Third Eye, Inc. v. UST Global Inc. ( 2023 )

AFFIRMED and Opinion Filed May 4, 2023
S In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-22-00334-CV
THIRD EYE, INC., Appellant
V.
UST GLOBAL INC., Appellee
On Appeal from the 101st Judicial District Court
Dallas County, Texas
Trial Court Cause No. DC-21-02821
MEMORANDUM OPINION
Before Justices Reichek, Nowell, and Garcia
Opinion by Justice Reichek
Third Eye, Inc. appeals the trial court’s judgment granting UST Global Inc.’s
requests for (1) specific performance of Third Eye’s contractual obligation to
produce documents, (2) a writ of mandamus allowing UST to inspect Third Eye’s
books and records, and (3) an award of attorney’s fees. Third Eye brings three issues
generally challenging the factual sufficiency of the evidence supporting the trial
court’s rulings and the breadth of the judgment. We affirm.
Background
In 2014, UST and Third Eye signed a Subscription Agreement (the
Agreement) pursuant to which UST acquired 833 shares of Third Eye and became
the company’s sole minority shareholder. The Agreement included a section entitled
“Information Rights” that required Third Eye to deliver to UST,
(a) a quarterly unaudited income statement and statement of cash
flows, and an unaudited balance sheet at the end of such month,
prepared in accordance with generally accepted accounting principles,
within forty-five days of the end of each fiscal quarter;
(b) a yearly unaudited balance sheet, statements of income and
cash flows, and a statement of stockholder’s equity within ninety days
after the end of each fiscal year; and
(c) consolidated financial statements for any period Third Eye
had a subsidiary whose accounts were consolidated with those of Third
Eye.
The Agreement additionally required Third Eye to permit UST, subject to applicable
laws and regulatory approvals, to visit and inspect Third Eye’s books of account and
records during Third Eye’s normal business hours. Third Eye was not required to
provide access to information it reasonably considered to be a trade secret or
confidential unless it was covered by an enforceable confidentiality agreement
acceptable to Third Eye.
On October 13, 2020, UST sent a demand letter to Third Eye requesting Third
Eye make various books and records available for inspection and copying. In
support of the request, UST cited the Agreement and section 21.218 of the Texas
Business Organizations Code. UST stated it was making the request “for the
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purposes of evaluating Third Eye’s financial position and understanding Third Eye’s
operations and practices, so that UST Global can monitor and protect the value of
UST Global’s equity in Third Eye.”
Third Eye responded one month later declining to produce records that
exceeded “the permissible scope of Section 21.218 records requests.” Third Eye
further stated that, due to the fact the companies were involved in an arbitration
proceeding, it was declining to produce any records unless appropriate measures
were put in place to “protect confidentiality and limit dissemination of sensitive
company information.”
UST replied that its rights to information under the Agreement were broader
than those under section 21.218, and it had never been provided the financial
disclosures it was contractually entitled to receive. UST noted that its desire to
evaluate Third Eye’s financial position to determine the value of its equity interest
was particularly compelling given recent communications indicating Third Eye may
be insolvent. UST stated it was “amenable to reasonable confidentiality protections
for the requested documents” and requested that Third Eye provide it with proposed
measures within a week. The record contains no response to UST’s request for
proposed confidentiality protections, and Third Eye did not allow UST to access its
books and records.
UST brought this suit in March 2021 alleging a claim for breach of contract
and requesting a writ of mandamus. UST asserted that Third Eye had never provided
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any of the information required by the Agreement and requested specific
performance of the Information Rights provision, as well as a writ of mandamus
ordering Third Eye to provide UST with access to its books and records. UST further
sought an award of attorney’s fees and costs.
A trial was conducted before the court without a jury. Vijay Padmanbhan,
chief corporate officer and head of the investment committee for UST, testified that
UST never received any of the documents Third Eye was required to deliver pursuant
to the Information Rights provision. He further testified the company had never
been allowed to inspect Third Eye’s books and records.
Shouvik Bhattacharyya, founder and chief executive officer of Third Eye,
testified that, for a period of time he prepared quarterly and yearly financial
statements with the help of an accountant, and filed tax returns on behalf of Third
Eye. He stated he used QuickBooks to prepare balance sheets and profit and loss
statements and had an electronic folder of accounting and finance matters. With
respect to informing UST about Third Eye’s financial performance, he said he
provided informal updates by email from December 2015 to 2017. According to
Bhattacharyya, UST employees provided the data used to create the financial
statements. Padmanbhan denied that UST employees prepared financial information
for Third Eye.
Beginning in 2017, Bhattacharyya stated UST employees began creating
separate companies and taking Third Eye’s business. He said UST mentioned there
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were “rogue employees” and he believed those employees were using Third Eye’s
confidential information. Bhattacharyya also believed UST had breached a master
service agreement between the two companies, and it was this claim that was the
subject of the arbitration proceeding.
