Can a Texas resident who is a shareholder of a foreign corporation doing business in Texas sue that foreign corporation in Texas courts to enforce inspection rights? The Business Organizations Code provides that foreign corporations authorized to do business in Texas enjoy the same, but no greater, rights and privileges as a domestic corporation organized for the purposes set forth in the application pursuant to which such certificate of authority is issued; and, as to all matters affecting the transaction of intrastate business in this State, it and its officers and directors shall be subject to the same duties, restrictions, penalties, and liabilities now or hereafter imposed upon a domestic corporation of like character and its officers and directors; provided, however, that only the laws of the jurisdiction of incorporation of a foreign corporation shall govern (1) the internal affairs of the foreign corporation, including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares, and (2) the liability, if any, of shareholders of the foreign corporation for the debts, liabilities, and obligations of the foreign corporation for which they are not otherwise liable by statute or agreement. It would seem that any Texas court having jurisdiction over a foreign corporation would have the authority to order a shareholder or director inspection under the laws of the state of incorporation.
In Fleisher Development Corp. v. Home Owners Warranty Corp., a D.C. federal court ordered a Delaware corporation to permit inspection pursuant to §220 of the Delaware General Corporations Law, notwithstanding the fact that the Delaware law provides exclusive jurisdiction to the Delaware chancery court to enforce the statute.
A foreign corporation with its principal place of business and its corporate records in Texas, being sued in Texas for refusal to allow inspection, might very well be subject to the Texas inspection laws. In Williams v. Freeport Sulphur Co., the court enforced the rights of shareholders of a Delaware corporation, headquartered in New York, to inspect the corporate records of the Delaware corporation’s Texas subsidiary. The court held that the denial by the Delaware parent corporation of the right of “right of its stockholders to an inspection of its books and records is a violation of its duty to plaintiffs enjoined both by the common law and the statutes of this state.” The court further held that the plaintiffs were entitled to bring the suit in Texas, as opposed to New York or Delaware. Significantly, the court imposed the inspection rights under the Texas statute. This statute clearly provided inspection rights to the Delaware parent corporation with respect to its Texas subsidiary; however, the application to Delaware shareholders of the Delaware parent is not so clear. The case was not brought as a derivative suit to enforce the rights of parent over the subsidiary; rather it was brought to prevent the Delaware parent corporation from withholding documents in its wholly-owned subsidiary from its Delaware shareholders; yet the court applied the Texas statute.
While the Texas decision did not expressly consider the point, numerous courts have held that domestic inspection rights apply to foreign corporations, at least where the documents are located in the state. In Valtz v. Penta Inv. Corp. the California court held that a Delaware corporation, with its principal place of business in California, was subject to the shareholder inspection rights under California, rather than Delaware law. The court held that shareholder inspection rights does not “address an internal affair; the inspection of shareholder lists is a right incidental to the ownership of stock, affects the relationship between the corporation and shareholder, and is thus subject to regulation by statute where the corporation does business.” McCormick v. Statler Hotels Delaware Corp., an Illinois decision, upholds that the enforcement of inspection rights of a shareholder in a Delaware corporation pursuant to the terms of the Illinois corporations statute, holds that where the foreign corporation’s records are in the state, enforcement of inspection rights does not interfere with the internal affairs of the corporation.
In Hollander v. Rosen, the Florida Court of Appeals held that a Georgia Corporation was subject to an order under the Florida statute to permit inspection of its books and records by a shareholder, including the statutory penalty for failure to comply. The court based its analysis on the fact that corporations authorized to do business in Florida were subject to the same “rights and privileges … duties, restrictions, penalties and liabilities” as domestic corporations. The court went on to hold that the defendant corporation was subject to the same shareholder rights, notwithstanding the fact that it had not applied to do business in Florida, because it was doing business in Florida and was thus required to apply for authority. In Havlicek v. Coast-to-Coast Analytical Serv.,
Inc., the California court held that directors of a Delaware corporation headquartered in California were subject to the California law requiring that directors be permitted inspection of corporate records. Interestingly, the court of appeals held that the relocation of the corporation and its documents to outside the state during the pendency of the appeal did not render the order to permit inspection moot. In Jefferson Indus. Bank v. First Golden Bancorporation, the Colorado court held that Colorado shareholder inspection rights applied equally to domestic and foreign corporations.
|About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more||
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