Closely held family corporations are often grounds for showing the complicated nature of familial relationships. This is on display in Hammoud v. Advent Home Medical, a recent Michigan Court of Appeals case (No. 340502) which illustrates the interplay of discord among family members, and the assertion of rights under the Michigan Business Corporation Act (MBCA).
In Hammoud, Amanda Hammoud owned 400 shares or 40% of stock in Advent Home Medical, Inc., transferred to her by her mother Cichon, the President of the company, in 2011. According to the pleadings, the mother and daughter became estranged over time. In 2017, Hammoud sent a letter to Cichon requesting “its statement of income for the fiscal year” and “if prepared by the corporation, its statement of source and application for funds for the fiscal year.” She also requested Advent’s “stock ledger and list of shareholders”, “the corporation’s accounting records, including its general ledger(s), bank statements, profit and loss statements, balance sheets, tax returns and payroll records.”
The reason behind her request was to “monitor the financial health of the corporation, especially given the recent communications about the corporation’s financial position and financial decisions reducing the benefits and payments to shareholders and employees,” and to “affirm her ownership/shareholder share” and to ensure compliance with its Articles of Incorporation, By-Laws, and Policies and Procedures.
The information was requested pursuant to MCL 450.1487(1) and 450.1487(2) which allow a corporate shareholder access to corporate documents. When the corporation did not respond to her request, claiming she was not a shareholder, Hammoud filed suit in Oakland Circuit Court pursuant to 450.1487(3), which provides that “if the corporation does not permit an inspection within 5 business days after a demand has been received in compliance with subsection (2) . . . the shareholder may apply to the circuit court . . . for an order of inspection.” Cichon disputed Hammoud was a shareholder, and the reasons for the stock transfer, alleging fraud, yet, the fact of the transfer was undisputed.
The trial court found Hammoud satisfied that she was a shareholder, and issued an order of mandamus requiring Advent to produce the records. Advent again refused. The court then issued a secondary order mandating the inspection of certain documents but not others. Advent appealed. In its first trip to the appeals court, Advent sought peremptory reversal of the trial court’s order. The court of appeals vacated the circuit court’s order and remanded for a determination of whether Hammoud satisfied the statutory prerequisites to inspect defendant’s records pursuant to MCL 450.1487:
- That a shareholder give the corporation a written demand describing the purpose of the inspection
- Establish a proper purpose for the inspection
- Establish that the records sought are directly connected with that purpose.
The circuit court found Hammoud’s stated purpose for inspecting various accounting records proper (“to monitor the financial health of the corporation”). But found that not all the records requested were “directly connected with [that] purpose” and excluded payroll records, and limited other accounting records to fiscal years 2015 and 2016, denying 2017 records.
The trial court also found that records pertaining to the bank statements, profit and loss statements, profit and loss statements, general ledgers, balance sheets, tax returns and payroll records were not directly connected with the purpose of “ensuring Advent was in compliance with its Articles of Incorporation, By-Laws and Policies and Procedures.”
Both parties appealed. The appellate court affirmed that Hammoud had a right as a shareholder to inspect the documents requested. The appellate court confirmed that she produced sufficient support of her status as shareholder:
- A notarized transfer of stock certificate confirming she owned 400 shares of stock
- Two certificates of partnership
- Shareholder status signed by Hammoud and Cichon
Moreover, Advent did not challenge the authenticity of the documents, present evidence contradicting that Hammoud owned the shares, or produce any contradictory evidence. The evidence established that she was a shareholder for the purpose of the request.
The appellate court then considered whether the circuit court correctly concluded that certain corporate records were subject to inspection, while others were not. The appellate court found the trial court erred in limiting the record production to 2015 and 2016 fiscal years.
It also found that shareholder records and the accounting records were directly connected to her stated purpose of “protection of her shareholder interest.” It also found no rational basis for excluding the payroll records from inspection, given that it related to the corporation’s financial health. The appellate court reversed these rulings of the circuit court’s order.
The bottom line here was that a Shareholder who can show their status as Shareholder of record of the corporation has rights to inspect corporate records and accounting records provided they can show a proper purpose for the inquiry. In this case the Shareholder was able to demonstrate she was a shareholder of record, and also provided a proper purpose for all the records she requested.