Saline v. Superior Court, G029761.

• Decision Date: 30 July 2002
• Docket Number: No. G029761.,G029761.
• Court: California Court of Appeals Court of Appeals
• Parties: Joseph P. SALINE, Petitioner, v. The SUPERIOR COURT of Orange County, Respondent; Commonwealth Energy Corporation, Real Party In Interest.

122 Cal.Rptr.2d 813

100 Cal.App.4th 909

Joseph P. SALINE, Petitioner, v. The SUPERIOR COURT of Orange County, Respondent;

Commonwealth Energy Corporation, Real Party In Interest.

No. G029761.

Court of Appeal, Fourth District, Division 3.

July 30, 2002.

As Modified August 7, 2002.

Enterprise Counsel Group, David A. Robinson and Benjamin P. Pugh for Petitioner.

No appearance for Respondent.

McDermott, Will & Emery, James L. Sanders, David R. Gabor and David Hirsch; Ervin, Cohen & Jessup, Eliot G. Disner, Robert M. Waxman and Andres F. Quintana, Beverly Hills, for Real Party in Interest.

OPINION

MOORE, J.

Petitioner Joseph Saline, a member of the board of directors of real party in interest Commonwealth Energy Corporation (CEC), seeks a writ of mandate directing the trial court to vacate its order restricting Saline's access to corporate records and directing that he keep the contents of the records confidential. Saline argues the order runs afoul of Corporations Code section 1602 and constitutes an unlawful prior restraint in violation of the First Amendment of the United States Constitution. CEC responds that the restrictions the court imposed are "just and proper" under Corporations Code section 1602, given Saline's alleged misbehavior and conflicts of interest. We hold that the trial court failed to make the findings necessary to justify the limitation on Saline's right to corporate documents and that a prior restraint on his speech has no legal basis. We therefore grant the petition.

I FACTS AND PROCEDURAL BACKGROUND

CEC is a provider of electrical energy services to consumers. A contentious dispute between CEC and its former chief executive officer, Fred Bloom, led to Saline's election to the CEC board of directors in November 2000. CEC disputed Saline's status, but it was confirmed by the court in a prior action. Because of the manner in which he was elected, Saline claims CEC's management never accepted him as a director and denied him the ability to participate in the corporation's management. The current CEO, Ian Carter, wrote in an e-mail to the other directors that he did not trust Saline and purposefully chose to "work around him ... as much as possible ...."

Since Saline's election, he and the other board members have, not surprisingly, disagreed regarding the company's future. While everyone seems to agree the company should be taken public, Saline claims that Carter has rejected any avenue for doing so that does not involve an initial public offering (IPO), because Carter's contract calls for generous stock options if the company goes public through an IPO. For its part, CEC claims Saline tried to take over CEC, and in doing so sent confidential documents to Denis Costa Tseklemis, the owner of several other energy corporations. CEC also claims Saline had a conflict of interest because he was a shareholder in New World Power Corporation (NWPC), and he was encouraging NWPC to acquire CEC. CEC also argues that Saline has disclosed "confidential business and proprietary information" to third parties. Specifically, CEC alleges Saline posted information on the Internet relating to the cost of an in-house billing system. CEC claims this was in direct violation of a confidentiality agreement Saline signed.

Saline claims that despite repeated requests, he was denied access to corporate documents. In August 2001, he brought an action to enforce his inspection rights. Saline specified 14 categories of documents to which he had been denied access. The court heard oral argument and later issued a minute order stating that CEC was required to allow Saline to inspect and copy the 14 categories of documents identified by his petition. The order imposed two restrictions on Saline: "1. Petitioner and counsel are prohibited from disclosing or discussing the corporate documents with anyone other than themselves and responding party's board members. 2. Petitioner is not granted access to documents protected by the attorney client privilege and work product doctrine."

Saline sought a writ of mandate, challenging the first condition only, and the general proposition that a court may place restrictions on the rights of directors to review corporate documents. He seeks to vacate the order as an unconstitutional prior restraint on his right to free speech. He alleged he was the target of misinformation being sent to shareholders seeking proxies for the upcoming annual meeting, and the "gag order" prevented him from using information discovered via his inspection rights to offer shareholders a dissenting opinion. We issued an alternative writ directing the superior court to set aside its prior order or show cause why a peremptory writ should not issue.

Our order did not stay the shareholder meeting, however, and the election proceeded in November. Saline claims to have won that election; CEC claims it was stolen by Saline. Although the urgency appears to have passed, we consider the free speech issue raised to be a matter of public importance worthy of this court's attention.

II DISCUSSION

This petition presents two related questions: (1) Is a corporate director's right to inspect corporate documents subject to restriction to prevent a tort against the corporation, and if so, did CEC make a proper evidentiary showing to justify such restrictions in this case? (2) May a court restrict a corporate director from discussing the contents of corporate documents with third parties?

Standard of Review

The scope of a corporate director's right to inspect corporate documents and the question of whether a prior restraint is permissible are pure questions of law and are reviewed de novo. (Ghirardo v. Antonioli (1994) 8 Cal.4th 791, 799, 35 Cal.Rptr.2d 418, 883 P.2d 960.) The question of whether a sufficient evidentiary showing was made is reviewed to determine if the court's ruling was supported by substantial evidence, whether or not contradicted. (Bickel v. City of Piedmont (1997) 16 Cal.4th 1040, 1053, 68 Cal. Rptr.2d 758, 946 P.2d 427.)

Restricting a Director's Right to Corporate Documents

Corporations Code section 1602 states, in part: "Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation ...." Courts have recognized that "[d]irectors occupy a fiduciary relationship to the corporation and its stockholders [citation], and the unqualified right of inspection accorded them by the statute here invoked is manifestly in aid of such principle." (Hartman v. Hollingsworth (1967) 255 Cal.App.2d 579, 581-582, 63 Cal.Rptr. 563.)

On the other hand, in Havlicek v. Coastto-Coast Analytical Services, Inc. (1995) 39 Cal.App.4th 1844, 46 Cal.Rptr.2d 696, the court held that "absolute" did not always mean "absolute," and the court could place "just and proper" restrictions on access to corporate records. The court hypothesized: "A disgruntled director unambiguously announces his or her intention to violate his or her fiduciary duties to the corporation ... by using inspection rights to learn trade secrets, gain access to confidential customer lists, and compete with the corporation. In this situation, does the Legislature want the judiciary to come to the aid of the disgruntled director, enforce the `absolute right' to inspect and help the director commit a tort against the corporation? No." (Id. at pp. 1855-1856, 46 Cal. Rptr.2d 696, fn. omitted.)

We agree with the Havlicek court that in such an egregious case, restrictions may be appropriate. The court went on to note, however, that to establish the propriety of restrictions, "the corporation must demonstrate, by evidentiary showing, that a protective order is necessary to prevent a tort against the corporation." (Havlicek v. Coast-to-Coast Analytical Services, Inc. supra, 39 Cal.App.4th at p. 1856, 46 Cal. Rptr.2d 696.)

The evidentiary showing offered by CEC in the lower court was woefully inadequate to...