In Farnum v. Iris Biotechnologies, Inc., the appellate court for California’s Sixth District recently confronted the issue of how to construe “without justification” in Corporations Code section 1604, which has a discretionary fee-shifting provision in favor of a shareholder of a California corporation where a corporation has withheld from shareholder inspection documents “without justification.” There were no published cases interpreting this section.

The Sixth District borrowed the “substantial justification” test under the Civil Discovery Act—whether the corporation’s denial was “well grounded in both law and fact.” In the case, it was established that the corporation’s denial was proper on 23 out of 31 document categories and the remaining 8 categories were narrowed to one year. Thus, the appellate court found it was not an abuse of discretion for the lower court to deny fees to the shareholder.

If confronted with a shareholder request to review corporate records contact your business legal counsel to assure that any documents withheld from review and withheld with “substantial justification” to avoid paying the shareholder’s legal fees and costs.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.