Enforcing a shareholder's right to inspect books and records through a Writ of Mandamus
A Writ of Mandamus is an archaic procedure that was developed in the English courts of equity to force a public official to perform a ministerial act required by law that the official refused to perform. It was applied to corporations based on the theory that corporations are created by law, and corporate officers may therefore be compelled to perform duties imposed by law. The procedure is little used today except as a form of interlocutory appeal, where a party requests the appellate court to order a trial judge to take a certain action required by law or cease acting contrary to law, when the trial judge has abused his discretion. The other somewhat less common use is to force a corporation or corporate officer to comply with a shareholder's right to inspect corporate books and records.
Texas Rules of Civil Procedure Apply
Although the writ of mandamus developed before the modern rules of civil procedure, the Texas Supreme Court has held: “A mandamus action is a civil suit and is generally regulated by the same rules of procedure as other civil actions. “ Nevertheless, some of the procedural peculiarities have survived.
Texas Writ of Mandamus Petition
Most attorneys are unfamiliar with filing a petition for writ of mandamus, outside the appellate context governed by TRAP 52. For the most part the Texas Rules of Civil Procedure governing other petitions will apply, but pleading for mandamus has certain eccentricities that should be carefully observed.
The party bringing the mandamus action is called the “Relator.” The party against whom the mandamus is ordered is called the “Respondent.” Because the right of inspection is a right that the shareholder has as to the corporation, rather than the corporate officers and directors or controlling shareholders, the corporation will be the Respondent.
Venue is governed by the general venue statute. Therefore, venue will lie in the county where corporation has its principal office in this state. If the documents being sought were located, and inspection would have taken place, at a location other than the defendant’s principal office, the venue might be proper in the county where the documents are located, as this would be the county in with the event or omission giving rise to the claim occurred. If either the documents are out of state and the corporation does not maintain an office in Texas, then venue would lie in the county of the shareholder’s residence.
In drafting the writ of mandamus petition, care should be taken to avoid the “notice pleading” that would normally be acceptable. “It is the burden of the relator to file a petition for writ of mandamus that shows he is entitled to the relief he requests.” The petition should be written almost as if it were a motion for summary judgment. All the elements and all the facts need to be pleaded in detail. The petition should state how and when the demand was made and attach a copy of the demand letter. The petition should state exactly the nature and circumstances of the refusal. The petition should also state the shareholder’s purpose for the inspection, explain why the purpose is proper, and give facts to support these allegations.
In a mandamus proceeding, courts require greater certainty of pleadings than is required in most other civil actions. The relator's petition must clearly and directly set out the facts that entitle him to relief. The facts on which the mandamus is sought should be pleaded with particularity, “clearly, fully, and unreservedly, by direct and positive allegations. “ Conclusions and opinion allegations must be avoided.This “stringent test of exactness” is necessary, because mandamus is an extraordinary remedy that should not issue “without careful, individual scrutiny of the facts alleged.” Therefore, the writ is not available unless the petition is “specific and positive in its averments” showing a clear and unqualified right to the writ.
Furthermore, the positions of the corporation should be anticipated, met and negated. The petition should counter as many of the objections that the corporation might raise as possible. If the shareholder is affiliated with a competitor, and the corporation is objecting to allowing inspection on trade secrets grounds, the petition should establish factually why this objection is not valid—not really a competitor, documents sought will not give a competitive advantage, shareholder has offered to execute a nondisclosure agreement, etc. If the shareholder has inspected documents in the past, and the corporation is claiming a campaign of harassment, then the petition should be forthright about how many inspections there have been and demonstrate why further inspection is needed and will not disrupt or harass the business.
The petition must specifically request the Writ of Mandamus in the prayer for relief.
The petition for mandamus must be verified by affidavit. The verification must constitute such a positive statement of knowledge of the facts as would constitute a basis for a charge of perjury if such facts were found to be untrue.
If the dispute gets to the point that an actual lawsuit is necessary to obtain inspection of records, then there will often be other claims that the shareholder has against the corporation or against the officers and directors. These claims can be joined in the petition, and this frequently happens.
Texas Writ of Mandamus Answer
The answer in a mandamus proceeding is far different from that in an ordinary lawsuit. An unverified general denial has “absolutely no effect” in a mandamus suit. When the answer is an unverified general denial in a mandamus proceeding, all allegations in a verified petition are considered to be true.
In a mandamus proceeding, a general denial, even when made under oath, is insufficient. “In mandamus suits, a general denial does not join issues upon the facts alleged in plaintiffs' petition. Plaintiffs were not put to the necessity of proving the facts alleged by them; but, in effect, such facts were admitted.”
