Corporate shareholders have certain rights to access the books and records of a company in which they hold stock. These are what are known as shareholder inspection rights, and they exist under the common law and by state statute. The idea is that stockholders are entitled to know how company affairs are being conducted in a business in which they are part owners.
What Are Shareholders Entitled To?
In California, the stockholder information/inspection rights arise primarily pursuant to Sections 213, 1501, 1600, 1603 and 1604 of the California Corporation Code. They apply to corporations in the state, as well as certain non-California corporations that have their principal office in California, or keep “accounting books and records” and meeting minutes in the state. It also applies to any subsidiaries of a corporation that is subject to the statute.
The California Corporation Code entitles all shareholders, irrespective of the size of their holding in the corporation, to receive an annual report. Shareholders are also entitled to the company’s bylaws and the results of vote at a regular, special or annual meeting. Additionally, those who own at least 5 percent of corporate shares are entitled to shareholder lists and records, as well as quarterly financial information.
Under the statute, shareholders are also entitled to “accounting books and records” and minutes of shareholder, board and board committee meetings. Access to this information, though, is predicated on the shareholder stating, in writing, a reasonable relationship between its interest as a shareholder and the purpose of its inspection of the information.
The statute doesn’t explicitly exclude shareholders from accessing other information, and California courts have recognized wider shareholder inspection rights. For example, Hobbs v. Tim Reed Gold Mining Co., involved a shareholder who wanted to inspect a mine in Arizona after hearing there had been a discovery of a new body of ore. In its decision, the California Supreme Court said the reason a shareholder can inspect a company’s books is that such an inspection might be necessary to protect its interest in the corporation, or to obtain information about the condition of the business.
“It would, indeed, be a strange rule which would allow the stockholder to examine the books of a corporation to ascertain its condition and deny him an inspection of the property to verify the statements contained in the books,” the court wrote. “The rule at common law, in our opinion, extends to the corporate property as fully as to the books.”
When Can a Corporation Refuse?
The information shareholders can access does have its limits. As referenced above, the right to inspect books and records or meeting minutes extends only where the purpose has been shown to be “reasonably related” to the shareholder’s interest in the corporation. Courts have also held that a shareholder has no right to inspect attorney-client communications, and a judge has discretion to consider other parties’ privacy interests.
A corporation might also be able to reject a shareholder’s examination request if it can be shown the request was made with an improper purpose. For example, in Havliceck v. Coast-to-Coast Analytical Services Inc., the California Court of Appeal decided a disgruntled director who made clear his intent to violate his fiduciary duties to the company could be denied access to inspect corporate documents.
Shareholder inspection requests might also be successfully challenged if they do not adhere to the technical requirements of the statute. The appeals court in Jara v. Suprema Meats, Inc. rejected a shareholder’s request to have monthly financial statements delivered to him under Section 1601 (the section only provides that records be able to inspected and copied at the company’s office). In doing so, the court declined to require the company respond to shareholder letters that seek something that falls outside the scope of the statute. As such, a defect in a shareholder’s written demand could allow the entire request to be denied, even if it includes information it might otherwise have been entitled.
Generally speaking, all shareholders of California corporations are entitled to inspect certain corporate information and records, though it can vary on the size of the corporation and the size of the shareholder’s holdings. And corporations cannot limit shareholder inspection rights with its bylaws or corporate charter.
Still, shareholders do not have unfettered access to corporate documents. Except in limited circumstances, the inspection request will have to articulate a proper purpose for seeking records that is reasonably related to the shareholder’s interests as a shareholder. In the event the request goes to court, shareholders should be prepared to explain the need for each record sought. Case law shows that courts are more likely to view the request favorably if the scope of records is limited to the identified purpose and the time periods for records sought isn’t overly broad.