John Dresty v. Clearwater Systems Corp. et al. (2013)

MEMORANDUM OF DECISION

The plaintiff, John Dresty (Dresty), has brought this action for a writ of mandamus, pursuant to General Statutes § 33–948, seeking an order to compel production of corporate records from the defendant Clearwater Systems Corporation (Clearwater).   The court conducted a hearing on August 6 and 29, 2013.

The following facts are undisputed.   Dresty was a founder, and former president, of Clearwater, which is a closely held corporation.   The business of the company is water treatment.   Dresty left the company in May 2011, following a disagreement with board members.   He presently owns 25,125 shares of Clearwater stock, which is approximately 4 percent of the outstanding stock.   There are approximately 90 shareholders of Clearwater.   Dresty is presently employed by Clearwater's chief competitor in the water treatment industry.

By letter dated March 12, 2013, Dresty, through his attorney, made a demand for inspection of corporate records pursuant to General Statutes § 33–946(c).  The relevant portion of the demand letter states:  “Specifically, under subsection c Mr. Dresty seeks all of the Director's and Committee minutes of meetings from 2010 forward and records of all actions taken by the Board of Directors or its committees.   In addition, he seeks the other documentation set forth in that subsection as well from 2010 on and the list of shareholders and the record date of ownership and purchase price.”   The demand letter also stated:  “Mr. Dresty is becoming increasingly concerned as to how the corporation is being managed and the value of his shares.   He does not see the present business model as being effective in increasing the revenues of the corporation in either the short or long run.   Rather, he sees increased costs for overhead that were unnecessary and expensive.   Mr. Bhargava approached Mr. Dresty to liquidate his holdings in the corporation but has indicated only that he would serve as a middleman, to align purchaser and buyer.   Given what Mr. Dresty sees as an uneasy state of affairs for the corporation's finances, he would like to inspect this documentation sooner rather than later.”

The relevant portions of § 33–946 are as follows:

(c) A shareholder of a corporation is entitled to inspect and copy, during regular business hours at a reasonable location specified by the corporation, any of the following records of the corporation if the shareholder meets the requirements of subsection (d) of this section and gives the corporation a signed written notice of his demand at least five business days before the date on which he wishes to inspect and copy:  (1) Excerpts from minutes of any meeting of the board of directors or a committee of the board of directors while acting in place of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders and records of action taken by the shareholders, the board of directors or a committee of the board without a meeting, to the extent not subject to inspection under subsection (a) of this section;  (2) accounting records of the corporation;  and (3) the record of shareholders.

(d) A shareholder may inspect and copy the records described in subsection (c) of this section only if:  (1) His demand is made in good faith and for a proper purpose;  (2) he describes with reasonable particularity his purpose and the records he desires to inspect;  and (3) the records are directly connected with his purpose.

The relevant portion of § 33–948 regarding court-ordered inspection is as follows:  “(b) If a corporation does not within a reasonable time allow a shareholder to inspect and copy any other record, the shareholder who complies with subsections (c) and (d) of section 33–946 may apply to the superior court for the judicial district where the corporation's principal office or, if none in this state, its registered office is located for an order to permit inspection and copying of the records demanded.   The court shall dispose of an application under this subsection on an expedited basis.”

In Embalmers' Supply Co. v. Giannitti, 103 Conn.App. 20, 36, 929 A.2d 729, cert. denied, 284 Conn. 931, 934 A.2d 246 (2007), the Appellate Court stated:  “[T]he receipt of a court order under § 33–948(b) is expressly conditioned on compliance with § 33–946(c) [now (d) ], which provides:  A shareholder may inspect and copy the records described in [§ 33–946(b) ] [now (c) ] only if:  (1) his demand is made in good faith and for a proper purpose;  (2) he describes with reasonable particularity his purpose and the records he desires to inspect;  and (3) the records are directly connected with his purpose.  General Statutes § 33–946(c) [now (d) ].” (Internal quotation marks omitted.)

The task for the court is to determine if the plaintiff's demand has complied with the three-prong requirement of § 33–946(d):  proper purpose, reasonable particularity, and connection with purpose.   Dresty made the demand for records in order to value the shares he owned.   Clearwater does not dispute that valuing stock is a proper purpose to seek corporate records.   See Pagett v. Westport Precision, Inc., 82 Conn.App. 526, 536, 845 A.2d 455 (2004) (valuing stock is a proper purpose).   Instead, Clearwater maintains that Dresty's has not described the records he seeks with “reasonable particularity.”

