Mandamus and Closely Held Stock Corporations in Virginia
Overview and Case Summary
Under Virginia statutes governing stock corporations, the directors and shareholders of a closely held corporation are entitled to inspect and copy the company’s books, records and documents. This right is enforced in Circuit Court using a Writ of Mandamus. It is a powerful tool for directors and shareholders who might find themselves being “Stonewalled” from gaining access to important company information. Sometimes, attorneys and judges may not be aware that a Writ of Mandamus is the proper remedy available to directors and shareholders of closely held corporations in Virginia. This article provides a brief overview of Writs of Mandamus as they apply to closely held corporations in Virginia.
Jon Gerlach represented the director of a closely held corporation in Fredericksburg, a popular downtown restaurant. One director of the corporation asked the other director several times for an opportunity to review company files such as bank accounts, payroll, inventory, sales receipts, etc. Those requests were either ignored or refused.
The director felt powerless and hired Jon Gerlach to help him gain access to the company information. Jon filed for a Writ of Mandamus in Fredericksburg Circuit Court, asking the Court to issue, on an expedited basis, a Writ of Mandamus directing the company to make all requested financial, operational and corporate books, records and documents of the company available immediately for inspection and copying. The lawsuit relied on two statutes: Va. Code §§ 13.1-771 and -773.1. Costs and attorney’s fees were also sought.
After a hearing on the merits, the Court issued the Writ of Mandamus and awarded attorney’s fees and costs against the company and in favor of Mr. Gerlach’s client, who was finally able to inspect and copy the relevant company files.
What is a Writ of Mandamus?
A Writ of Mandamus is typically defined as “an extraordinary remedy employed to compel a public official to perform a purely ministerial duty imposed upon him by law.” Richlands Med. Ass’n v. Commonwealth, 230 Va. 384, 386, 337 S.E.2d 737, 739 (1985); In re Commonwealth’s Attorney for the City of Roanoke, 265 Va. 313, 317, 576 S.E.2d 458, 461 (2003). This often repeated definition -- which most lawyers will remember from law school – may be so ubiquitous as to have fostered a widespread, although mistaken, belief that Writs of Mandamus are germane only to the duties of governmental officials, not private citizens.
In fact, Writs of Mandamus are available under Virginia law in certain cases where shareholders and directors of a closely held corporation have been unreasonably denied access to the company’s books, records and documents.
The Remedy is Statutory
Directors of closely held stock corporations in Virginia have a statutory right, enforceable by a Writ of Mandamus, to inspect and copy the books, records and documents of the corporation. Va. Code § 13.1-773.1. The statute provides, in pertinent part:
A director of a corporation is entitled to inspect and copy the books, records and documents of the corporation at any reasonable time to the extent reasonably related to the performance of the director's duties as a director, including duties as a member of a committee, but not for any other purpose or in any manner that would violate any duty to the corporation. Va. Code § 13.1-773.1.A.
The circuit court of the city or county where the corporation’s principal office, or if none in the Commonwealth, its registered office, is located may order inspection and copying of the books, records and documents upon application of a director who has been refused such inspection rights, unless the corporation establishes that the director is not entitled to such inspection rights. The court shall dispose of an application under this subsection on an expedited basis. Va. Code § 13.1-773.1.B.
For shareholders, another Virginia statute provides inspection and copying rights similar to directors, albeit the scope is narrower for shareholders. Va. Code §§ 13.1-771 and 773. These statutes provide, in pertinent part:
Subject to subsection C of § 13.1-772, a shareholder of a corporation is entitled to inspect and copy, during regular business hours at the corporation’s principal office, any of the records of the corporation described in subsection E of § 13.1-770 if the shareholder gives the corporation a signed written notice of the shareholder’s demand at least five business days before the date on which the shareholder wishes to inspect and copy. Va. Code § 13.1-771.A.
If a corporation does not allow a shareholder who complies with subsection A of § 13.1-771 to inspect and copy any records required by that subsection to be available for inspection, the circuit court in the city or county where the corporation’s principal office is located, or, if none in this Commonwealth, where its registered office is located, may summarily order inspection and copying of the records demanded at the corporation’s expense upon application of the shareholder. Va. Code § 13.1-773.A.
Is Mandamus the Proper Remedy?
Virginia statutes and case law indicate that a Writ of Mandamus is the proper remedy for forcing compliance with Va. Code §§ 13.1-771 and 773.1. See Bank of Giles County v. Mason, 98 S.E.2d 905 (Va. 1957) at 909. (“The writ of mandamus is a proper remedy, both under the statute and at common law, available to a stockholder who has been improperly denied his right of inspection.”)
Research reveals a number of Virginia cases where the Writ of Mandamus was successfully employed to enforce a shareholder’s and/or a director’s statutory right to inspect and copy the books, records and documents of the corporation. (See, e.g., Cattano v. Bragg, 727 S.E.2d 625 (Va. 2012) and Retail Property Investors v. Skeens, 471 S.E.2d 181 (Va. 1996).
