Lead Opinion
{¶ 1} The issue in this case is whether appellants have a right to inspect the records of a wholly owned subsidiary of the company in which they own stock. For the reasons that follow, we conclude that they do.
{¶ 2} Appellants Jared, Nathan, and Samuel Danziger own stock in Croghan Bancshares, Inc. (“the company”), which has one operating asset, Croghan Colonial Bank (“the bank”). The bank has only one stockholder, the company. In February 2001, the Danzigers sent a letter to the company demanding to review the corporate minutes of the company and the bank. When the company failed to respond, the Danzigers filed a complaint in common pleas court, asserting that they had a right as shareholders of the company to inspect the corporate minutes of both the company and the bank.
{¶ 3} After receiving the complaint, the company informed the Danzigers that it would permit them to examine its corporate minutes. The company also informed the Danzigers that it would not permit them to examine the bank’s corporate minutes because the Danzigers were not shareholders of the bank. The Danzigers advised the company that they did not distinguish between the
{¶ 4} The Danzigers filed exhibits with the trial court demonstrating that the company and the bank have the same directors and the same officers, that the company owns all of the bank’s stock, and that the company’s sole source of income is dividends paid by the bank. Both parties moved for summary judgment. The trial court granted the company’s motion for summary judgment, finding that the company had complied with R.C. 1701.37(C) by offering the Danzigers an opportunity to inspect and copy its minutes. The court also found that the Danzigers did not have a right to examine the minutes of the bank pursuant to R.C. 1103.16(C) because they were not shareholders of the bank. The court of appeals affirmed the trial court’s judgment.
{¶ 5} The cause is now before this court upon our acceptance of a discretionary appeal.
{¶ 6} At common law, the right of a shareholder to inspect the books and records of a corporation was a fundamental “incident to ownership of stock.” Cincinnati Volksblatt Co. v. Hoffmeister (1900),
{¶ 7} “Any shareholder of the corporation, upon written demand stating the specific purpose thereof, shall have the right to examine in person or by agent or attorney at any reasonable time and for any reasonable and proper purpose, the articles of the corporation, its regulations, its books and records of account, minutes, and records of shareholders * *
{¶ 8} The right of shareholders of banks to inspect a bank’s records is set forth separately in R.C. 1103.16(C), which provides:
{¶ 9} “Any shareholder of the bank, upon written demand stating the specific purpose of the demand, has the right to examine in person or by agent or attorney at any reasonable time and for any reasonable and proper purpose, the books and records of the bank, except books and records of deposit, agency or fiduciary accounts, loan records, and other records relating to customer services or transactions.”
{¶ 10} R.C. 1701.37(C) and 1103.16(C) do not address whether shareholders have a right to inspect the records of a wholly owned subsidiary of the company in which they own stock. R.C. 1701.37(C) and 1103.16(C) provide inspection
{¶ 11} That conclusion is not dispositive, because the Danzigers also assert a common-law right to inspect. In Ohio, “[n]ot every statute is to be read as an abrogation of the common law. ‘Statutes are to be read and construed in the light of and with reference to the rules and principles of the common law in force at the time of their enactment, and in giving construction to a statute the legislature will not be presumed or held, to have intended a repeal of the settled rules of the common law unless the language employed by it dearly expresses or imports such intention.’ ” (Emphasis sic.) Bresnik v. Beulah Park Ltd. Partnership, Inc. (1993),
{¶ 12} In State ex rel. Brown v. III Investments, Inc. (Mo.App.2002),
{¶ 13} Whether shareholders have a right to inspect the corporate minutes of a wholly owned subsidiary of the company in which they own stock is an issue of first impression in Ohio. Accordingly, we look outside Ohio for guidance in resolving the issue.
