The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.
California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”
Case research revealed the following about shareholders’ inspection rights in California:
- The term “accounting books and records” is not defined. A court is likely to interpret this term broadly – i.e., that detailed records must be provided – so long as the shareholder can show that requested records are requested “for a purpose reasonably related to such holder’s interests as a shareholder”.
- The shareholder’s right is to inspect records at the corporation’s office and to make copies and extracts of the records. The corporation has no obligation so send such records to the shareholder.
- Putting the two foregoing points together, the corporation should ask the shareholder which records he wishes to inspect (so the corporation can have them ready) and the purpose of the inspection. If the corporation is satisfied that the purpose is appropriate and the records relate to that purpose, the corporation should make the records available for inspection; if not, the corporation should explain which records it is unwilling to provide and why it is unwilling to provide them.
Delaware General Corporation Law Section 220 has, at its core, somewhat similar operative language, giving stockholders a right to “inspect for any proper purpose, and to make copies and extracts from…[t]he corporation’s stock ledger, a list of its stockholders, and its other books and records”. “Proper purpose” means “a purpose reasonably related to such person’s interest as a stockholder.”
However, Section 220 adds a procedural requirement that is not present in California: The stockholder’s request must for inspection must be (emphasis added) “upon written demand under oath stating the purpose thereof“. The demand can be made to the corporation or to its registered agent in Delaware.
Bottom line for my client: Because the corporation is required to comply with California law, I advised it to proceed in accordance with the bullet points made above and to ignore Delaware’s procedural requirements.
- Which Financial Information Must a Private Company Provide to Employees with Vested Stock Options?
- Which Financial Information Must an LLC Provide to its Members?
- Who Gets to See the Shareholder List?
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Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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