Judge William A. Crowfoot, Case Number: 23AHCP00478, Date: 2024-05-06 Tentative Ruling

Judge: William A. Crowfoot, Case: 23AHCP00478, Date: 2024-05-06 Tentative Ruling

On November 13, 2023, Sean E. Rogers (“Petitioner”) filed this petition for a writ of mandate ordering respondent Pasaca Capital, Inc. (“Pasaca”) and its controlling stockholder, respondent Charles Huang (“Huang”) to allow the inspection and copying of Pasaca’s corporate records.

On January 9, 2024, Pasaca and Huang (collectively, “Respondents”) filed a response. The response and supporting papers were ordered sealed by the Honorable Margaret L. Oldendorf on February 2, 2024, and unredacted copies were filed on February 26, 2024.

On February 27, 2024, Petitioner filed a reply brief under seal. No public copy with the appropriate redactions have been filed. Petitioner is ordered to do so within 5 days of the date of this hearing.

Corporations Code section 1601 provides in relevant part: “The accounting books,¿records,¿and minutes of proceedings of the shareholders and the board and committees of the board of any domestic corporation, and of any foreign corporation keeping any¿records in this state or having its principal executive office in this state …¿shall be open to inspection¿at the corporation's principal office in this state …¿upon the written demand on the corporation of any shareholder … at any reasonable time during usual business hours, for a purpose reasonably related to¿the¿holder's interests as a shareholder ….” (Corp. Code § 1601(a)(1).) “Upon refusal of a lawful demand for inspection, the superior court of the proper county, may enforce the right of inspection with just and proper conditions ….” (Id., § 1603.)

Corporations Code section 1602 governs the inspection rights of a director. This is an “absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. . . . This section applies to a director of any foreign corporation having its principal office in California or customarily holding meetings of its board in California.” (Corp. Code, § 1602.)

Petitioner states that during the COVID-19 crisis, he was solicited by Respondents and induced to serve as a director for Pasaca and its Chief Executive Officer (“CEO”), as well as a director of Pasaca’s most profitable subsidiary, Innova Medical Group, Inc. (“Innova”). (Petition, ¶ 2.) Eventually, he was terminated from employment at both Pasaca and Innova after being accused of self-dealing and other malfeasance. (Petition, ¶ 3.)

Prior to his removal as a director, Petitioner demanded, pursuant to Corporations Code section 1602, to inspect and copy Pasaca’s corporate records as well as those of its subsidiaries. (Petition, ¶ 4.) Pasaca responded by immediately removing Petitioner as a director and refusing his inspection demand on the basis of his removal. (Petition, ¶ 5.) Then, Petitioner, as a shareholder with no less than 5% of Pasaca’s outstanding shares, made a demand pursuant to Corporations Code section 1601 to inspect the accounting books, records, and minutes of proceedings of the shareholders and the board and committees of the board of Pasaca. (Petition, ¶ 6.) Pasaca rejected this demand on the grounds that Petitioner did not demonstrate that the demand was “made for a proper purpose.” (Petition, ¶ 7.)

First, Respondents argue that Corporation Code section 1602 does not apply because Pasaca is incorporated in Nevada and the internal affairs doctrine requires the application of Nevada law. “The internal affairs doctrine is a conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation's internal affairs ... because otherwise a corporation could be faced with conflicting demands.” (Edgar v. MITE Corp. (1988) 457 U.S. 624, 645.)

However, the Court finds it unnecessary to analyze whether the internal affairs doctrine precludes the application of Corporation Code section 1602 because Respondents do not identify – and the Court has not independently found – any conflicting Nevada statute which governs directors’ inspection rights.

The Court also addresses Respondents’ argument about judicial estoppel. Respondents claim that Petitioner is estopped from arguing that Nevada law does not apply because he has already conceded that it does in a different proceeding. (Response, pp. 12-13.) In California, courts consider five factors in determining whether to apply judicial estoppel: (1) the same party has taken two positions; (2) the positions were taken in judicial or quasi-judicial administrative proceedings; (3) the party was successful in asserting the first position (i.e., the tribunal adopted the position or accepted it as true); (4) the two positions are totally inconsistent; and (5) the first position was not taken as a result of ignorance, fraud, or mistake. (Gottlieb v. Kest (2006) 141 Cal.App.4th 110, 131.)