{¶ 14} “Although there is surprisingly little authority on the matter, the cases considering this issue have divided over whether a shareholder’s right of inspection includes the books and records of subsidiary corporations as well.” Phillip I. Blumberg, The Increasing Recognition of Enterprise Principles in Determining Parent and Subsidiary Corporation Liabilities (1996), 28 Conn.L.Rev. 295, 340. There are, however, “a number of cases in which the shareholder’s right to inspect books and records has been extended to cover the books and records of a subsidiary.” Melvin Aron Eisenberg, Megasubsidiaries: The Effect of Corporate Structure on Corporate Control (1971), 84 Harv.L.Rev. 1577, 1595, fn. 92, citing
{¶ 15} Our review of cases leads us to adopt the general view that shareholders have a common-law right to inspect corporate records of a wholly owned subsidiary of the company in which they own stock where the separate corporate existence of the subsidiary corporation should be disregarded. In Woodworth v. Old Second Natl. Bank,
{¶ 16} 18A Am.Jur.2d (1985), Corporations, Section 400 states:
{¶ 17} “Courts have generally recognized, both at common law and under statute, the right of shareholders to inspect the corporate documents of a corporation which is the subsidiary of the corporation in which the shareholders hold stock. In such cases a court will disregard the legal fiction of separate and distinct corporate entities. Thus, it has been held that stockholders of a corporation were entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors. Indeed, it has been suggested that greater liberality should be accorded one seeking inspection of the books and records of a subsidiary than in a situation in
{¶ 18} 5A Fletcher Cyclopedia of the Law of Private Corporations (1995), Section 2230 states:
{¶ 19} “[I]n order for shareholders of the parent to establish their rights to inspect the books and records of the subsidiary, they must make some showing of identity or misuse of the corporate form which will justify the disregard of the separate corporate existence of the two entities.”
{¶ 20} Today we adopt the majority rule and hold that, in Ohio, shareholders have a right at common law to inspect the records of a wholly owned subsidiary of the corporation in which they own stock when the parent corporation so controls and dominates the subsidiary that the separate corporate existence of the subsidiary should be disregarded. This right, always important, takes on a new significance in light of recent high-profile corporate scandals involving financial misdeeds. See Kathleen F. Brickey, From Enron to WorldCom and Beyond: Life and Crime after Sarbanes-Oxley (2003), 81 Wash.U.L.Q. 357. Those charged with protecting shareholders, such as investment banks, accountants, and lawyers, have not always been up to the task. See Gary J. Aguirre, The Enron Decision: Closing the Fraud-Free Zone on Errant Gatekeepers? (2003), 28 DelJ.Corp.L. 447. The common-law right to inspect gives shareholders additional opportunities to ferret out misdeeds and contributes to corporate transparency. Whether inquisitive shareholders could have prevented the worst offenses of the Enron scandal and others will never be known, but that was the purpose behind the right from the very beginning.
{¶ 21} We must now determine whether the facts in this case support a finding that the company so controls and dominates the bank that the separate corporate existence of the bank should be disregarded.
{¶ 22} The Supreme Court of Pennsylvania has stated:
{¶ 23} “[T]he facts indicate the Paper Company is merely a controlled subsidiary, using the same offices as Boxboard Company and having identical officers and directors. The rule is clear that ‘the stockholders of one company have a right to inspect the books and records of subsidiary companies where the latter are so organized and controlled, and their affairs so conducted, as to make them adjuncts or instrumentalities of the former Company.’ ” Boxboard Prods. Co.,
{¶ 24} In Carapico v. Philadelphia Stock Exchange, Inc. (Del.Ch.2000),
{¶ 25} In this case, we conclude that the separate corporate existence of the bank should be disregarded. The company owns all of the stock of the bank and has no assets other than the bank. The company and the bank have the same directors. All of the officers of the company are also officers of the bank. The company and the bank hold shareholders’ meetings on the same day and at the same place. All of the income of the company is derived from dividends paid by the bank. It is abundantly clear from reviewing the record that the company is the bank and that in this case, the bank’s separate corporate existence should be disregarded.
Judgment reversed.
Dissenting Opinion
dissenting.
