With Court “ordered” corporate record inspections, who pays for the fees? More often than not, shareholders have to pay their own attorneys’ fees.
In Bauk v. Piedmont Cheerwine Bottling Company, 18 CVS 358, Order and Opinion on Petitioners’ Requests for Costs and Fees and to Modify Protective Order, 2020 NCBC 6, Judge Conrad denied the shareholders’ request for attorneys’ fees incurred in forcing the corporation to adequately respond to their document inspection demands. The reason: a consent order – although sensible – does not trigger the right to attorneys’ fees under North Carolina’s Business Corporation Act (the “BCA”). Instead, inspection must be compelled by an adjudicative order (i.e., one with findings of fact and conclusions of law).
Quick Background on BCA: The BCA allows a shareholder, acting in good faith, to demand inspection of certain corporate books and records. N.C. Gen. Stat. 55-16-02. Shareholder inspection demands are intrusive and potentially abusive. These demands often come after the corporation and the shareholder are already at odds, so corporations typically object or try to narrow them. Naturally, disagreements ensue.
The BCA contemplates corporate resistance. If a corporation fails to comply, the BCA allows a shareholder to petition for an order compelling inspection. N.C. Gen. Stat. 55-16-4. If the Court orders inspection, the BCA requires the Court to also award a shareholder’s costs (including reasonable attorneys’ fees) – unless the Corporation proves it had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded. N.C. Gen. Stat. 55-16-4(c).
Bauk v. Piedmont Cheerwine Bottling Company: In this case, certain Cheerwine shareholders suspected management of self-dealing. Over the span of several years, the shareholders tried to investigate – making periodic requests for corporate records, which the shareholders say the corporation partly, but never fully satisfied. Fed up, the shareholders filed a petition under N.C. Gen. Stat. 55-16-04, seeking a court order compelling inspection.
The corporation resisted. It claimed to be the victim of years of shareholder harassment. By the corporation’s count, it had produced thousands of pages of information in response to at least thirty inspection requests, and it refused only those requests that were repetitive or that sought information to which the shareholders were not entitled.
After some apparent judicial encouragement by Judge Conrad, the parties reached a compromise that was memorialized in a consent order that Judge Conrad signed. Thereafter, the corporation produced agreed-upon documents.
Having obtained the requested documents via a court order, the shareholders then sought their attorneys’ fees under the BCA, which states:
[i]f the court orders inspection and copying of the records demanded, it shall also order the corporation to pay the shareholders costs (including reasonable attorneys’ fees) incurred to obtain the order unless the corporation proves that it refused inspection in good faith because it had a reasonable basis for doubt about the right of the shareholder to inspect the records demanded.
N.C. Gen. Stat. 55-16-04(c).
The shareholders argued that since there was an order compelling production (albeit a consent order), they were entitled to fees. In response, the corporation relied on the Court of Appeals decision in Carswell v. Hendersonville Country Club, Inc., 169 N.C. App. 227, 609 S.E.2d 460 (N.C. Ct. App. 2005). The corporation argued that under Carswell, a mere consent order is not enough; instead, an adjudicative order with findings of fact and law is required.
Following Carswell, Judge Conrad denies the shareholders’ motion for attorney’s fees. Carswell involved a similar situation. Mr. Carswell, a shareholder, asked to inspect the corporation’s books, and the corporation (a country club) resisted. Although the club was generally compliant (providing access to most of the documents), a dispute arose over whether Carswell was entitled to a complete membership list (with addresses). Carswell hired an attorney who petitioned for access under the BCA. The club responded with a motion to dismiss and suspension of Carswell’s club membership. In the end, cooler heads prevailed, and they were able to negotiate a settlement which included production of the records, membership reinstatement, and dismissal of the petition with prejudice. The settlement was memorialized in a consent order approved by a judge.
In their settlement, the parties cleverly carved out the issue of attorney fees. The consent order stated that the parties could submit by brief and affidavit their respective arguments on attorney fees. The trial court reviewed the materials and ruled that each side should bear its own costs and fees. Mr. Carswell appealed, arguing that an award of attorney fees was mandated under N.C. Gen. Stat. 55-16-04(c) (quoted above). The Court of Appeals disagreed.
The Court of Appeals explained that the parties’ agreement to allow access, reinstate membership, etc. was not the kind of inspection order discussed in 55-16-04(c). It was not an “adjudication of rights,” noting in particular that it had no findings of fact or conclusions of law. Instead, it was merely a court-approved contract without any judicial determinations. Thus, even though he got the corporate records, Mr. Carswell was not entitled to his fees under 55-16-04(c).
The Cheerwine shareholders, of course, tried to distinguish Carswell’s order as more akin to a general settlement and compromise. They argued that Carswell order did more than enforce document inspection rights – it reinstated club membership and allowed reciprocal document access. It also dismissed the petition for documents with prejudice. By contrast, the Cheerwine consent order was narrow, focused only on document production. The Cheerwine shareholders also argued policy: requiring an adjudicated order as a predicate to fee recovery invites abuse. It removes a key incentive for a corporation to comply with pre-litigation demands. Shareholders might give up rather than hire a lawyer to press their rights.
Judge Conrad considered these arguments but was not persuaded. Dutifully following Carswell, Judge Conrad sided with the corporation. He explained that although the Court approved it, the consent order was not an adjudicative order. Like the order in Carswell, it had no findings of fact or conclusions of law, and it adjudicated nothing. It simply memorialized the parties’ agreement.
As to the potential for abuse, Judge Conrad noted it was “[a] danger perhaps, but the severity is debatable.” Constrained by Carswell, and more broadly by North Carolina’s general rule that statutes authorizing attorney’s fees are to be strictly construed, Judge Conrad denied the shareholders’ request for fees.
Takeaway: The key takeaway is that a shareholder’s right to recover attorney fees under 55-16-04(c) seems broad but really is limited. A shareholder needs an adjudicative order (with findings of fact and conclusions of law), which the corporation can easily avoid even after a shareholder files a petition – by entering into a consent order or by simply producing the requested documents before an adjudicated order is entered (leaving nothing to adjudicate). So, if it is fees you’re looking for, keep looking. The fee shifting provision in the BCA has little practical value to a shareholder seeking corporate documents.