What inspection and information rights does a stockholder have?

February 9, 2008

Most states allow stockholders to demand access to a corporation’s books and records, and a stockholder list, as long as the stockholder has a proper purpose and meets certain procedural requirements.

Delaware General Corporation Law Section 220(b) provides that “Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from … [t]he corporation’s stock ledger, a list of its stockholders, and its other books and records …”

A stockholder that wants to exercise inspection rights should probably engage an experienced attorney because a corporation can reject the request for failure to comply with procedural requirements.

If the corporation refuses to permit an inspection or does not reply to the demand within 5 business days, the stockholder may apply to the Delaware Court of Chancery for an order to compel such inspection.

One requirement for exercising inspection rights is a proper purpose for the demand.  Section 220(b) provides that “[a] proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder.”

Delaware courts have held that the following purposes, among others, are proper:  gather information prior to filing a stockholder derivative suit, communication with other stockholders regarding a solicitation of proxies, communication with other stockholders regarding a stockholder class action against the corporation, communication with other stockholders for the purpose of influencing management to change its policies, communication with other stockholders to encourage them to dissent from merger and seek appraisal, valuation of one’s stockholdings, and investigation of suspected mismanagement where some credible basis for the stockholder’s suspicions is shown to exist.

Courts have rejected inspections for purposes such as:  gaining information to facilitate a tender offer when the stockholder has already been enjoined from pursuing a tender offer, valuing the company as a whole in order to determine whether to increase one’s bid in a tender offer, gathering information for use in a stockholder’s individual employment-related claims against the corporation, obtaining information to use to exert economic pressure upon a third party in connection with a labor union’s strike, or satisfying idle curiosity.

If a stockholder seeks to inspect only the corporation’s stock ledger or list of stockholders, the burden of proof is on the corporation to establish that the inspection if for an improper purpose.  If the stockholder seeks to inspect the corporation’s books and records, other than its stock ledger or list of stockholders, then the burden of proof is on the stockholder to show a proper purpose.

A stockholder will be entitled to inspect documents that are essential and sufficient to the accomplishment of the proper purpose.  The Court of Chancery may “prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.” A stockholder may be required to execute a confidentiality agreement in order to exercise inspection rights.

Given that disgruntled stockholders can create problems by exercising inspection rights, companies should be careful about their stockholder base.

Comments

  • Disgruntled worker

    I am a minority shareholder who is attempting to obtain information from a company that I was recenty fired from. The company attorney is requiring a Confidentiality Agreement which I indicated would be executed when they deliver the requested documents. They are insisting that the document be executed a few days in advance. Do I have any legal standing to wait until the information exchange? This has been a acrimonious relationship with quite the history. I would love to sue, and have been told we have a good case, if we are willing to put up the $200,000+ in advance. So far, I am fighting this battle on my own. Any suggestions?

  • http://www.startupcompanylawyer.com Yokum

    @DW – Please consult with your own counsel. Most companies would request a confidentiality agreement before providing documents.

  • Roberta

    I am a 49% owner in the Real Willard Water located in Rapid City, SD. I have been offered a small sum of money to sell my shares to the family. How can I tell if it is a good price or not?

  • http://www.startupcompanylawyer.com Yokum

    @Roberta – Get a valution of the business done by a third party.

  • jpsmom

    I belong to a small corporation and we pay annual maintenance dues, if our dues are not current at the time of the annual meeting we are not allowed to vote, we vote on Directors and an annual budget and maybe some other things that might need attention. What I need to know is can a stockholder that is not in good standing vote a proxy for a stockholder that is in good standing. The Board is trying to write new by-laws and this question is very important.
    Thank You for any help you can give

  • http://www.startupcompanylawyer.com Yokum

    @jpsmom – I'm not familiar with how this would work without reviewing the relevant documents. (Note – this isn't an invitation to send me them. Please check would the company's counsel.)

  • hal1931

    I am a minority stockholder in a small community bank. I know most of the other stockholders except for a few. I would like to have their names and addresses so I can contact them with my ideas about the future of the bank. I presume I have a right to their names and addresses. If the bank refuses to furnish them to me, I also presume I can get a local atty to inspect the bank records on my behalf. Correct?

  • http://www.startupcompanylawyer.com Yokum

    @hal1931 – depends on the state of incorporation and whether you have a proper purpose.

  • http://www.startupcompanylawyer.com Yokum

    @hal1931 – depends on the state of incorporation and whether you have a proper purpose.

  • ivpllc

    Can a Corporation charge the stockholder for the inspection of the books and records of the Corporation; I understand the stockholder will be charged for the requested copies of the books and records but the actual inspection at the office where the books and records are kept.