Here, Respondents refer to a different unrelated proceeding that Petitioner stipulated would be governed by Nevada law. But this other proceeding does not involve and is not related to any inspection rights Petitioner may have as a director or shareholder. Moreover, judicial estoppel is an equitable doctrine, and its application, even where all necessary elements are present, is discretionary. (MW Erectors, Inc. v. Niederhauser Ornamental & Metal Works Co., Inc. (2005) 36 Cal.4th 412, 422.) Here, given the California Legislature’s strong endorsement of public policy permitting directors to inspect records, and the extensive connections Pasaca has with California, the Court declines to conclude that Petitioner is judicially estopped from asserting that Nevada law governs Pasaca for all purposes.

Next, Respondents argue that Petitioner no longer has standing to assert a right to inspect Pasaca’s records because Petitioner is no longer a director. (Response, p. 13.) Respondents also argue that Petitioner has a conflict of interest because Pasaca is currently investigating him for misconduct; Respondents claim that Petitioner’s competing interests makes “disclosure of any records to him problematic.” (Response, p. 14.)

In his reply brief, Petitioner argues that, as a former director, he has a qualified right of inspection within an exception to the standing requirements of Corporations Code section 1602. Petitioner likens himself to the appellant in Wolf v. CDS Devco (2010) 185 Cal.App.4th 903, 921-922, a former corporate director who feared that he would be subject to claims by minority shareholders that he did not adequately combat corporate mismanagement and believed that he should be able to inspect records in order to be able to defend himself. The court in Wolf concluded that the former director did not allege sufficient facts to demonstrate that he faced a realistic threat of personal liability. In contrast, Petitioner argues he is exposed to personal liability for acts he purportedly committed during his time as a director of Pasaca because Pasaca has accused him of committing fraud and allowing an alleged childhood friend to charge excessive and inappropriate prices to Claire Holdings, Inc., which was a joint venture between Pasaca and LivePerson, Inc. (Reply, p. 10; Petition, ¶¶ 25-28, 56.) In fact, Respondents confirm Petitioner’s fears of potential personal liability by stating in their response that Pasaca is currently investigating Petitioner for misconduct, including fraud and any conflict of interest Petitioner may have had with respect to the decision to enter into the joint venture with Liveperson, Inc. (Response, p. 15.)

Therefore, Petitioner has a right as a former director to inspect and copy all of Pasaca’s books, records and documents (as well as those of Pasaca’s subsidiary corporations, both domestic or foreign) up until the date of Petitioner’s removal as a director.

With respect to the scope of Petitioner’s inspection rights as a shareholder, Respondents argue that, under Nevada law, Petitioner would not have a right to inspect Pasaca’s records because Petitioner is not a shareholder with a 15% stake or more. (NRS 78.257(1).) In contrast, California does not have a minimum ownership threshold. However, despite this conflict, the internal affairs doctrine does not apply because applying Nevada law to preclude Petitioner’s from inspecting corporate records would impair California’s interest in allowing such inspection, as explicitly expressed in section 1601, which was intended to apply to foreign corporations as well as domestic ones. Therefore, pursuant to Corporations Code section 1601, Petitioner, as a shareholder, is entitled to inspect Pasaca’s accounting books, records, and minutes of proceedings of the shareholders and the board and committees of the board, for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust certificate.”

Petitioner’s demand letter specified that the purpose for inspecting Pasaca’s records was to: (1) determine the value of his shares, and (2) to determine whether to sell his interests in the corporation. (Petition, Ex. 3.) These are well-recognized purposes related to a shareholder’s interest. (Schnabel v. Superior Court (1993) 5 Cal.4th 704, 715.) However, Respondents argue that Petitioner’s stated purpose is belied by the broad scope of documents identified in his demand. “[T]he right of inspection does not extend to records not reasonably related to the proper purpose for which it is sought.” (Schnabel, supra, 5 Cal.4th at p. 717.) Respondents argue that Petitioner would only need limited records to assess the value of his shares, and these records would not include Pasaca’s tax and audit information that he demands. (Response, pp. 16-17.) The Court disagrees. Even if Petitioner would need limited records, this does not mean that the documents requested under the category of accounting books and records in Schedule 2 of Petitioner’s demand letter (attached as Exhibit 3 to the Petition) are “not reasonably related” to the stated purpose of determining the value of Petitioner’s shares. Furthermore, despite Respondents’ complaints about the volume of documents which would need to be produced, Respondents provide no evidence of such voluminosity, and the Court is skeptical of any such unsubstantiated representation because the accounting books and records demanded are mostly limited to those for the last two to five fiscal years.

