A. No Absolute Right. With limited exceptions, board members have both a right and a duty to review all financial records of the association. Although Corporations Code §8334 gives a director the "absolute right" to review corporate records, that right has been limited by the courts so as to protect privacy, avoid conflicts of interest, and protect attorney-client privilege.
1. Privacy. In Chantiles v. Lake Forest, a candidate ran for the board and won but thought his friend should have won as well. As a new director, he wanted to inspect proxies to see how people voted. The board refused and he sued. The court agreed with the board and decided that privacy rights outweighed a director's "absolute" right to inspect records. (Chantiles v. Lake Forest II.)
2. Conflict of Interest. In Tritek Telecom v. Superior Court, a board member in a nonprofit corporation sued the corporation. During the litigation, the director claimed an absolute right to view the corporation's records related to his litigation against the corporation. The board refused citing attorney-client privilege. The Court of Appeal agreed with the board. It reasoned that a plaintiff director cannot take off his "shareholder's hat" and swap it for his "director's hat" and claim an absolute right to access all corporate documents when it would advance his personal interests against those of the corporation. (Tritek Telecom v. Superior Court.)
3. Violation of Fiduciary Duties. Courts may impose conditions upon a director's right to inspect a corporation's books and records. A director's right to inspect may be denied where a disgruntled director announces an intention to violate his fiduciary duties. (Havlicek v. Coast-to-Coast Analytical Services.)
4. Former Director. Former directors do not have any special inspection rights by virtue of their having been a director. Their inspection rights are the same as any other member of the association. As such, former directors do not have the right to inspect executive session or "director only" records. For HOAs, director-only records generally encompass executive session matters. Former directors continue to have the same inspection rights as other members but nothing more. An exception may exist if the former director is being sued for acts taken as a director and needs the records to defend himself. (Wolf v. CDS Devco.)
5. Personnel Records. Whether individual directors can read an employee's personnel records has not yet been decided by the courts. However, there has been enough decisions related to privacy issues to indicate the probable outcome if the matter were litigated.
6. Executive Minutes. Past and present executive session minutes can be reviewed by board members unless a director has a conflict of interest involving a topic discussed at a particular executive session meeting at which he/she was not present. This restriction also applies to recordings (if any) of executive session meetings. (Hamilton v. Town of Los Gatos.)
7. Balancing Test. Because the courts use a balancing test, other records may be carved out of a director's inspection rights.
B. Deadlines. As with member requests for records, the association should meet statutory deadlines for producing records for inspection by board members.
C. Copy Costs. For small, routine requests for copies of records, board members should not be charged copy costs since they are volunteering their time and reviewing minutes and financial records is part of their duties. However, for large or unusual requests where a director might request a copy of all records for the past two years, the board can require the director to pay the copy costs. When a director abuses his position on the board to demand excessive copying of records and/or repeated copying of the same records, the director should bear the cost of the burden he creates for the association.
D. Custody and Control. The right to inspect and request copies of records does not give a director the right to take possession of records. All records should remain in custody and control of the association's managing agent unless specifically authorized otherwise by the board.
Recommendation: If a director has a conflict of interest or seeks to invade the privacy rights of others or seeks records for an improper purpose, the board should consult legal counsel before releasing records to the director.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.