The same pleadings requirements apply to the answer as to the petition. The answer needs to specifically respond to each allegation in the petition. “A general denial is not sufficient and such facts are admitted.” Furthermore, the answers must be factual, not conclusory. In Chavco Investment Company, Inc. v. Pybus, the defendant corporation pleaded that the shareholder brought the suit to compel inspection of the books in bad faith and for an improper purpose, that the shareholder’s sole purpose was “the culmination of a long but disagreeable relationship between the parties,” and that the shareholder “sought to force appellant either to purchase appellee's stock at a grossly inflated price or to sell to appellee at a grossly inadequate price.” The court held that “to raise a fact issue on proper purpose, specific facts must be alleged in the pleadings. If this were not required, a corporation that desired to defeat the right of its stockholders to inspect the books, could do so by alleging the ‘magic words’ that the stockholder had ‘improper purposes for wanting to inspect the books.’ Thus a corporation could obtain a jury trial on proper purpose, resulting in lengthy delays in the determination of the stockholder's rights to the inspection. Mandamus would be effectively destroyed under such circumstances.” “The right of a stockholder as conferred by statute to examine the corporate records, although not absolute, is a valuable right. It cannot be circumvented by the mere conclusion that no proper purpose exists. Facts must be alleged which show an improper motive. Conclusionary statements such as the existence of bad faith, improper purpose, or a disagreeable relationship, are not sufficient to raise a fact issue.”
Furthermore, the answer must be sworn. In the absence of a verified denial of that fact, it is admitted as true. However, a defendant who fails to file a verified denial may still controvert facts in a petition for mandamus by filing supporting affidavits.
In a Texas writ of mandamus proceeding, discovery is available. Both parties will want to take depositions and other discovery regarding the positions and proof relating to the shareholder’s purpose and other relevant matters. However, having initiated the mandamus lawsuit to force the corporation to permit his inspection of corporate records, the shareholder may not obtain those same records by means of a request for production of documents because production of the documents in discovery would effectively grant the shareholder the ultimate relief he is seeking in the action and would render the lawsuit moot. This situation was presented to the Dallas court of appeals in In re Kimberley-Clark Corp. The court held that a trial court abuses its discretion if it grants an order compelling discovery that allows a party to receive through discovery the relief sought in the main suit. In Uvalde Rock Asphalt Co. v. Loughridge, the Texas Supreme Court held that the trial judge abused discretion in denying company's request for jury trial on issue of proper purpose for inspection of corporate records and granting shareholders' motion for discovery; company was entitled to mandamus relief because shareholders would receive, through trial court's order, discovery of all relief sought in main suit.
The problem comes when a shareholder has joined other claims with the mandamus, such as shareholder oppression. Corporate documents may be relevant and discoverable in derivative action, and are vitally necessary in order to prove the case. One court has noted that a shareholder in litigation against a corporation is in no way restricted in civil discovery by the procedural or substantive requirements of the inspection statute; the two procedures are totally independent. Courts frequently note that shareholders in litigation with corporation are entitled to receive in discovery production of documents that might have otherwise been sought through a demand for inspection.
How then is should an attorney deal with a situation in which the existence of his client’s mandamus claim may interfere with his discovery on the other claims? Several options are available. The shareholder’s attorney should send a document request regardless. If the corporation produces the documents voluntarily, then it waives its defenses in the mandamus action, and the writ of mandamus relief becomes moot. A shareholder may still recover attorney's fees under the inspection statute, but only through the date that the documents were received in discovery and will have an obligation to segregate writ of mandamus fees from those relating to other claims. Alternatively, the shareholder can attempt to have the mandamus claim resolved first, either by summary judgment, or a bifurcated trial if the court will permit it on an expedited basis.
If the corporation has not followed the pleading requirements for the answer to file verified, specific, non-conclusory denials of all the material facts that were properly pleaded in the verified petition, then the shareholder should be able to move for summary judgment that is essentially a judgment on the pleadings. Verified allegations in a petition for writ of mandamus are taken as true if not specifically and factually controverted by a verified denial. “Under the rules of pleading and practice in mandamus actions where defendants stand solely on an unverified general denial, plaintiff is entitled to summary judgment if his pleadings state facts entitling him to the relief sued for.”
If the corporation’s pleadings do properly raise the issue of a defense, then the shareholder may still be able to obtain a traditional summary judgment. Particularly if the sole issue is the shareholder’s subjective motives, then the shareholder will be entitled to move for summary judgment on his own affidavit as to his actual motives. Citizens Association for Sound Energy v. Boltz considered such a summary judgment and held that the shareholders’ affidavit as to his proper purpose was competent evidence. That court of appeals affirmed the summary judgment ordering inspection, holding that the defendant had not met its burden to support allegations of improper purpose with summary judgment evidence.
If the corporation raises a fact issue as to any of the elements of the mandamus cause of action, typically the
proper purpose element, then the parties are entitled to a jury trial of that issue. “Although the right to a jury trial does not exist in all situations where mandamus is applicable, it does exist in the situation where a corporation, in resisting a stockholder's attempt to inspect the books and records, raises by its pleadings a fact issue over whether the stockholder has a proper purpose for wanting to see the books.” The parties also have the right to a jury trial on the issues of reasonableness and necessity of costs and fees incurred in the mandamus action.