Major Expansion at an Exclusive Country Club Leads to a Fight over Access to Records, Plans and Financials
At one of Charlotte’s finest golf courses, Myers Park Country Club, the summer weather isn’t all that’s leaving some members hot under the collar. As the club embarks on a $27 million renovation plan tied to its 100th anniversary, member Mark Erwin has sued the club under state corporate inspection laws for a better look at records relating to the approvals, plans and financials related to the project. In Erwin v. Myers Park Country Club, Inc., 2021 NCBC 45, the Business Court surveys the “absolute” and “qualified” rights of inspection available to a member like Erwin, and in the process sheds some light on the typically private affairs of exclusive clubs.
Club renovations are common, but a $27 million price tag to “be partially funded through a combination of assessments, monthly fees, and member fees” is likely to draw a curious glance. Id. ¶ 11. Here, Erwin sought to gather information on the “Connecting the Centuries” project to examine the propriety of related transactions, potential mismanagement, and financial feasibility to share with other club members and shareholders. Id. ¶¶ 14, 49.
- Court fights over shareholder inspections may, on balance, lead to public disclosure of more sensitive information than would an initial, agreed production.
- Corporations in North Carolina can’t use the Business Judgment Rule to shield records from a shareholder’s exercise of statutory inspection rights.
The North Carolina Business Corporation Act provides a “qualified shareholder” – at least six months as a member or holder of 5% of any share class – the opportunity to inspect certain corporate records in two, distinct areas generally considered as “absolute” and “qualified” inspection rights under N.C. Gen. Stat. § 55-16-02(a), (b), (g).
Judge Robinson affirmed Erwin’s access to several information categories to which he had “absolute” access under the statute, including shareholder minutes and records of final project-related actions taken by the shareholders (without any meeting), as well as any revenue shortfalls experienced by the club from 2019 through March 2021. 2021 NCBC ¶¶ 33, 35-36. The Court noted, interestingly, that the club’s Rule 30(b)(6) deponent testified there were no minutes created of meetings, though there may have been at least one held during the time period. Id. ¶ 33.
The Court also upheld Erwin’s right to “written communications” to shareholders related to the renovation project, and any revenue shortfalls or plans to address them. As is typical, the really interesting stuff was not access to the discovery loaf itself but how the parties proposed to slice it. Erwin sought project “renderings, narratives, presentations, and brochures” shared by the club at a shareholder meeting. The club argued such materials weren’t written communications, but the Court disagreed and ordered production. Id. ¶ 39-40.
The Court also refereed a dispute about the appropriate definition of a “revenue shortfall.” The club argued there were no such shortfalls, showing that in 2020 it “ended the year with a record high” of $2.87 million in cash – nearly double its year-end 2019 position. Id. ¶ 41. But Judge Robinson sided with Erwin’s approach: that his request rightly sought information on shortfalls in actual club revenue as measured against its projected revenue. ¶ 42.
So-called “qualified” inspection rights differ from “absolute” ones in that they require a showing that demands are “made in good faith and for a proper purpose,” set forth with “reasonable particularity,” and are “directly connected” to the requester’s purpose. N.C. Gen. Stat. § 55-16-02(c). In parsing several inspection requests under the “qualified” standard, the Court considered the club’s argument that Erwin’s exercise was not for a “proper purpose” because it sought “a re-assessment of the Board’s business judgment as to whether the Project should or should not be undertaken and what contractors should or should not be hired to complete the Project.” The Court found no controlling law to support the contention that the “business judgment rule” could be used to ward off a shareholder’s statutory inspection rights. 2021 NCBC ¶ 47-48.
Brad Risinger is a partner in the Raleigh office of Fox Rothschild LLP.