any threatened litigation between the parties.
The court in Saline, supra, 100 Cal.App.4th at page 915, “agree[d] with the principle set forth in Havlicek [that a director’s inspection rights are not limitless], ” but concluded that “it should only be applied in extreme circumstances where a preponderance of the evidence establishes the director’s clear intent to use the documents to commit an egregious tort—one that cannot be easily remedied by subsequent monetary damages—against the corporation.” Defendant cites no evidence of any such intent on the part of plaintiff. The evidentiary submissions in this case disclose no potential conflict of interest as serious as that in Saline, where the director seeking to enforce inspection rights wanted the corporation to be acquired by another company in which he owned shares. Despite this conflict of interest, the court held that the director should have been granted access to documents protected by the attorney-client privilege and work product doctrine, because the record did not establish that he had, or intended to, knowingly disclose any confidential information. (Saline, supra, 100 Cal.App.4th at p. 914 [only relevant issues “related to the prevention of a tort resulting from [the director’s] inspection of the documents—not the entirety of his conduct as a director”].) In this case, while it appears that plaintiff disagrees with how defendant is being managed and is mindful of his interests as a shareholder, there is no evidence that he intends to use his inspection rights to disclose confidential information or commit a tort against defendant.
Defendant suggests that plaintiff can be denied his right to inspect records related to his termination because he has not “assert[ed] any legitimate purpose for the inspection.” However, the directors in Havlicek, supra, 39 Cal.App.4th at page 1851, were granted their inspection rights even though they had “never articulated the purpose for their inspection demand.” The corporation in Havlicek argued unsuccessfully that the directors’ suit should be governed by Delaware law, which had “a public policy... to protect corporations against unreasonable or burdensome inspections by directors” (id. at p. 1852), as reflected in a statute that permitted a director to examine corporate records only “ ‘for a purpose reasonably related to his position as a director.’ ” (Id. at p. 1851.) Unlike Delaware, California “does not impose a ‘proper purpose’ requirement.” (Ibid.) Corporations Code “[s]ection 1602 represents a legislative judgment that directors are better able to discharge [their fiduciary] duties if they have free access to information concerning the corporation. Thus, California has a public policy favoring broad inspection rights for the directors.” (Havlicek, supra, at p. 1852.) We find no persuasive reason why that policy should not be implemented here, and independently agree with the trial court’s decision to permit inspection of the privileged documents. The court fashioned a protective order under section 1603 that permits the production of documents pertaining to plaintiff's termination generated during a circumscribed four-month period in late 2006 and early 2007 with plaintiff precluded from using them against defendant.
B. Jury Trial or Evidentiary Hearing on the Petition
Defendant argues that the court should have granted its request for a jury trial, or held an evidentiary hearing, on the petition. Defendant maintains that a trial was necessary because there were disputed issues of fact as to plaintiff’s motives for the inspection requests, and the reasonableness of the requests given their scope and the burden of honoring them.
The court’s decision to forego a trial of the matter was not an abuse of discretion. (See Code Civ. Proc., § 1090 [where defense to mandate petition raises material questions of fact, court has “discretion” to order questions tried to a jury]; American Federation of State, County & Municipal Employees v. Metropolitan Water Dist. (2005) 126 Cal.App.4th 247, 263 [court has “ ‘broad discretion’ ” to decide a mandamus case “ ‘on the basis of declarations and other documents rather than live, oral testimony’ ”]; Cal. Rules of Court, rules 3.1103(a)(2), 3.1306(a) [good cause must be shown for testimony or cross-examination]; 1 Cal. Civ. Writ Practice (Cont.Ed.Bar 4th ed. 2010) § 9.30, p. 226 [“burden of justifying oral testimony at the hearing on the merits of a writ petition is a heavy one”]; The American Law Institute, Principles of Corporate Governance (1992) § 3.03, pp. 91, 94 [director’s application to inspect corporate records “should be decided expeditiously, ” and court “should be able to decide such applications by a hearing on the basis of affidavits”].) The lengthy declarations submitted by the parties gave the court sufficient information to determine the petition.
III. CONCLUSION
The judgment on the petition for writ of mandate is affirmed.
We concur: Margulies, J., Dondero, J.