Monday, August 31, 2015

Hogans v. Hogans Agency, Inc. (Ct. of Special Appeals)

Filed:  August 28, 2015

Holding: A corporation may require a stockholder, who is a direct competitor of the corporation, to sign a confidentiality agreement before inspection of the corporation’s books of accounts and other corporate records.

Facts:  Stockholder (the “Stockholder”) owns 37.5% of stock in an insurance and real estate brokerage company (the “Corporation”).  Stockholder also owns another real estate brokerage company that is a competitor to the Corporation.  The Stockholder asserted that his right to request an inspection of company records falls under Sections 2-512 and 2-513 of the Maryland General Corporation Law (the “MGCL”). Section 2-513 broadens the rights for stockholder's who have had at least 5% of the outstanding stock of a corporation, for at least six months. A stockholder who fits the criteria has the right to inspect the "book of accounts" of the corporation. 

The Corporation responded to the request by providing the Stockholder with copies of the Corporation’s bylaws, minutes of the proceedings of the Corporation’s stockholders, an annual statement of affairs for the prior tax year and the name, address, and shares of each of the Corporation’s stockholders. The Corporation agreed to allow for the onsite inspection and copying of the books of accounts, under the condition that the Stockholder sign a confidentiality agreement, prohibiting the Stockholder from sharing the information with a third party. The Stockholder refused and filed a pro se Complaint for Stockholder’s Right to Inspect requesting: 1) to gain immediate access to a copy of the books of account for inspection; 2) access to the Corporation’s photocopier free of charge; 3) the Corporation to pay for a complete audit of company records and 4) the Corporation to pay the Stockholder’s attorney’s fees and costs.

The trial court granted the Corporation’s motion for summary judgment ordering that a confidentiality agreement must be signed by the Stockholder in order for him to be allowed access to inspect corporate records. 

Analysis:  On appeal, the Stockholder argued the MGCL does not require that a stockholder sign a confidentiality agreement prior to inspection of a corporation’s records and that “possible competition” between a stockholder and a corporation is not sufficient to deny a stockholder his right of inspection.  The Court noted that the right of a stockholder to inspect the corporate records of a corporation is provided for under Sections 2-512 and 2-513 of the MGCL, which delineates the differences between the rights of any stockholder versus that of a stockholder who has owned more than 5% for six months.

The Court pointed to two case holdings regarding stockholder access to corporate records, that were reconciled through a treatise authored by James J. Hanks Jr.  In Weihmayer vs Bitner, 88 Md. 325 (1898), it was determined that a stockholder was entitled to an absolute right to inspect corporate records, that can be refused only through a finding that the intended use was “evil, improper of unlawful.”  In Wright v. Hebin, 111 Md. 644 (1910) the court decided it would allow for the refusal of access, if the court issued a writ of mandamus, where it decided what the proper safeguards to protect the interests of all concerned would be. Stockholders could gain access to information for “legitimate purposes.” 

Hanks agreed that a five-percent, six-month stockholder was entitled to inspect the books, for the purpose of protecting his equity investment, “but not for any other purpose, such as competing with the corporation.”  Hanks goes on to state that a corporation may take reasonable measures, such as conditioning the right to inspect corporate records upon the stockholder signing a confidentiality agreement, “to protect the corporation against disclosure and misuse of confidential documents and information.”

The Court relied upon this explanation of the rights of a stockholder to inspect, and agreed with the trial court’s “exercise of sound discretion” in requiring the Stockholder to sign a confidentiality agreement prohibiting him from sharing information with third parties.  The condition of allowing access, after a confidentiality agreement was signed, was found to be a reasonable means to prevent the Stockholder from using the inspection rights to gain information that could be used to advance his own competing business.

The full opinion is available in PDF.

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