Corporate Law Shareholder rights to C Corporation

[kevin]

Hi,

I am a minor shareholder of a corporation that was changed
from S to C structure. The company is not sending me any
reports because the president claims that due to the company
structure, I am not entitled to the paperworks. Is this true?
Am I not entitled to shareholder reports, company earnings
and other company docs?

All assistance is appreciated.

Regards,

Kevin

 

[Michael Wechsler]

Originally posted by kevin:
Hi,

I am a minor shareholder of a corporation that was changed
from S to C structure. The company is not sending me any
reports because the president claims that due to the company
structure, I am not entitled to the paperworks. Is this true?
Am I not entitled to shareholder reports, company earnings
and other company docs?

This could be true. You are a minor shareholder. Did you get any paperwork regarding the change to the C corp status? An S corporation is a small corporation of 35 shareholders or less (I'm not sure if it's uniform in all states). I'm not sure what reports you aren't getting but with a C corporation there are a lot of other very important differences besides just paperwork issues. I believe that you may be double taxed as well on the income -- the corporation is taxed on their income and any dividends you receive are taxed as well. An S corp is commonly created to prevent this double taxation issue. Are they refusing to provide you any paperwork or just what you used to get, e.g. quarterly reports?

 

[rella]

shareholders rights in a C corporation in New York State

As a minority shareholder (3%) of a privately held c corp in New York state although it may have been incorporated in Delaware, do I have the right to see annual reports?

 

[Michael Wechsler]

Re: shareholders rights in a C corporation in New York State

Originally posted by rella
As a minority shareholder (3%) of a privately held c corp in New York state although it may have been incorporated in Delaware, do I have the right to see annual reports?

Here are the laws of DE with regard to the "right of inspection." DE is the state in which the overwhelming majority of corporations are created.

DELAWARE GENERAL CORPORATION LAW
§ 220. Inspection of books and records.

(a) As used in this section:

(1) "List of stockholders" includes lists of members in a nonstock corporation.

(2) "Stockholder" means a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person, and also a member of a nonstock corporation as reflected on the records of the nonstock corporation.

(3) "Subsidiary" means any entity directly or indirectly owned, in whole or in part, by the corporation of which the stockholder is a stockholder and over the affairs of which the corporation directly or indirectly exercises control, and includes, without limitation, corporations, partnerships, limited partnerships, limited liability partnerships, limited liability companies, statutory trusts and/or joint ventures.

(4) "Under oath" includes statements the declarant affirms to be true under penalty of perjury under the laws of the United States or any state.

(b) 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:

(1) The corporation's stock ledger, a list of its stockholders, and its other books and records; and

(2) A subsidiary's books and records, to the extent that:

a. The corporation has actual possession and control of such records of such subsidiary; or

b. The corporation could obtain such records through the exercise of control over such subsidiary, provided that as of the date of the making of the demand:

1. The stockholder inspection of such books and records of the subsidiary would not constitute a breach of an agreement between the corporation or the subsidiary and a person or persons not affiliated with the corporation; and

2. The subsidiary would not have the right under the law applicable to it to deny the corporation access to such books and records upon demand by the corporation.

In every instance where the stockholder is other than a record holder of stock in a stock corporation or a member of a nonstock corporation, the demand under oath shall state the person's status as a stockholder, be accompanied by documentary evidence of beneficial ownership of the stock, and state that such documentary evidence is a true and correct copy of what it purports to be. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in this State or at its principal place of business.

(c) If the corporation, or an officer or agent thereof, refuses to permit an inspection sought by a stockholder or attorney or other agent acting for the stockholder pursuant to subsection (b) of this section or does not reply to the demand within 5 business days after the demand has been made, the stockholder may apply to the Court of Chancery for an order to compel such inspection. The Court of Chancery is hereby vested with exclusive jurisdiction to determine whether or not the person seeking inspection is entitled to the inspection sought. The Court may summarily order the corporation to permit the stockholder to inspect the corporation's stock ledger, an existing list of stockholders, and its other books and records, and to make copies or extracts therefrom; or the Court may order the corporation to furnish to the stockholder a list of its stockholders as of a specific date on condition that the stockholder first pay to the corporation the reasonable cost of obtaining and furnishing such list and on such other conditions as the Court deems appropriate. Where the stockholder seeks to inspect the corporation's books and records, other than its stock ledger or list of stockholders, such stockholder shall first establish that:

(1) Such stockholder is a stockholder;

(2) Such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents; and

(3) The inspection such stockholder seeks is for a proper purpose.

Where the stockholder seeks to inspect the corporation's stock ledger or list of stockholders and establishes that such stockholder is a stockholder and has complied with this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose. The Court may, in its discretion, 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. The Court may order books, documents and records, pertinent extracts therefrom, or duly authenticated copies thereof, to be brought within this State and kept in this State upon such terms and conditions as the order may prescribe.

(d) Any director (including a member of the governing body of a nonstock corporation) shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to the director's position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger and the list of stockholder's and to make copies or extracts therefrom. The burden of proof shall be upon the corporation to establish that the inspection such director seeks is for an improper purpose. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. (8 Del. C. 1953, § 220; 56 Del. Laws, c. 50; 63 Del. Laws, c. 25, § 9; 70 Del. Laws, c. 79, §§ 11, 12; 70 Del. Laws, c. 186, § 1; 71 Del. Laws, c. 339, § 39; 74 Del. Laws, c. 84, §§ 5-8.)

 

[Michael Wechsler]

Section 220 of the DE GBL is a valuable protection afforded to shareholders within which includes the investor's statutory right to inspect corporate books and records. According to this section, the stockholder must submit a sworn, written request to inspect the corporate records inlcuding specifying the purpose of the inspection and documents sought for review. The person or entity using this section must be a stockholder of record or the investor's attorney or agent (a power of attorney must be included using this method.) It doesn't matter how many shares are owned by a stockholder of record, nor how long they are held, for a shareholder to make this request for inspection.

In the event that inspection is not permitted, the stockholder may sue in Chancery Court. Law requires that the corporate records be provided or a response to the request within five business days of receipt. It is important to ensure that proper procedure and statutory requirements are followed or else the defendants can dismiss the suit.

Burdens of proof: If a stockholder only requests a shareholder list, the burden is on the company to prove that the purpose of the request is improper. Courts have traditionally held that shareholders hould have rights to access corporate records for many purposes -- solicit proxies to other shareholders, class actions, derivative suits, analysis and demands for changes in corporate policies, etc. The bottom line is that the stockholder must be seeking the information for a 'proper purpose' which sometimes can be differentiated between a suit or action against the directors (might be proper) versus a suit against the corporation itself (potentially improper depending upon the context.)