The structure of a corporation establishes a division of rights and responsibilities among at least three groups. Ownership of the corporation is vested in the shareholders, while directors are charged with its overall management. Officers are responsible for the corporation’s day-to-day operations. A shareholder who is not also a director or officer may not have much of a role in the operation or management of a corporation, but they have rights to information about the corporation’s financial status. The Delaware Court of Chancery recently ruled in favor of a shareholder seeking access to a corporation’s books. Rodgers v. Cypress Semiconductor Corporation, No. 2017-0070-AGB, order (Del. Chanc. Ct., Apr. 17, 2017). The court’s order offers useful guidelines for shareholders seeking access to corporate information.
New Jersey law defines “shares” as “the units into which the proprietary interests in a corporation are divided,” and a “shareholder” as “a holder of record of shares in a corporation.” N.J. Rev. Stat. §§ 14A:1-2.1(l), (m). Any shareholder has the right to request financial documents, including balance sheets and profit and loss statements, from the corporation. Certain shareholders “have the right for any proper purpose to examine…[the corporation’s] minutes of the proceedings of its shareholders and record of shareholders.” Id. at § 14A:5-28(3).
Delaware law goes further, giving shareholders the right to inspect a wide range of corporate documents upon a “written demand under oath stating the purpose” of the shareholder’s request. 8 Del. Code § 220(b). If the corporation denies the shareholder’s demand, the shareholder can petition the Court of Chancery to compel production. A plaintiff in such a case must establish standing as a shareholder, compliance with the “form and manner of making a demand for inspection,” and a “proper purpose” for the inspection.” Id. at § 220(c).
The plaintiff in Rodgers was a shareholder of the defendant corporation. Additionally, he had served as the corporation’s president and chief executive officer (CEO) for over three decades before resigning in April 2016. He remained on the board of directors for another four months and then resigned that position as well. The plaintiff later learned of possible conflicts of interest involving a person named to a position with the board of directors. He notified the board of his concerns and then made a written request for an inspection of the corporation’s books and records. The corporation agreed to allow access to certain documents, with multiple conditions, but largely rejected the plaintiff’s demand.
The plaintiff filed suit in Chancery Court to compel production of the requested records. In April 2017, the court ruled in his favor. It found that concern over conflicts of interest is a “proper purpose” under § 220. It rejected the corporation’s argument that the plaintiff had to “set forth a credible basis to believe that the Board breached its duty of loyalty or acted in bad faith.” Rodgers, order at 11. The documents requested by the plaintiff were all reasonably related to his intended investigation, the court found. It ordered the defendant to produce the documents within five days of the entry of its order.
Samuel C. Berger is a business attorney who represents entrepreneurs, businesses, and business owners in New York and Northern New Jersey. Our firm offers fixed-fee legal-service packages that cover a wide range of legal needs for our clients. To schedule a confidential consultation to see how we can help you and your business, contact us today online, at (201) 587-1500, or at (212) 380-8117.
More Blog Posts:
New York Statute Could Make Certain Shareholders Individually Liable for Unpaid Wages, New York & New Jersey Business Lawyer Blog, December 1, 2016
“Piercing the Corporate Veil” Under New York and New Jersey Laws, New York & New Jersey Business Lawyer Blog, October 6, 2016
A New York City Media Scandal Shines a Light on the Corporate Duty of Loyalty, New York & New Jersey Business Lawyer Blog, August 18, 2016