{¶ 27} Treatment of the bank in this case as the alter ego of Croghan Bancshares, Inc. represents an unprecedented departure from the traditional application of the alter-ego doctrine. A review of cases from across the country reveals that courts are reluctant to disregard the separate corporate existence of a subsidiary company that conducts its business in corporate form. The facts of this case demonstrate the existence of a classic parent-subsidiary corporate relationship and do not support the majority’s conclusion that Croghan “so controls and dominates the [bank] that the separate corporate existence of the
{¶ 28} This is a matter of first impression in Ohio, and we should, I think, carefully and completely set forth the test to be applied when a shareholder seeks to examine books and records of a subsidiary corporation so that all courts of our state will know what factors should be considered in pondering further challenges in other cases. We should adopt the two-part standard utilized in virtually every jurisdiction that has considered the issue: the right of a shareholder of a parent corporation to inspect the books and records of a corporation does not include the right to inspect the books and records of a wholly owned subsidiary absent a showing of fraud or that the subsidiary is the alter ego of the parent corporation.
I
{¶ 29} The right of a shareholder to inspect the books and records of a corporation is a fundamental right incident to corporate ownership, which has been recognized at common law, see, e.g., Whitney v. Am. Shipbuilding Co. (1912), 14 Ohio N.P. (N.S.) 12,
{¶ 30} “(C) Any shareholder of the corporation, upon written demand stating the specific purpose thereof, shall have the right to examine in person or by agent or attorney at any reasonable time and for any reasonable and proper purpose, the articles of the corporation, its regulations, its books and records of account, minutes, and records of shareholders aforesaid, and voting trust agreements, if any, on file with the corporation, and to make copies or extracts thereof.”
{¶ 31} More specifically, R.C. 1103.16 provides for the inspection right of those who are shareholders of a bank. It states:
{¶ 32} “(C) Any shareholder of the bank, upon written demand stating the specific purpose of the demand, has the right to examine in person or by agent or attorney at any reasonable time and for any reasonable and proper purpose, the books and records of the bank, except books and records of deposit, agency or fiduciary accounts, loan records, and other records relating to customer services or transactions.”
A. COMMON LAW
{¶ 33} A review of common-law cases where shareholders asserted rights to inspect records of a subsidiary indicates that courts have consistently applied the same test for allowing inspection of the records of a subsidiary corporation: cases
{¶ 34} For example, in State ex. rel. Rogers v. Sherman Oil Co. (1922),
{¶ 35} And in Woodworth v. Old Second Natl. Bank (1908),
{¶ 36} Finally, in Bailey v. Boxboard Prods. Co. (1934),
B. STATUTORY ANALYSIS
{¶ 37} In interpretation of statutes, courts have extended this right to inspect only if the circumstances warrant a disregard of separate corporate existence.
{¶ 38} For example, in Saito v. McKesson HBOC, Inc. (Del.2002),
{¶ 39} In Skouras, a shareholder claimed that his statutory right of inspection extended to the corporation’s wholly owned subsidiaries because of a close relationship between the parent and the subsidiary corporations both as to management and policymaking. Concluding that “[m]ere control and even total ownership of one corporation by another is not sufficient to warrant the disregard of a separate corporate entity,” the court denied access. Id. at 681. See, also, Carapico v. Philadelphia Stock Exchange, Inc. (Del.Ch.2000),
{¶ 40} This Delaware rule has also been adopted and applied in Illinois. In S. Side Bank v. T.S.B. Corp. (1981),
{¶ 41} Further, in a California case, the court applied a similar rule and denied a shareholder access to the books and records of a subsidiary corporation. See Lisle v. Shipp (1929),
{¶ 42} Consistent with these holdings, courts have allowed shareholders of a parent corporation to inspect the books and records of a subsidiary upon a showing that their separate corporate existences should be disregarded because of fraud or because the subsidiary corporation is a mere alter ego of a parent corporation.
