California law provides shareholders and directors with powerful tools to learn about the activities of the corporation and its performance. You might think that a director would already have access to all the information she needs to carry out her duties as a member of the board. Unfortunately, it is not uncommon for a controlling shareholder or a CEO who effectively calls the shots to withhold critical information from shareholders and even from directors, providing them instead only with information the person in control wants them to see. This opens the door to frauds and cover-ups by insiders. Directors have a duty to investigate suspicious activities, to ask hard questions and they must insist on seeing all of the records that would clear the air concerning transactions and activities they have lingering questions or doubts about. Shareholders, too, are in no position to challenge the activities of insiders if they are denied access to critical information about the corporation.
Director Rights to Information
Directors are charged by law with oversight of the corporation and directors can be held liable to the corporation if they fail to carry out their duties. The law has no patience for a director who was “asleep at the switch” when she could have avoided a loss to the corporation by insisting on access to corporate records she had a right to inspect. A director’s need for unfiltered information about the corporation is even greater than a shareholder’s need for information because of the director’s legal liability. Thus, California law grants a director an absolute right at all reasonable times to access and inspect all of the corporation’s books, records and documents of every kind and to inspect the physical properties of the corporation, and these rights of access and inspection also apply to subsidiaries of the corporation. The director rights of inspection apply to directors of all California corporations and to directors of foreign corporations that have their principal executive office in California or that customarily conduct board meetings in this state.
Shareholder Rights to Information
A shareholder also needs access to information about the corporation to protect her investment. Perhaps the most basic right of a California shareholder to information about the corporation’s activities results from the statutory obligation of any California corporation and of any foreign corporation with its principal executive office in California or that customarily holds its board meetings in this state to provide an annual report to the shareholders within 120 days after the close of the corporation’s fiscal year. The obligation to furnish an annual report to the shareholders can be avoided only by corporations with less than 100 shareholders where the requirement is expressly waived in the bylaws of the corporation. At a minimum the annual report must contain a set of financial statements concerning the corporation, including a balance sheet as of the end of the fiscal year and an income statement and a cash flow statement for the fiscal year. In the case of corporations with at least 100 shareholders there are various additional disclosures concerning major corporate transactions involving corporate insiders that must also be made in the annual report unless such a transaction was approved by the shareholders or unless the corporation is already required to make those kinds of disclosures under the Securities Exchange Act of 1934. If a California corporation or a foreign corporation subject to the statutory obligation to furnish the annual report fails to do so the corporation is required to provide its financial statements for the preceding fiscal year-end to any shareholder who makes a written request for them.
Shareholders with at least 5 percent of the corporation’s shares have even greater rights to receive regular financial statements from the corporation. A 5 percent shareholder (or two or more shareholders who collectively own at least 5 percent of the corporation’s shares) is entitled to receive, in each instance upon written request, an income statement and a period end balance sheet for the three month, six month and nine month period end of the corporation’s current fiscal year.
The corporation must comply with shareholder demands for the corporation’s financial statements, as previously discussed, within 30 days of a proper demand. The corporation’s obligation to furnish the financial statements on demand, as previously discussed, can be enforced by a superior court upon an action filed by any shareholder or shareholders entitled to the reports. Attorney’s fees and civil penalties may be recovered by a shareholder bringing such an action if the superior court finds that the corporation’s failure to provide the reports was unjustified.
California law also gives a shareholder the right to inspect the accounting books and records of the corporation as well as the minutes of the “proceedings” of the shareholders and of the board, including minutes of committees of the board, for a purpose reasonably related to the shareholder’s interest in the corporation. To exercise her rights of inspection a shareholder must make written demand on the corporation and the inspection must be done during normal business hours. The shareholder rights of inspection apply to any California corporation and to any foreign corporation that maintains its principal executive office in this state or that maintains the records sought in this state. Shareholder rights of inspection, as described, cannot be limited by the corporation’s articles or bylaws.
Should the corporation refuse a lawful demand for inspection by a director or by a shareholder, the superior court is empowered to enforce their rights of inspection and for good cause shown the superior court is empowered to appoint inspectors or accountants to audit the books and records of the corporation or to investigate the property, funds or affairs of any California corporation and of any foreign corporation keeping records in this state. The court has the discretion to order the corporation to pay or share in the cost of the expenses of the investigation or audit. If the court finds that the corporation failed without justification to comply with a shareholder demand for inspection the court is empowered to award the shareholder his reasonable expenses, including attorneys’ fees incurred in bringing the proceedings in court.
If you have been denied access to critical information about your company as a director or shareholder, and you live in the state of California, call me for a free consultation to discuss your case: San Diego area – (858) 794-4805 | San Francisco area – (415) 536-1530. Or fill out the form at the top right and we can setup an appointment.