As a general rule, corporations and their boards are subject to scrutiny by their shareholders. One of the ways that stakeholders can review and scrutinize a Corporation is through a demand for corporation books and records, also known as inspection rights. These rights allow a shareholder to access corporate books and records so long as there is a proper purpose. The push and pull between corporations and their stockholders over review of information is a long and litigious story, and both sides require the use of knowledgeable attorneys to manage their claims. Speak with a lawyer today to discuss any claims occurring on corporation books and records that may affect your interests.

Who can Make a Demand for Corporate Books and Records?

Because a significant percentage of corporations in the United States are registered in Delaware, most demands for corporation books and records fall under their state laws. Delaware law contains both common law and statutes that create a fundamental right for stakeholders to know how management is handling the affairs of the corporation. Statutes provide that any stockholder, including record holders and beneficial owners, can make a demand for corporate books and records, and there is no legal threshold for how much stock or for how long the stock has been owned before a request can be made.

A demand for corporation books and records must be made under oath and in writing. The request must state what specific documents are sought and for what proper purpose. Stockholders can request to see the stock ledger or list of stockholders, books and records, and subsidiaries’ books and records. The stockholder is entitled to see any information that falls under these three categories that is readily available to the corporation, but the law is unclear as to what exactly are books and records. This creates a murky litigious area between corporations that wish to keep some information confidential and stockholders who demand transparency in their held investments.

What is a Proper Purpose?

Along with a request to review specific documents in a corporate books and records request, the stockholder must also state a proper purpose for the review. Under Delaware law, a proper purpose is one that is reasonably related to their interest as a stockholder. If the requested reason is vague or not related to their stockholder interest, the request can be denied by the corporation. If the purpose stated is averse to the interests of the corporation, the request can also be denied by the business for a review of its books and records.

The threshold for determining whether there is a proper purpose for the review is fact-dependent on each request. The court will look at the materials requested in the demand – if a stockholder list is requested, the burden falls on the corporation to prove an improper purpose, and if books and records are requested, the burden falls on the stockholder to prove a proper purpose. Commonly accepted proper purposes for demands of stockholder lists as well as books and records include the following:

• Solicit proxies or stockholders’ consent
• Solicit support for derivative litigation
• Evaluate settlement of a derivative litigation
• Communicate with stockholders regarding a tender or exchange offer
• Identify potential buyers and sellers
• Learn the propriety of dividend distribution
• Calculate the value of the stock
• Investigate mismanagement, self-dealing, or corporate waste
• Test the propriety of public disclosures
• Inquire regarding the independence of directors

An experienced attorney will be able to review a demand for corporation books and records to determine whether the facts of your particular case meet the threshold for disclosure.

There is also often an issue of mixed motives when it comes to a stockholder’s demand for corporation books and records. There may be a proper primary purpose, but a secondary purpose also exists that is improper and potentially harmful to the corporation. States are split in their handling of mixed motive cases, with some states finding that so long as the primary purpose is legitimate, the demand for corporate books and records stands, and others leaning more toward rulings that the finding of any improper purpose makes the request objectionable. Talk with your lawyer about your state law regarding mixed motive demands for corporation books and records.

Defenses Against a Demand for Corporate Books and Records

While stockholders have many legitimate and proper purposes for the demand of corporation books and records, corporations also have defenses against requests that it believes have an improper purpose for the review. Generally speaking, an improper purpose is one that is intended to harm the corporation or its stockholders. One of the most common defenses to an improper demand is that the request is being made in bad faith with the intention of harming those associated with the corporation.

Another common defense to a demand for corporate books and records is that the stockholder is on a fishing expedition and that the stated purpose of the demand is too vague. Requests for speculative purposes, to gratify curiosity, or to harm the company are not allowed. In addition, a corporation can defend against a demand if the information requested is not needed. If the stockholder has no legitimate need for the information sought, the request can be denied.

Sometimes, a stockholder will make a demand for corporate books and records in order to give another company a competitive advantage as a form of corporate espionage. However, it is not enough to prove that a stockholder has an association with a competitor, and there must be more evidence to show that the information is being sought specifically to give that competitor an advantage.

Requests for books and records have also been made in order to harass or extort members of a corporation board or its shareholders. A company is allowed to deny the demand if the purpose of the request is to use the information to coerce the company to make certain decisions or otherwise harm people associated with the corporation. This also applies to any request being made by a stockholder when the corporation believes that person or entity is out to destroy the company. An experienced lawyer can review all purpose requests and potential defenses to a demand for corporation books and records in your case.

Laine Wagenseller is a Los Angeles-based real estate litigation trial attorney.  He is the founder of Wagenseller Law Firm in downtown Los Angeles which specializes in lawsuits involving properties and partnerships.  The lawyers at Wagenseller Law Firm have handled many neighbor disputes involving ownership issues, easements and licenses. For more information please call the firm at (213) 286-0371.

The post Demand for Corporation Books and Records appeared first on Wagenseller Law Firm.