Citing the statutes and cases mentioned above, Jon Gerlach successfully applied - on behalf of his client - to the Circuit Court of the City of Fredericksburg for an expedited Writ of Mandamus to enforce his client’s statutory rights to inspect and copy the corporation’s books, records and documents.
Civil Action Service of Process Rules do NOT Apply to Writs of Mandamus
After the Verified Petition for Writ of Mandamus was filed with the Court, the company through its registered agent made a “Special Appearance” in the case and argued that the Petitioner had failed to effect service of process on the company using the rules governing service of a civil complaint in Virginia, contending that the court lacked personal jurisdiction over the corporation.
The belief that service of process for a Writ of Mandamus must be effectuated in the same manner as a civil complaint reflects a commonly-held but fundamental misunderstanding concerning how an application for the Writ of Mandamus is served.
An application for a Writ of Mandamus is a narrow stand-alone application to a court of competent jurisdiction for judicial enforcement of a statutory right which has its own special rule for perfecting service. Service of a petition and notice of the intended application for a Writ of Mandamus is governed by Va. Code § 8.01-644. No other service of process is required other than that set forth in VA Code § 8.01-644.
Specifically, Va. Code § 8.01-644 provides the following method for service of an application for Writ of Mandamus:
“… application for a writ of mandamus … shall be on petition verified by oath, after the party against whom the writ is prayed has been served with a copy of the petition and notice of the intended application a reasonable time before such application is made.” (emphasis added)
Under Va. Code § 8.01-644, service required for the Writ of Mandamus differs markedly from service of process of a civil complaint. Service for obtaining a Writ of Mandamus is perfected and completed precisely on the date and time when the Notice of Intent to File the Petition for Writ of Mandamus is personally served on the corporation’s registered agent. VA Code § 8.01-644 does not contemplate nor require a director or shareholder to serve the corporation with notice of the Writ of Mandamus in the manner that a civil complaint must be served.
Unlike civil complaints, Mandamus service is not governed by Rule 3:1 of the Supreme Court of Virginia. While members of the bench and bar well-understand the rules as they apply to civil actions regarding service, Petitions for Writs of Mandamus are distinct from civil complaints in that they are included within the “matters not covered by these Rules” for which the “established practices and procedures are continued”. Virginia Supreme Court Rule 3:1. The specific “established practices and procedures” for Writs of Mandamus are specifically spelled out in § 8.01-644.
In contrast with civil actions governed by Rule 3:1, there is no requirement that the respondent in an application for Writ of Mandamus be accorded 21 days to respond after service of process. Guidance for this principle, and the non-applicability of civil action service of process in a mandamus setting, is found in the Fredericksburg Circuit Court Clerk’s Manual – Civil, at page 12 as follows:
“In circuit court, it is well-recognized principle that matters not covered by the Rules, the established practices and procedures are continued. Rule 3:1. For examples, mandamus, prohibition, and certiorari are instituted by a petition. (emphasis added)
Matters initiated by either petition or application are distinct from matters initiated by a complaint. Issuance of a summons as prescribed by Rule 3:5 is not applicable to legal process to be served upon the defendant or respondent.”
Put simply, the procedure for obtaining a Writ of Mandamus differs in important ways from an ordinary civil action. Attorneys frequently are not aware of this distinction, which can lead to costly mistakes when their client is served with papers in a Writ of Mandamus proceeding.
Rocket Docket
Instead of providing the Respondent twenty-one (21) days in which to respond -- as would be the case in many civil actions -- the Court is statutorily required to dispose of a Writ of Mandamus in an expedited manner. Va. Code §§ 773 and 773.1.B, specifies that the Circuit Court “shall dispose of an application under this subsection on an expedited basis” (emphasis added). This is one of those situations in which a lawsuit should move quickly through the Court, offering, again, a powerful tool for the Petitioner.
Attorney’s Fees/Costs
Under the Virginia Stock Corporation Act, the Circuit Court has discretion to award costs and attorney’s fees in a mandamus action. Va. Code § 13.1-773.1.C. authorizes the Court to “order the corporation to reimburse the director for the director's reasonable costs, including reasonable counsel fees”. The General Assembly by enacting this statute recognized that corporate directors should not have to bear the financial costs involved in obtaining judicial enforcement of a statutory right.
In this case, the director tried without success to gain access to the company’s books, records and documents, before hiring a lawyer to represent him. If it wasn’t for Jon’s quick action in filing for a Writ of Mandamus, and the Court’s expedited handling of the case, his client might still be trying. The Court’s award of attorney’s fees helped relieve his client of the financial burden of having to go to court, and all of the books, records and documents he was entitled to review were finally produced.
Conclusion
Attorneys should familiarize themselves with Writs of Mandamus in non-governmental cases. Mandamus is an important litigation tool for shareholders and directors of closely held stock corporations in Virginia who have been unreasonably denied access to their company’s books, records and documents. Procedures differ from a civil complaint, special rules of service apply, and the matter is fast-tracked on the Court docket. Costs and attorney’s fees are available by statute, in the court’s discretion.