Respondents also argue that Petitioner’s inspection demand is impermissibly overbroad because it seeks records of Pasaca’s subsidiaries. This is inaccurate. The right of inspection created by section 1601 “shall extend to the records of each subsidiary of a corporation subject to this subdivision.” (Corp. Code, § 1601.)

Last, Respondents argue that Petitioner’s request for shareholder lists and registers, stock ledgers, and other documents relating to Pasaca’s securities issuances and sales are not permissible under Corporations Code section 1601. Respondents also argue that Petitioner is not entitled to any documents protected by privacy interests and/or attorney-client privileged information. These arguments are well-taken based on the plain language of section 1601, which only includes accounting records, books, and minutes. This is not to say that Petitioner may not be allowed to inspect documents related to Pasaca’s securities issuances and sales under some other section of the Corporations Code.

Based on the foregoing, the Court concludes that Petitioner is entitled to inspect the accounting books, records, and minutes as requested in Exhibit 5 of the Petition, but is limited to Schedule 2, Categories A and B. Pasaca may redact the records as necessary to preserve privacy rights and withhold any documents on the basis of attorney-client privilege.

Respondents argue that Huang is improperly named in this petition because he is an individual who is not responsible for providing corporate records under Corporations Code sections 1601 or 1602, not a corporate entity. (Response, p. 17.) In his reply, Petitioner argues that Huang is joined as an alter ego of Pasaca. (Reply, p. 14.) Petitioner states that Huang is Pasaca’s majority shareholder and dominates the corporation, “exercising unfettered control over its affairs”, such that there is no real separation between the two. (Ibid.) Huang is also Pasaca’s current Chairman and its Chief Financial Officer. Petitioner further claims that Huang engaged in self-dealing and treated Pasaca and its assets as Huang’s personal property and resisted Petitioner’s attempts to establish a corporate compliance program, corporate governance policies, or any controls and procedures at Pasaca and its portfolio companies. (Petition, ¶ 24.)

A plaintiff seeking to invoke the alter ego doctrine must prove two conditions: (1) unity of interest and ownership between the two entities and (2) an inequitable result if the two entities are not equally liable. (Constellation-F, LLC v. World Trading 23, Inc. (2020) 45 Cal.App.5th 22, 30.) Petitioner argues that Huang will likely continue to deny Petitioner his inspection rights and deprive Petitioner of the benefit of the Court’s order. (Reply, p. 14.)

Any finding of alter ego liability would be preemptive and the possibility that Pasaca will not comply with the Court’s writ is insufficient to show that inequity would result.

Accordingly, the Petition is granted in part. The Court issues a peremptory writ ordering Pasaca to permit Petitioner’s inspection of books, records and documents (as well as those of Pasaca’s subsidiary corporations, both domestic or foreign) up until the date of Petitioner’s removal as a director, as identified in Exhibit 5, Schedule 1 attached to the Petition, pursuant to Corporations Code section 1602.

The Court also orders Pasaca to permit Petitioner’s inspection and copying of Pasaca’s accounting books, records, and minutes of proceedings as identified in Exhibit 5, Schedule 2, Categories A and B, as well as those of Pasaca’s subsidiaries keeping any records in, or having its principal office in, California, pursuant to Corporations Code section 1601. Pasaca may redact these records as necessary to preserve privacy rights and withhold any documents on the basis of attorney-client privilege.

Petitioner’s request for fees and costs is denied. Corporations Code section 1601 does not include inspection of the documents related to securities issuances and sales. Therefore, Pasaca was substantially justified in refusing Petitioner’s request as a shareholder. There is no basis to recover fees and costs in connection with a director’s right to inspection.

William A. Crowfoot

Judge of the Superior Court

Parties who intend to submit on this tentative must send an email to the Court at ALHDEPT3@lacourt.org indicating intention to submit on the tentative as directed by the instructions provided on the court website at www.lacourt.org. Please be advised that if you submit on the tentative and elect not to appear at the hearing, the opposing party may nevertheless appear at the hearing and argue the matter. Unless you receive a submission from all other parties in the matter, you should assume that others might appear at the hearing to argue. If the Court does not receive emails from the parties indicating submission on this tentative ruling and there are no appearances at the hearing, the Court may, at its discretion, adopt the tentative as the final order or place the motion off calendar.