As mentioned earlier, the demand stated:  “[S]pecifically, under subsection c Mr. Dresty seeks all of the Director's and Committee minutes of meetings from 2010 forward and records of all actions taken by the Board of Directors or its committees.”  (Emphasis added.)   Clearwater had sales in 2012 of 4.6 million dollars and it has twenty-six (26) employees.   There are approximately ninety (90) shareholders of its stock.   This is not a “Mom and Pop” business.   See, e.g., Donaldson v. Auger Associates, Superior Court, judicial district of Fairfield, Docket No. CV–91–1201502 (April 13, 1993, Melville, J.) (court made distinction that defendants were not a high level commercial operation, but rather in the nature of a “mom and pop” rental business as demonstrated by their rather primitive business methods).   It is reasonable to infer that the minutes of the board of directors, and any committees of the board, could and would relate to a variety of topics unrelated to the value of Clearwater's stock.

The court finds the following language from Pagett v. Westport Precision, Inc. instructive:  “Section 33–946(c) [now (d) ] also requires that a shareholder must both state his purpose and describe the documents requested with reasonable particularity.   The parties are not in dispute about whether the plaintiff sufficiently particularized which records he sought to inspect, but they do contest whether the purpose was sufficiently detailed.   We have never defined reasonable particularity in a situation such as this and look to how other jurisdictions have interpreted statutory language similar to that of § 33–946(b) and (c).  In Parsons v. Jefferson–Pilot Corp., 333 N.C. 420, 429, 426 S.E.2d 685 (1993), the North Carolina Supreme Court held that [w]hether a shareholder has described his purpose or the desired records with reasonable particularity necessarily depends upon the facts and circumstances of each case.

“[I]n the absence of ․ statutory ․ guidance, [the court] may appropriately look to the meaning of the [word] as commonly expressed in the law and in dictionaries.  ‘Particularity’ is defined in pertinent part as ‘a minute detail,’ ‘an individual characteristic,’ ‘the quality or state of being particular as distinguished from universal’ and ‘attentiveness to detail.’   Webster's Ninth New Collegiate Dictionary (1988).   Because ‘particularity’ is modified by the adjective ‘reasonable,’ we conclude that the particularity requirement directs a shareholder to express his purpose with sufficient particularity so that the reason for the inspection can be ascertained by the corporation, but that minute detail of purpose is not required.”  (Citations omitted;  internal quotation marks omitted.)  Pagett v. Westport Precision, Inc., supra, 82 Conn.App. 537–38.

When reviewing the plaintiff's demand for all minutes of meetings of the board of directors in the light of Pagett, the court concludes that the plaintiff has not complied with the reasonable particularity requirement.   Dresty has not identified any distinguishing detail or characteristic, as to the minutes, which would allow Clearwater to comply with his demand.

The court also finds support for its position in the language of the applicable statutes.   In contrast to subsection (a) of § 33–946, which allows a shareholder to inspect records required to be kept under § 33–945(e), which records include “the minutes of all shareholder meetings and records of all actions taken by shareholders without a meeting,” subsection (c) of § 33–946 only allows inspection of excerpts from minutes of meetings of the board of directors.   The following subsection, § 33–946(d), requires a shareholder to describe the requested records, including minutes, with “reasonable particularity.”   Since the statute specifies that excerpts of minutes may be inspected, it is implied that the excerpts must be identified with reasonable particularity.   In this case, the plaintiff has made no effort to describe what minute excerpts he seeks, he simply makes a universal request for all of the minutes.   This is not permitted under § 33–946(c) and (d).  To hold otherwise allows a shareholder to conduct a “fishing expedition” through the defendant's corporate records.   See, e.g., Strauss v. Educational Innovations, Inc., Superior Court, judicial district of Stamford–Norwalk, Docket No. CV–08–4014480–S (November 14, 2008, Downey, J.) (mere inference that plaintiff may have sought to go on a fishing expedition constitutes improper motive).

The reasonable particularity requirement also applies to “accounting records of the corporation” described in § 33–946(c).  Here again, the plaintiff has failed to particularly describe the records he seeks, but rather demands “the other documentation set forth in that subsection.”   For the same reasons applicable to the minute excerpts, such a demand does not comply with the statute.   Accounting records encompasses a broad spectrum of documents, from tax returns to employee payroll records.   It is probable that some accounting records may be unrelated to the plaintiff's stated purpose of valuing his stock.   A shareholder must describe the records related to his purpose with reasonable particularity;  the burden is not upon the defendant to determine which “records are directly connected with this purpose.”  General Statutes § 33–946(d)(3).

Since the plaintiff has not described the requested records with reasonable particularity, the court is unable to determine if the records are directly related to the stated purpose of valuing his stock.   The court cannot find that the plaintiff has complied with § 33–946(d)(3).

Conclusion

The plaintiff has not complied with § 33–946(d), consequently he is not entitled to an order pursuant to § 33–948.   The court acknowledges that certain corporate records were provided to the plaintiff during the trial.   This was the product of colloquies on the record and evidences the good faith of all parties.   The provision of records during the hearing process does not relieve the plaintiff of his burden to make an initial demand which complies with § 33–946.   Judgment may enter for the defendants.

Domnarski, J.

Domnarski, Edward S., J.