By Gerald P. Burleson, member of the California Bar, and
Chi “Chuck” Zhang, 3rd year law student, University of San Diego Law School
© 2014 by Gerald P. Burleson, all rights reserved
Corporations have a statutory and fiduciary duty to provide shareholders with an annual report containing an up-to-date balance sheet, income statement, and a statement of cash flows accompanied by any independent auditors’ reports, within 120 days of the end of the previous fiscal year. See Cal. Corp. Code § 1501(a).
Shareholders need annual reports to make informed decisions about the value of their investment. Because there is a limited market for the shares of a non-public corporation, the corporation’s annual financial report is very important in ascertaining value, performance, and equity. While delays in distribution of the report may happen, a shareholder should not hesitate to make a clear and concise request for the reports.** If a shareholder is unable to resolve his or her issue, the law provides moderate to severe statutory and common law remedies for a corporation’s failure to timely provide shareholders with annual reports.
Unlike California Corporations Code § 1601, the law does not require shareholders to specify a separate, reasonable purpose for obtaining annual reports under § 1501(a). The law imposes a moderate statutory fine upon corporations that “neglect, fail, or refuse” to cause annual reports to be sent to shareholders. See Cal. Corp. Code § 2200. Furthermore, the California Supreme Court has held that a corporation breaches its fiduciary duty if it furnishes a “false, misleading, or improperly prepared report,” thus availing the shareholder to common law remedies such as negligence that may allow recovery of the shareholder’s damages caused by the corporation’s misconduct. See Small v. Fritz Companies, Inc.
Especially for closely held private corporations, annual financial reports contain crucial information for shareholders to determine the value of their shares and the health of their investment. Unlike publicly held corporations, the market for shares in closely held corporations is limited and oftentimes restricted, and information about the company’s value may not be available from other sources, so the value of the company’s shares may be gauged largely or even exclusively from the information presented in the annual report. Thus, the courts broadly interpret § 1501, especially for shareholders in this type of situation. For example, the California Supreme Court held that a former-shareholder had the right to receive the corporation’s financial reports for the purpose of determining the value of the shares that the shareholder had previously relinquished under a contractual obligation with the corporation. See Stephenson v. Dreyer.
A shareholder should create a record of diligence in seeking the information from the corporation amicably, including an initial request for the annual financial report. If the annual report is not forthcoming, a shareholder should contact an attorney for assistance if enforcement of the company’s duty to provide the report will be pursued.
Click here for an example Request for Annual Financial Report to Shareholders. 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 signed a written agreement to represent you. You further acknowledge that you should obtain independent legal counsel concerning your specific situation.