{¶ 43} In Williams v. Freeport Sulphur Co. (Tex.Civ.App.1930),
{¶ 44} In the instant case, because the Danzigers have not alleged fraud in their complaint, I would assert that the dispositive issue for this court should be limited to a determination of whether the bank is or is not the mere alter ego of Croghan. Although no Ohio court has established criteria for this determination, other courts across the country have developed some general principles for determining when separate corporate existence should be disregarded.
{¶ 45} For example, in United States v. Walton (C.A.6, 1990),
{¶ 46} Similarly, in Logal v. Inland Steel Industries, Inc.,
{¶ 47} Further, in Doughty v. CSX Transp., Inc. (1995),
{¶ 48} In Saeks v. Saeks (1985),
{¶ 49} The Texas Supreme Court has also recognized a similar rule. See Gentry v. Credit Plan Corp. of Houston (1975),
{¶ 50} Finally, in Skouras,
{¶ 51} Based on the foregoing, I believe that our court should consider a broad and inclusive list of factors in deciding whether Croghan so dominates and controls the bank that one is the alter ego of the other or that the two companies are in fact a single business entity or, to borrow language from the Texas Supreme Court, whether the “management and operations are assimilated to the extent that the subsidiary is simply a name or conduit through which the parent conducts its business.” Gentry,
II
{¶ 52} The undisputed facts in this case reveal that Croghan owns all of the shares of stock of the bank, that the same individuals serve as directors and officers of both companies, that Croghan board meetings occur separately from bank board meetings, that separate records are kept by each company, that the two corporations hold separate shareholders’ meetings, and that Croghan’s only source of income consists of dividends paid from the bank.
{¶ 53} These facts viewed alone, or considered as a whole, do not support the majority’s conclusion that Croghan and the bank should be treated as one entity, resulting in Croghan’s shareholders being able to inspect the bank’s records. None of these facts demonstrate that the bank is the mere alter ego of Croghan. In reality, these facts demonstrate separate corporate identity: separate meetings, separate record keeping, separate shareholder meetings, different assets owned and held by each corporation, different income streams, and the purely passive income Croghan derives from its stock ownership compared with income the bank derives from engaging in banking activities, such as commercial, personal, or mortgage lending. Presumably, the agenda for board meetings also differs for each corporation.
{¶ 54} The majority’s notion that one corporation is the alter ego of the other, based in part on its ownership of all of the shares of the subsidiary, is really not dispositive because, in reality, most holding companies own all or a substantial majority of the shares of any subsidiaries, and a wholly owned subsidiary is, by definition, a subsidiary in which the parent owns all of the subsidiary’s shares. Accordingly, that fact alone does not establish that the subsidiary is the mere alter ego of the parent.
{¶ 55} As the Texas Supreme Court noted in Gentry, “A subsidiary corporation will not be regarded as the alter ego of its parent merely because of stock ownership, a duplication of some or all of the directors or officers, or an exercise of the control that stock ownership gives to stockholders.” Id., 528 S.W.2d at
{¶ 56} The majority also seems to blur the distinction between corporate control incident to stock ownership and control of day-to-day operations of a subsidiary’s business. As the United States Supreme Court has observed, “it is hornbook law that ‘the exercise of the “control” which stock ownership gives to the stockholders * * * will not create liability beyond the assets of the subsidiary. That “control” includes the election of directors, the making of by-laws * * * and the doing of all other acts incident to the legal status of stockholders.’ ” United States v. Bestfoods (1998),
{¶ 57} In this case, the Danzigers have failed to demonstrate that Croghan controls the day-to-day operations of the bank’s business; rather, they have merely demonstrated that Croghan exercises control incident to its status as the sole shareholder of the bank. This fact does not justify disregarding the bank’s separate corporate existence.
