Monday, January 6, 2014

Information Rights of Shareholders in a California Corporation

Generally, all shareholders of a corporation registered in California are entitled to obtain from the corporation, upon request, certain corporate information. The type of information and the requirements that a shareholder must meet to get access to it it depend on the size of the corporation and the size of the shareholder’s equity interest in the corporation. In certain instances, it is required that the shareholder state a “purpose reasonably related to such interest.”

When Is “Reasonably Related Purpose” Not Required

  • Generally, all shareholders irrespective of the size of their equity ownership in a corporation are entitled to receive an annual report (CA Corporations Code Section 1501), except that a corporation with fewer than 100 shareholders may expressly waive this requirement in its bylaws. In such a case, the shareholders are entitled to receive a financial report similar to what an annual report should entail.
  • All shareholders irrespective of their of the size of their equity ownership are entitled to receive a copy of the corporation’s bylaws (CA Corporations Code Section 213).
  • All shareholders irrespective of of the size of their equity ownership are entitled to receive the results of vote at a regular, special or annual meeting (CA Corporations Code Sections 1509-1511).
  • Shareholders owning individually or in the aggregate at least 5% of corporate shares are entitled to obtain and copy shareholders register and records (CA Corporation Code Section 1600) and quarterly financial information (CA Corporations Code Section 1501(c)-(d)).

When Is a “Reasonably Related Purpose” Required? Other than the situations delineated above, all other shareholders are required to state in writing a reasonable relationship between their interest in the corporation and the purpose of their inspection of books and records. In fact, if such relationship purpose of inspection of records and books is stated, then such shareholders are entitled to inspect (CA Corporations Code Sections 1600 and 1601):

  • Shareholder lists and Records
  • Minutes of Books and Records
  • Accounting Books

What is a “Reasonably Related Purpose”? The courts are unfortunately not clear on the answer and the legislation is not clear as to the time frame during which the written demand should be made on the corporation. Hence, the corporation is afforded some time to intelligently evaluate the “reasonable purpose” and ascertain the next course of action. If the corporation decides to withhold the information to a shareholder owning less than 5% of shares in the corporation, then the next venue will probably be courts.

What is an Annual Report? An Annual Report encompasses the following (CA Corporations Code Section 1501(a)):

  • Income Statement; and
  • Statement of Cash Flows for the Applicable Fiscal Year

Other Important Rules

  • The statutory right of shareholders to inspect and copy corporate books cannot be limited by articles of incorporation or bylaws. (CA Corporations Code 1600(d)).
  • The copies of corporate books, under this section, could be made by person, attorney or agent. (CA Corporations Code 1600(d)).
  • 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.

Happy company making!

Inna


White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
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