The arbitration proceeding was still in process when UST sent the demand
letter requesting access to Third Eye’s books and records. Bhattacharyya testified
he refused to comply with the demand because he was trying to “protect the
company.” He further stated that all documents responsive to UST’s demand had
been turned over in discovery. In support of this assertion, Third Eye submitted a
one-page summary showing various categories of Third Eye’s income and expenses
for the period of January 2014 through May 2021. Bhattacharyya stated he had
records of the payroll, rent, and other expenses reflected in the document, but he
believed those records were “not the books and records requested by UST.”
After hearing the evidence, the trial court found “UST had a proper purpose
for demanding to examine and copy Third Eye’s books, records of account, minutes,
and share transfer records; and Third Eye did not permit, and still refuses to permit,
UST to access, examine, and copy its books, records of account, minutes, and share
transfer records.” Accordingly, the judgment ordered Third Eye to permit UST to
examine its books and records at Third Eye’s offices. The trial court additionally
found UST was entitled to specific performance on its breach-of-contract claim, and
ordered Third Eye to produce the documents required to be delivered under the
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Information Rights provision of the Agreement. Finally, the trial court awarded UST
its attorney’s fees.
Analysis
In its first two issues, Third Eye contends the evidence is factually insufficient
to support the trial court’s judgment. To evaluate a factual sufficiency challenge,
we consider and weigh all the evidence presented. Dow Chem. Co. v. Francis, 46
S.W.3d 237, 242 (Tex. 2001) (per curiam). We can set aside a verdict only if the
evidence supporting it is so weak, or the findings so against the great weight and
preponderance of the evidence, that it is clearly wrong and unjust. Id. We must not
substitute our judgment for that of the factfinder, and should remain cognizant that
the factfinder is the sole judge of witness credibility. Golden Eagle Archery, Inc. v.
Jackson, 116 S.W.3d 757, 761 (Tex. 2003).
Third Eye’s primary challenge is to the trial court’s finding that UST had a
proper purpose in requesting to inspect Third Eye’s books and records. An improper
purpose is a defense to a books-and-records request. TEX. BUS. ORGS. CODE ANN.
§ 21.222(b)(4). To show an improper purpose, the party invoking the defense must
establish by proof “a state of facts sufficient to convince the court the stockholder is
not seeking the information which might be revealed by the desired inspection for
the protection of his interest as a stockholder, or that of the corporation, but that he
is actuated by corrupt or unlawful motives.” Moore v. Rock Creek Oil Corp., 59
S.W.2d 815, 818 (Tex. 1933).
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Third Eye argues it presented unrebutted evidence of its concern that UST
would take the information obtained through the inspection and use it to harm Third
Eye. As facts supporting this concern, Third Eye points to Bhattacharyya’s
testimony that UST was misappropriating Third Eye’s information and assets. But
Bhattacharyya specifically testified that UST employees were starting new, separate
companies and taking Third Eye’s business. There was no evidence that UST, itself,
was seeking to harm the company in which it had invested. See Moore, 59 S.W.2d
at 819 (wholly incredible that stockholders made demand to depress market value of
their own stock). Indeed, UST stated it was willing to work with Third Eye to put
in place reasonable confidentiality protections for Third Eye’s information.
Third Eye additionally points to the fact that the parties were involved in an
arbitration proceeding, and the inspection request “stemmed from information
obtained during all the arbitration procedures.” The information to which Third Eye
refers concerned the company’s potential insolvency. Third Eye does not explain
why the fact that UST learned of Third Eye’s potential insolvency during an
arbitration proceeding renders its concern about the company as a shareholder
improper. Nor does Third Eye explain how information obtained through a books-
and-records inspection would have been harmful to Third Eye in the arbitration
instituted to resolve a master service agreement dispute. The mere fact that
stockholders seeking access to a company’s books and records are on unfriendly
terms with the company is not a ground for denying mandamus relief. Id. at 818.
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Third Eye cites several cases for the proposition that its concerns regarding
UST’s potential misuse of its financial information should have compelled the trial
court to deny UST’s request. In those cases, however, the court did not hold the
company’s alleged concerns were conclusive, but rather were sufficient to raise a
fact issue on whether the shareholder had a proper purpose for requesting the
inspection. See Uvalde Rock Asphalt Co. v. Loughridge, 425 S.W.2d 818, 820–21
(Tex. 1968) (orig. proceeding); In re Elusive Holdings, Inc., 641 S.W.3d 498, 504
(Tex. App.—Austin 2021, orig. proceeding); In re Dyer Custom Installation, Inc.,
133 S.W.3d 878, 883 (Tex. App.—Dallas 2004, orig. proceeding); Guar. Old Line
Life Co. v. McCallum, 97 S.W.2d 966, 968 (Tex. App.—Dallas 1936, orig.
proceeding). Here, the fact issue was presented to the trial court for resolution.
