Inspection Rights. Craig Johnson founded Distributed Solutions, Inc (DSI), in 1991 to make software and provide consulting services, including payroll services for small companies. Johnson was the sole officer and director and the majority shareholder

Question

Jeffrey Hagen was a minority shareholder. In 1993, Johnson sold DSI's payroll services to himself and a few others and set up Distributed Payroll Solutions, Inc (DPSI). In 1996, DSI had revenues of $739,034 and assets of $541,168. DSI's revenues in 1997 were $934,532. Within a year, however, all of DSI's assets were sold, and Johnson told Hagen that he was dissolving the firm because, in part, it conducted no business and had no prospects for future business. Hagen asked for corporate records to determine the value of DSI's stock, DSI's financial condition, and "whether unauthorized and oppressive acts had occurred in connection with the operation of the corporation which impacted the value of" the stock. When there was no response, Hagen filed a suit in an Illinois state court against DSI and Johnson, seeking an order to compel the inspection. The defendants filed a motion to dismiss, arguing that Hagen had failed to plead a proper purpose. Should the court grant Hagen's request? Discuss.

Answer 1

Inspection rights
The court denied the motion to dismiss, but after the defendants gave Hagen twelve boxes of corporate records—two years after Hagen's initial request—the court issued a summary judgment in the defendants' favor, concluding in part that Hagen's request to inspect DSI's records had not been specific enough. Seeking damages, Hagen appealed to a state inter-mediate appellate court, which reversed this judgment and remanded the case. The chief question on appeal was the specificity of Hagen's request. The appellate court held that this was not a valid defense because "this claim came only after (1) defendants had ignored plaintiff's initial written request, (2) . . . plaintiff was compelled to institute litigation, and [3] defendants had briefed and argued—unsuccessfully—a motion to dismiss plaintiff's complaint based on lack of a proper purpose . . . . [A] corporation's failure to respond within a reasonable time to a shareholder's written demand for inspection of the corporation's books and records does, under proper circumstances, constitute a denial of access which is a violation of the [Illinois Business Corporation] Act."