Commercial Division Blog

Posted: October 19, 2016 / Categories Commercial, Corporations

Shareholders Had Common-Law Right to Inspect Books and Records of Corporate Subsidiary

On October 11, 2016, the First Department issued a decision in Matter of Pokoik v. 575 Realties, Inc., 2016 NY Slip Op. 06648, holding that shareholders had a common-law right to inspect the books and records of a subsidiary, explaining:

Under New York law, shareholders have both statutory and common-law rights to inspect a corporation's books and records so long as the shareholders seek the inspection in good faith and for a valid purpose. Furthermore, because the common-law right of inspection is broader than the statutory right, petitioners are entitled to inspect books and records beyond the specific materials delineated in Business Corporation Law § 624 (b) and (e).

Petitioners' concerns about board mismanagement and excessive expenditures and wasteful dissipation of corporate assets are, on their face, a proper purpose, even if the inspection ultimately establishes that the board had engaged in no wrongdoing. While respondents maintain that petitioners did not tender any evidence to suggest that corporate formalities were not followed between 575 and SPMC, they do not refute petitioners' assertions that SPMC is the wholly owned subsidiary of 575, in which petitioner Leon Pokoik Family Partners, LP holds shares, and that 575 and SPMC share office space and management and are dominated by certain family members who control the affairs of multiple family businesses. Significantly, 575's counsel advised petitioners' counsel that 575 has no employees; has no payroll; pays no salaries; pays no workers' compensation insurance; and, issues no W-2 forms and has no books or records reflecting salaries paid by 575 to any individual or entity — which leaves petitioners with no source other than SPMC for the information they seek. Furthermore, petitioners' requests are narrowly related to salaries and compensation and there has been no showing that requiring SPMC to produce the records would impose any undue burden.

Under these circumstances, petitioners have made a sufficient showing to establish their common-law right to inspect the books and records of SPMC, 575's wholly owned subsidiary, relating to salary and compensation.

(Internal quotations and citations omitted).