You own some shares of a business, but you don’t work there and you’re not on the board of directors. The CEO just sent a letter regretfully informing you and the other owners that there won’t be any dividends this year. But you know from one of his neighbors that the CEO just started a bottom-to-top renovation of his house, and he’s also driving a new vehicle that must have cost at least six times as much as the car he bought last year.
How can you find out what’s going on inside the company?
You’re the president of a company, and one of the smaller shareholders is demanding access to the company’s financial and customer data. Last month this same shareholder asked if you were interested in buying his shares. You suspect he’s now asking for company information because he wants to start his own competing business.
Can you refuse to let him see any of the company records?
Traditionally, a shareholder had the right to inspect corporate books and records “for proper purposes.” Today, Minn. Stat. § 302A.461 more clearly defines that right, providing shareholders two levels of access to corporate records: guaranteed access, and access for a “proper purpose.”
Guaranteed Access
Minn. Stat. § 302A.461 requires a corporation to maintain certain records and make them available for inspection by any shareholder if the shareholder requests them in writing from an officer. No other requirements must be met by the shareholder, and the statute does not allow the corporation any defense against providing the information. The required records include
- Records of board and shareholder proceedings
- Bylaws and articles of incorporation
- Annual financial statements
- Shareholder reports
- The names and addresses of the directors and principal officers
- Shareholder agreements
- The share register (for nonpublic corporations)
These documents must be provided by the company promptly at the shareholder’s written request — within ten days.
Conditional Access
Corporations are also required to keep “appropriate and complete financial records,” but they need not provide these and other internal records to a shareholder, unless the shareholder demonstrates a “proper purpose.” Minn. Stat. §302A.461 subd. 3, 4. A “proper purpose” is a purpose “reasonably related to the person’s interest as a shareholder.” Minn. Stat. § 302A.461 subd. 4(d).
In practice, the “proper purpose” analysis is a two-step process. First, the shareholder must assert a valid purpose. This is not difficult. In Fownes v. Hubbard Broad., Inc., the Minnesota Supreme Court stated that shareholders had a proper purpose if they desired to inspect records “to place an accurate value on their shares of stock, and to evaluate the conduct and affairs of the corporation’s officers and majority shareholders so as to determine the effects on the financial condition” of the corporation.[1] Almost any request for records can be characterized as an effort to evaluate the conduct and affairs of the corporation’s officers.
The second step is more complicated. Fownes, anticipating that shareholders use false pretenses to seek corporate records for more nefarious reasons, went on to say that evidence of a proper purpose can be rebutted by “evidence of improper motive or purpose.” That is, even if a shareholder asserts that he wants corporate records to monitor the company’s stock value, the company can avoid providing the records (other than the guaranteed access records listed above) by showing that the shareholder actually intends a different, unrelated purpose.
A 1991 case provides an example. In Bergmann v. Lee Data Corp., the Minnesota Court of Appeals approved a trial judge’s decision to deny a shareholder access to corporate records. The shareholder claimed that he sought the records in order to “investigate alleged officer misconduct,” but the company argued that he actually intended to use the records in a wrongful termination lawsuit he had already filed against the company. Both the trial court and the appellate court deemed this an improper purpose, not reasonably related to his interest as a shareholder, and refused to order the company to produce the requested records.[2]
Thus a corporation may successfully resist a shareholder’s request for records outside the laundry list in Minn. Stat. § 302A.461 subd. 2, depending on the specific facts of the dispute. If one side pursues the matter into court, the judge will resolve their dispute by deciding whether the shareholder’s true purpose reasonably relates to his interest as a shareholder.
Other Rules
If a shareholder satisfies the statute’s “proper purpose” requirement, there are not many other requirements to obtain access to corporate records. The request must be in writing, and must be made at a reasonable time. (There are some slight differences in the process depending on whether the company is publicly held or not. See Minn. Stat. § 302A.461 subd. 4(b) and 4(c).) If the shareholder meets the statute’s minimal requirements and the company still refuses to provide the records, the shareholder may sue to obtain access, and he is not required to prove any damages,[3] so long as he remains a shareholder at the time he seeks the records.[4]
[1] Fownes v. Hubbard Broad., Inc., 302 Minn. 471, 473–74, 225 N.W.2d 534, 536 (1975).
[2] Bergmann v. Lee Data Corp., 467 N.W.2d 636, 640 (Minn. Ct. App. 1991).
[3] Blohm v. Kelly, 765 N.W.2d 147, 157-58 (Minn. Ct. App. 2009).
[4] See Sifferle v. Micom Corp., 384 N.W.2d 503, 509 (Minn. Ct. App. 1986).
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