Source: http://www.jerryburleson.com/shareholder-demand-for-inspection-of-records-in-california-under-corporation-code-%C2%A71601/
Timestamp: 2019-02-20 09:44:53
Document Index: 550036702

Matched Legal Cases: ['§1601', '§ 1601', '§ 1601', '§ 1601', '§1601', '§ 1601', '§ 1501', '§ 1600', '§ 1603', '§ 213']

Shareholder Demand for Inspection of Records in California under Corporation Code §1601 - Jerry Burleson
by Jerry Burleson | Dec 10, 2013 | Shareholder Rights |
Shareholders have limited rights to inspect the records of California corporations. While statutory laws governing the types of records shareholders may examine are complex and may appear unwieldy, an experienced attorney may assist the shareholder to take full advantage of broader common law shareholder rights of inspection. However, while shareholders have rights to corporate information beyond those of the general public, shareholders do not have unfettered access to corporate confidences and secrets. Knowledge of the legal nuances governing inspection rights is crucial for shareholders to develop a successful legal strategy to enforce their rights.
California Corporations Code § 1601 (available below) and the common law are sources of shareholders’ rights of inspection, which provide vital pieces of information for shareholders to maintain and oversee the integrity of their investment. Sometimes, Corporations have some contestable interests in nondisclosure, and corporations have long harnessed legal expertise to protect their interests. Likewise, shareholders should not shy away from using the same tools to protect their rights. Thus, understanding the mechanics of creating a proper, legally sound initial inspection request at the outset is crucial for shareholders to protect their interests.
Shareholders should understand that, by requesting to inspect corporate records, this may trigger corporate defensive interests. In the initial stages of making an inspection request, a shareholder should be sensitive of these interests while exerting their rights. This may preclude an adversarial dynamic between the shareholder and corporate officers and directors, thereby increasing the likelihood of success. Shareholders who utilize legally recognized principals in initiating an inspection request can avoid much friction in communication, a benefit to all parties. Equally as important, conforming to legal principles behind inspection requests allows shareholders to create a favorable record in the event of subsequent legal proceedings.
Schnabel v. Superior Court illustrates several factors that favor a plaintiff’s right to inspection. The plaintiff clearly articulated, through the testimony of an accountant, that each record requested reasonably relates to the corporation’s value. Since there is no immediate market for shares within a closely held corporation, the lack of a “market out” necessitates the valuation of the company based on the corporation’s accounting books and records. Accordingly, the plaintiff limited the time period of her request to information related to the current value of the underlying assets, as opposed to an excavation of financial records. Thus, a proper shareholder inspection request should 1) articulate a purpose for seeking records that is reasonably related to the person’s interests as a shareholder, 2) identify facts that illustrate the necessity of the records sought, such as to value shares of a closely-held corporation that do not have an immediately ascertainable market price, 3) identify and narrow the scope of records sought to information related to the purpose articulated above, 4) limit the time periods for the records sought to those related to the purpose articulated above, 5) should court enforcement of the demand become necessary, the shareholder should be prepared to support the demand with a declaration, such as from an accountant, explaining the necessity of each record sought.
In Hobbs v. Tom Reed Gold Mining Co., the court recognizes a shareholder’s common law right to inspect corporate records. Emphatically, § 1601 illustrates by example, not exclusion, of a shareholder’s common law rights. The Hobbs court considered a shareholder’s common law right to inspect the books of the corporation and identified a shareholder’s interest in “the assets and business of the corporation . . . for the protection of his interest or . . . information as to the condition of the corporation and the value of [its] interests therein.” Because a mining company’s mines, ores, and other valuable assets might not be properly reflected on “the books,” the shareholder was able to convince the court that he should have primary access to the company’s mine to conduct this inspection. Thus, by construing an information request to show a purpose reasonably related to the shareholder’s interest, courts have room to permit a broader inspection based on the factual underpinnings of the shareholder’s interest and the nature of the corporation.
Shareholders must also beware of some limitations on their rights and accordingly must carefully carry out their inspection request. The court in Hartman v. Bandini Petroleum Co. noted that if shareholders have antagonistic motives toward the corporation, the corporation may be able to deny the request even if a reasonable purpose otherwise exists. Thus, shareholders must create a favorable record from the initial communication and take care not to create facts that may be construed against the shareholder. While shareholders unquestionably have the right to inspect, they probably should not take a “guns blazing” approach; rather, a well-planned legal strategy will more adequately serve a shareholders’ interest.
For example, a court may deny a request altogether if the corporation can show that the request is adverse to the interests of the corporation, or if it would unreasonably burden the corporation. A reasonable purpose concurrent with one or more antagonistic or unreasonably burdensome requirements, or vague and inartful demands, may defeat an inspection demand. The court in Jara v. Suprema Meats, Inc. rejected a shareholder’s request to have financial records sent to him because he has no statutory right to have information “sent” to him under § 1601. Thus, by requesting something that the shareholder had no right to, the entire request may be denied, including information that the shareholder may otherwise have rights to. The court held that corporations do not have an affirmative duty to respond to defective, or “vague, ambiguous, or inartful request[s]” by shareholders because responding to such requests would unreasonably burden the corporation.
In light of their statutory and common law rights, shareholders should carefully craft their inspection demands to include a purpose reasonably related to their interests as shareholders and avoid making requests beyond the scope of their statutory and common law rights. Understanding the mechanics of a properly made shareholder inspection demand during the initial stages will increase the chance that all parties will achieve a satisfactory outcome. This will help maintain cordiality between the shareholder and corporate officers and directors at the outset, and also favor the shareholder should court enforcement become necessary.
A sample Shareholder Demand for Inspection of Records is available at the conclusion of this article. NOTE: This blog article and the sample Shareholder Demand for Inspection of Records are for general informational purposes only. By clicking the link to the sample document below, you understand and acknowledge that no attorney-client relationship will exist between you and the Law Offices of Gerald P. Burleson absent a written agreement by such firm to represent you. Readers should consult with independent legal counsel concerning how to proceed in their own specific situation.
Text of Corporations Code §1601:*
*§ 1601 is not the only California statute granting shareholders a means to access records of the corporation. Corporation Code § 1501 deals with shareholder access to the company’s annual report and its financial statements, § 1600 deals with shareholder inspection of the company’s list of shareholder names, addresses and shareholdings, §§ 1603-1604 deal with court enforcement of shareholder inspection rights and § 213 grants shareholders the absolute right to inspect or obtain a copy of the corporation’s bylaws.
Example Shareholder Demand for Inspection of Records under Corporations Code Modified
Click here for a sample Shareholder Demand for Inspection of Records. By clicking this link, you understand that no attorney-client relationship or privilege will exist between you and the Law Offices of Gerald P. Burleson unless we have agreed to represent you. You acknowledge that you should obtain independent legal counsel concerning your specific situation.