{¶ 58} Next, longstanding precedent recognizes two separate corporations despite the fact that the same individuals occupy positions as members of the board of directors of each corporation. In Carapico v. Philadelphia Stock Exchange, Inc.,
{¶ 59} Similarly, in Logal, supra, the court concluded that the shareholder’s allegation that a parent corporation and its subsidiary shared the same board of directors, officers, principal office, and trademark did not state a claim under the
{¶ 60} The New Jersey Supreme Court has held that, under the common law, a subsidiary did not constitute the alter ego of the parent corporation despite the fact that the parent owned all of the stock of the subsidiary, the companies shared the same directors, the subsidiary’s board met in the parent’s offices, the parent “created [the subsidiary] for the sole purpose of acquiring and operating [a] mercury processing business and that, as the trial court found, ‘[the parent’s] personnel, directors, and officers were constantly involved in the day-to-day business’ of [the subsidiary].” New Jersey Dept. of Environmental Protection v. Ventron Corp. (1983),
{¶ 61} Accordingly, the viewpoint held by the majority here is unique in holding that because the same individuals hold positions on the boards of two corporations and have separate meetings on the same day, the one corporation is the alter ego of the other. All the evidence here suggests the separate corporate existence of the bank and Croghan: the fact that one corporation holds a board meeting following the other does not give rise to an inference of sameness. Rather, it highlights the fact that two different corporations have separately conducted business in separate meetings in corporate form: each would separately record in its minute book the business it conducted and transact such business as necessary, distinct from the business of the other corporation.
{¶ 62} Finally, I believe that the evidence that Croghan derives all of its income from dividends tends to prove that these two corporations act independently and in accord with requisite corporate formalities, and I think it demonstrates that the majority’s conclusion to disregard the bank’s separate corporate existence is not well taken. Plainly, the passive income Croghan derived from dividends is different from the income derived by the bank in the normal course of conducting banking operations. Hence, the majority’s conclusion that these corporations are the same entities is, in my view, faulty because income derived from conducting banking activities is different from the passive dividend income derived from the ownership of shares of stock.
Ill
{¶ 63} A comparison of the facts before us and the facts before the Texas Supreme Court in Gentry, supra, demonstrates the majority’s unprecedented
{¶ 64} After considering these factors, the court held that “all of the evidence points to one conclusion: that Credit Plan was operated and used by Colonial not as a separate entity but simply as a name under which Colonial did its business. There is no evidence to the contrary.” (Emphasis added.) Id. at 575.
{¶ 65} In the instant case, no such domination exists: Croghan is a holding company, which is defined as “[a] company formed to control other companies, usu[ally] confining its role to owning stock and supervising management.” Black’s Law Dictionary (8 Ed.2004) 298. And in Ohio, holding companies may be formed for this purpose. See R.C. 1701.03(A) (“A corporation may be formed under this chapter for any purpose or combination of purposes for which individuals lawfully may associate themselves”).
{¶ 66} Further, as the Illinois Supreme Court has observed, “Ownership of capital stock in one corporation by another does not, itself, create an identity of corporate interest between the two companies, nor render the stockholding company the owner of the property of the other, nor create the relation of
{¶ 67} Therefore, Croghan’s business as a holding company is to hold a controlling share in other companies and to derive its income from the dividends of the shares. The bank’s business is to operate the bank. The record does not show that Croghan conducts a banking business or that it uses the bank as a conduit. Nor is there any evidence that Croghan runs the day-to-day operations of the bank or that it treats the bank as a mere division of its company. Rather, as the Danzigers concede, the bank is simply a wholly owned subsidiary of Croghan.
{¶ 68} Further, the Danzigers have not shown (1) that Croghan and the bank are ignoring the corporate formalities, (2) that the bank is undercapitalized, or (3) that Croghan and the bank are commingling funds or assets. See, e.g., Walton and Logal, supra. They have not shown that Croghan’s “[d]ominion [is] so complete, [and its] interference so obtrusive” that the bank’s separate corporate existence should be disregarded. Berkey v. Third Ave. Ry. Co. (1926),
IV
{¶ 69} Although this case involves merely the request by shareholders to inspect the books and records of a wholly owned subsidiary, the majority’s unprecedented application of the alter-ego doctrine may have unintended consequences as this doctrine is applied to shareholder and corporate liability.
