One of the key factors in shareholders deciding to sue directors of companies (including by way of a derivative action under s237 of the Corporations Act), is whether they can find evidence of unlawful conduct and whether the directors hold directors and officers insurance. But getting details of such evidence and resources such as insurance is difficult.

In Merim Pty Ltd v Style Limited [2009] FCA 314 the plaintiff, Merim Pty Limited (“Merim”) was successful in its application for an order pursuant to s247A of the Corporations Act 2001 (Cth) authorising a director of Merim, and his nominated legal and financial advisors, to inspect the books of the defendant, Style Limited.

Its stated purpose in applying for the order was to investigate whether Style’s chairman and directors misled Style’s members and the market regarding the performance of Style. Merim had invested a substantial amount in buying Style shares and convertible notes.

Despite claims by Style that that Merim may be contemplating action to gain control of, or take over, Style, Justice Goldberg was satisfied that Merim had not been given a satisfactory answer or information in relation to the financial issues concerning Style which it raised. He was satisfied that Merim was acting in good faith and that the inspection was to be made for a proper purpose.

The fact that Merim sought to convene a general meeting of members of Style did not detract from the primary or dominant purpose Merim gave for inspecting Style’s books.

Scope of order

In granting an order for inspection under s247A Justice Goldberg said “it is not appropriate to allow a wholesale and general inspection of Style’s books. This would cause unnecessary disruption to the company. In any event the books to be inspected should be books that bear on, and be particularly relevant to, the purpose for which the inspection is sought. Merim has sought inspection of specific categories.”

The judge did not agree to all thirteen categories of documents Merim sought to inspect.

He accepted that “books” in s247A includes any directors and officers insurance policies held by a company.Merim knew that Style held directors and officers insurance as that fact was stated in Style’s Annual Financial Report. What Merim did not know, however, was the extent of the cover granted under that policy and whether it is current.

Confidentiality

Justice Goldberg did not consider that it is necessary for a specific confidentiality regime to be imposed in relation to the order for inspection:
“Section 247C(1) provides that a person who inspects books on behalf of an applicant under s247A “must not disclose information obtained during the inspection” other than to the Australian Securities and Investments Commission or the applicant for the order. In my view that is an appropriate and sufficient protection for Style in relation to the confidentiality of its documents. It does not, for example, allow the persons carrying out the inspection to disclose such information in the course of any later proceedings which may be brought. To the extent to which an applicant would wish to tender in evidence any of those documents, it would need to obtain access to them by way of discovery or notice to produce.”