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Quote of the Day - I began wearing hats as a young lawyer because it helped me to establish my professional identity. Before that, whenever I was at a meeting, someone would ask me to get coffee... - Bella Abzug

Directors And Shareholders Can't Switch Hats During An Adversarial Shareholder Derivative Suit

It's a fact-specific nightmare to unravel, but when a director of a small, closely-held corporation files a shareholder derivative action against the company, the shareholder can't just switch back to his or her position as a director and demand unfettered access to all corporate documents. That's double true, especially documents protected by the attorney-client privilege, even where the attorney at one time represented the corporation. 

Here's how the court of appeal in Tritek Telecom, Inc. v. Superior Court put it:  "Mak filed this action to enforce his inspection rights as a director after he filed the shareholder action against Tritek [the corporation] and Rerolle [the other shareholder/director] in his individual capacity as a shareholder to vindicate his personal rights.  Accordingly, Mak is not a disinterested director and the presumption of good faith does not apply.  Additionally, enforcing Mak's "absolute" inspection rights in this case is problematic because it gives him access to documents he could not obtain via discovery in the shareholder action."

The court continued, "Although Mak is still a Tritek director, his filing of the shareholder action makes him Tritek's adversary.  Mak 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.  (La Jolla Cove Motel and Hotel Apartments, Inc. v. Superior Court (2004) 121 Cal.App.4th 773, 787-788 [corporate counsel has no duty to disclose privileged information to dissident director with which the corporation has a dispute].)"

Finally, the court ruled, "Accordingly, we conclude 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."

Just follow the bouncing ball.  It all makes sense then.

Posted by J. Craig Williams on 1/7/2009 at 21:16 Comments (0)


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