Given (1) UST’s undisputed evidence that Third Eye never provided it with the
financial information it was contractually obligated to deliver, (2) UST’s stated
concern regarding its investment in Third Eye, and (3) Third Eye’s own evidence
that it began losing substantial business beginning in 2017, we conclude the evidence
was factually sufficient to support the trial court’s conclusion that UST had a proper
purpose in requesting to inspect Third Eye’s books and records.
With respect to the trial court’s order that Third Eye produce documents,
Third Eye argues the evidence shows it already produced all the documents in its
possession. But the evidence regarding what information had been given to UST
was conflicting, and the court was free to disbelieve Bhattacharyya’s testimony that
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Third Eye was not withholding information. Golden Eagle, 116 S.W.3d at 761.
Bhattacharyya conceded that, even though he had prepared quarterly and yearly
financial statements for Third Eye, he never provided them to UST as required by
the Agreement. Instead, Bhattacharyya stated he gave UST informal reports via
emails. This alone is sufficient evidence to support the trial court’s finding that
Third Eye was in breach of the Agreement. Although Bhattacharyya also stated that
employees of UST provided the financial information on which Third Eye’s
financial disclosures would have been based, Padmanbahn disputed this and said
UST’s employees never prepared financial information for Third Eye.
Third Eye submitted only a single, one-page document into evidence to
support its assertion that it had turned over all the requisite financial information in
its possession to UST. The document was a summary created by Bhattacharyya for
the arbitration proceeding to show Third Eye’s profits and losses over a seven-year
period. Bhattacharyya stated he had in his possession the underlying records to
support the information in the summary, but indicated these documents were not
given to UST because he believed that they were not responsive to UST’s books-
and-records request. But Third Eye provided no evidence to show the records would
not be part of the information it was required to deliver under the Agreement.
Furthermore, Bhattacharyya stated he had some of Third Eye’s financial information
on his computer in a file called “accounting and finance matters.” Bhattacharyya
did not specify what types of documents were in the computer file, and the trial court
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could have concluded that at least some of that information would fall under the
disclosure requirements of the Agreement.
Finally, Third Eye argues the mandamus relief awarded to UST is overly
broad. Third Eye argues that section 21.218(b) of the Texas Business Organizations
Code limits the right to inspect a company’s books and records to only those books
and records relating to the stated purpose for the inspection. See TEX. BUS. ORGS.
CODE ANN. § 21.218(b). Because the trial court’s judgment does not limit the books
and records Third Eye must make available, Third Eye contends the relief awarded
exceeds the relief to which UST was entitled.
UST’s stated purpose for its request to examine Third Eye’s books and records
was to determine Third Eye’s financial soundness and monitor the value of UST’s
investment. Third Eye fails to identify any books or records that would not relate to
this broad purpose, and we may presume the trial court concluded that all the books
and records in Third Eye’s possession were properly within the scope of what UST
was entitled to examine. See Pulley v. Milberger, 198 S.W.3d 418, 427 (Tex. App.—
Dallas 2006, pet. denied) (we presume trial court made all findings to support
judgment).
Third Eye further argues the trial court’s order requiring it to make its books
and records available for inspection at its offices is not supported by either section
21.218 or UST’s pleadings. The Agreement states, however, that Third Eye must
allow UST to “visit and inspect Third Eye’s properties, [and] examine its books of
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account and records, during normal business hours of [Third Eye] . . . .” UST
referenced this provision in its petition. Nothing in section 21.218 prevents a trial
court from ordering that a books-and-records inspection take place at the subject
company’s offices. See TEX. BUS. ORGS. CODE ANN. § 21.218. Accordingly, we
conclude the trial court’s judgment is not erroneously overbroad or unsupported by
the pleadings. We resolve Third Eye’s first two issues against it.
Because of our resolution of the first two issues, it is unnecessary for us to
address Third Eye’s remaining issue concerning attorney’s fees.
We affirm the trial court’s judgment.
/Amanda L. Reichek/
AMANDA L. REICHEK
JUSTICE
220334F.P05
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S
Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
THIRD EYE, INC., Appellant On Appeal from the 101st Judicial
District Court, Dallas County, Texas
No. 05-22-00334-CV V. Trial Court Cause No. DC-21-02821.
Opinion delivered by Justice
UST GLOBAL INC., Appellee Reichek. Justices Nowell and Garcia
participating.
In accordance with this Court’s opinion of this date, the judgment of the trial
court is AFFIRMED.
It is ORDERED that appellee UST GLOBAL INC. recover its costs of this
appeal from appellant THIRD EYE, INC.
Judgment entered May 4, 2023
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