{¶ 70} In Belvedere Condominium Unit Owners’ Assn. v. R.E. Roark Cos., Inc. (1993),
{¶ 71} The first part of the Belvedere test requires courts to consider whether one corporation is the alter ego of the other. With today’s majority opinion, standards of the first part of the Belvedere test are lowered, and the separate corporate existence of any subsidiary corporation may be disregarded by courts considering claims against parent companies or individual shareholders. Essentially, after today’s decision, any parent corporation owning a subsidiary corporation that exercises control over that entity incident to its ownership, with a shared board of directors who meet on the same day, could be treated as a single corporation. This is a dramatic departure from recognized law throughout the United States and will further distinguish Ohio as a state where corporations will be less likely to conduct business in this form.
{¶ 72} Finally, the majority’s stated interest in “protecting shareholders” is undermined, in my view, by the far reach of today’s decision, which will affect thousands of sole shareholders who run their own companies in corporate form as much as it will affect every larger corporate entity.
Y
{¶ 73} In my view, the Danzigers have shown nothing more than the existence of a parent-subsidiary corporate relationship between Croghan and the bank. Therefore, I would hold that, because they have demonstrated neither fraud nor that one corporation is the alter ego of the other, the separate corporate existence of the bank should not be disregarded, and the Danzigers, as non-shareholders of the bank, may not examine its books and records.
Notes
. {¶ a} The Delaware statute states:
{¶ c} “(1) The corporation’s stock ledger, a list of its stockholders, and its other books and records.” 8 Del.Code 220(b).
. {¶ a} At the time of the S. Side Bank decision, 32 Ill.Rev.Stat. 157.45 (1979) stated:
{¶ b} “Any person who shall have been a shareholder of record or the holder of a Voting Trust Certificate for at least six months immediately preceding his demand or who shall be the holder of record of at least five per cent of all the outstanding shares of a corporation, shall have the right to examine, in person, or by agent or attorney, at any reasonable time or times, for any proper purpose, its books and records of account, minutes and records of shareholders and to make extracts therefrom.” This provision, materially unchanged for purposes of this decision, is now found at 805 Ill.Comp.Stat. 5/7.75(b).
. These cases do not necessarily involve shareholder inspection rights. In fact, courts have applied the alter-ego doctrine to cases involving shareholder/corporate liability, tax liability, and alimony payments. These cases therefore consider not only whether one company is the alter ego of another but also whether continued recognition of the separate corporations would cause an injustice to a third party. Although the Danzigers’ request to inspect the books and records of the bank does not involve shareholder or corporate liability, all cases that consider the alter-ego doctrine employ essentially the same analysis. And because no question of liability exists in this case, this court must consider only whether the separate corporate existence of the bank should be disregarded; it need not address whether recognition of the corporate formalities causes an injustice to a third party.
. The court listed the following factors: “(1) the parent corporation owns all or a majority of the capital stock of the subsidiary; (2) the corporations have common directors or officers; (3) the parent corporation finances the subsidiary; (4) the parent corporation subscribed to all of the capital stock of the subsidiary or otherwise caused its incorporation; (5) the subsidiary has grossly inadequate capital; (6) the parent corporation pays the salaries or expenses or losses of the subsidiary; (7) the subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to it by the parent corporation; (8) in the papers of the parent corporation, and in the statements of its officers, the subsidiary is referred to as such or as a
. The majority also asserts that Croghan’s sole asset is the bank. This is not accurate; Croghan actually owns the stock of the bank. It is well settled that “[s]tock is an asset in itself, distinct from the asset that is the issuing company.” Mut. Holding Co. v. Limbach (1994),
Concurrence Opinion
concurring.
{¶ 26} Under the limited facts before us, I concur with the majority opinion. The determinative fact of this case is that the sole business purpose of the holding company was to own the bank. If the holding company controlled multiple subsidiaries or conducted banking operations on its own, the case would present a closer question. Here, the only apparent reason to own part of the holding company is to own the bank. This, combined with the identity of the directors and officers of the two companies, weighed heavily in arriving at the judgment announced today.