The California Corporations Code, as well as common law not found in the statutes, provide for shareholder inspection and participation rights in a corporation.
California Corporations Code section 1601(a)(1) provides that any shareholder is entitled to inspect and copy the following, at any reasonable time during usual business hours for a purpose reasonably related to such holder’s interest as a shareholder or holder of a voting trust certificate.
- the record of shareholders
- the accounting books and records
- minutes of proceedings of
- the shareholders and
- the board and
- committees of the board.
The holders of 5% of any class of shares of the corporation may request, at specified intervals during the fiscal year, income statements and balance sheets and, if no annual report has been sent, the statements required by Corp. Code section 1501 (a).
The definition of “accounting books and records” is not defined explicitly in the Corporations Code. Other sections impose duties of financial disclosure that show the meaning of accounting books and records—balance sheet, income statement, and statement of cashflows. The corporation does not have to allow inspection of the General Ledger at entry level, or line item level balance sheet showing what each principal has loaned the Company, if the balance sheet shows a summary of those loans as a consolidated number. The inspection must be allowed at any reasonable time, so, the shareholder might access monthly information rather than just annual data, if the shareholder repeats the requests more than once annually.
Corp. Code section 1501(a) is an example of the type of accounting books and records that a shareholder may inspect. (Jara v. Suprema Meats, Inc. (2004) 121 Cal. App. 4th 1238.) Section 1501 requires that the directors of a corporation send to shareholders an annual report on the business and financial condition of the corporation. Corp. Code section 1501(a)(1) provides that the report must contain a balance sheet and an income statement and statement of cashflows for the fiscal year, accompanied by a report of independent accountants or a certificate of an authorized officer that the statement was prepared without audit from the books and records of the corporation.
So even if waived in the smaller corporation’s bylaws, this section informs the definition of accounting books and records.
The inspection of books and records does not mean the shareholder is entitled to unfettered access to corporate confidences and secrets. (National Football League Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 107 [no shareholder inspection of attorney-client privileged material.]) The shareholder’s inspection must have a proper purpose “reasonably related to shareholder’s interest as a shareholder.” (Corp. C. §1601(a).) So in most instances, the limited books and records inspection described here will fulfill the corporation’s duties to the shareholders. The “purpose” must be to determine the condition of the corporation and the value of shareholders’ interests therein. For instance, inspection was permitted by the California Supreme Court in Schnabel v. Superior Ct. (1993) 5 Cal. 4th 704, 715, the purpose being to “ascertain the value of the stock” in a divorce case.
Meeting minutes are open to inspection (Corp. C.§ 1601[a]), even if they contain information about salaries and bonuses. Some privileges will apply, and possibly third party financial privacy could protect the actual dollar amounts and recipients. (National Football League Properties, supra.) But the information will probably be detected in the accounting books and records. Accessing historic minutes is probably required by section 1601. The section makes no exception for minutes created prior to the shareholder’s acquisition of stock.
Shareholders have rights around dissolution. The corporation can voluntarily dissolve only upon the vote of shareholders holding shares representing 50% or more of the voting power of the corporation. Any 5% of the shareholders can petition for court involvement in a voluntary dissolution. Any 33.3% of shareholders can petition for involuntary dissolution, and the shares of the alleged wrongdoers don’t count.
Shareholders have rights around meetings as well. Shareholders have a right to attend shareholder meetings, which must occur at least annually for the election of directors. (Corp. Code § 600.) Although shareholders have no right to attend directors’ meetings, they have a right to inspect the minutes upon demand, at a reasonable time.
This subject is purposefully vague, and the courts are there to protect shareholder legitimate interests. We have litigated cases in the past where the Board of Directors did not want to share certain requested information as it believed the information would be used for wrongful purposes, such as for competition. Such litigation is costly, time consuming and bad for morale. However, for fully transparent corporations, the sharing of books and records and other legitimately requested reviews works just fine.
This obligation can be waived in the bylaws of a corporation with fewer than 100 shareholders of record.
One extreme example is Hobbs v. Tom Reed Gold Mining Co. (1913) 164 Cal. 497, 500-501, which is now considered limited by section 1601 because it allowed a shareholder to inspect the company’s Arizona gold mine. Hobbs set forth the common law definition of proper purpose: to determine whether company operations were carried on with skill and good judgment. In Hobbs, The California Supreme Court permitted the gold mine inspection “for the protection of his interest or for his information as to the condition of the corporation and the value of his interest therein.” (Hobbs supra at 501.) Section 1601 would not permit the mine inspection, but, the basis for the inspection–to protect the shareholder’s interest and the value of his stock—still applies.
Article By: Kathleen J. Smith
Kathleen J. Smith is an experienced civil litigator. Kathi advises clients on and handles all types of civil litigation, including employment matters, wage and hour, business, real estate, trademark disputes, class action defense, trust and probate, and homeowners association disputes. Kathi is experienced in all types of dispute resolution, from mediation to arbitration to civil trial.