Some Shareholders Have an Absolute Right to Inspect Corporation Records

Absolute rights are scary or wonderful, depending on your point of view.

Absoluteness means that there is no exception.

Inspecting corporation records puts a spotlight on the inner workings of the corporation. That should be a good thing. It helps keep everyone who runs the corporation honest.

If your corporation is subject to California law, then shareholders who hold 5% or more of the outstanding shares have an absolute right to undertake certain, specific inspections.

Such shareholders have the right to inspect and copy the names and addresses of other shareholders.  They even have the right to find out how many shares are owned by the other shareholders. Because this is an “absolute”right of inspection, it does not matter the reason for the inspection request.

To obtain such a list of shareholders, the requesting shareholder must give the corporation at least 5 days’ prior notice of the inspection.

So this right does have some conditions before it become absolute, it seems.

If the corporation fails to provide the shareholder roll to a properly requesting shareholder, the requesting shareholder has a right obtain a court order to postpone any pending shareholders’ meetings.

Any and all shareholders, regardless of how many shares held, can also demand to inspect and copy shareholders’ records so long as the inspection is “reasonably related” to the requesting shareholder’s interest as an owner of shares in the corporation.

So for this inspection right, the request cannot be for just any reason at all but must be for a reason related to the requester’s ownership of shares.

Any of the above discussed inspection rights cannot be restricted by the corporation’s bylaws or its articles of incorporation. So check the bylaws and articles to make sure they do not contain restrictions on inspection rights.

Even if your corporation is incorporated in another state, if the corporation has its executive office in California or regularly holds board meetings in California, these rules will apply to your corporation.

How about inspecting accounting books and records? Those records can reveal important problems with the corporation’s cash flow or maybe even embezzlement.

As you might expect, any shareholder has the right to inspect accounting records of the corporation.

Any shareholder can also request to inspect the minutes of the meetings of the shareholders and board.

This inspection right even applies to records of any subsidiaries of the corporation.

Although this right is not “absolute,” it is very broad as to what the requester can ask for.

There is, however, a very important limitation on a shareholder’s right to ask for accounting records or minutes of meetings.

The purpose of the request must be “reasonably related” to the requester’s interest as a holder of shares in the given corporation.

In other words, a requesting shareholder cannot ask for these records to help a third party who is an outsider to the corporation.

The requester cannot ask for records to further his or her own interest that has nothing to do with the ownership in the shares.  For example, to embarrass another shareholder or a director.

But if the requesting shareholder suspects malfeasance with the finances of the corporation, a request to inspect accounting records is clearly within such shareholder’s interest as a holder of shares in such corporation.

Corporations that are subject to this broad right to inspect accounting books and records include not only California corporations but out-of-state corporations that keep their records in California or have their executive office in California.

Finally, directors of a corporation have the “absolute” right to inspect any and all corporate records and to inspect the corporation’s physical property. This right even applies if the director is not a shareholder.  This, of course, is necessary because the directors are ultimately responsible for running the corporation and have a need to know all aspects of its operations.

Inspection rights are important to shareholders and directors. The corporation has an obligation to provide access to its records according to applicable law. Even corporations incorporated in another state than where it operates may be required to comply with the local inspection laws.

References: California Corporations Code sections 1600, 1601, 1602.

This discussion is not legal advice, a solicitation of you as a client, nor the engaging in the practice of law in any jurisdiction.

This discussion is merely for information/education and should not be relied upon for legal advice by anyone because the facts discussed may be different from your own situation.  If you need legal advice, consult a qualified attorney.

For more information please visit my website at www.palacioslawoffice.com.

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About Elio Palacios, Jr.

Attorney Elio Palacios, Jr., represents individuals, corporations, entrepreneurs, small businesses, startups and early stage businesses, physicians, dentists, and healthcare businesses in corporate, business and commercial transactions and litigation. He also counsels employers and individuals on visa, immigration and naturalization matters. Visit www.PalaciosLawOffice.com to learn more.
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