Informational rights from Amma

Case discussion Facts –Hannibal Lechter Foods, Inc., a privately-held company, makes a popular meal extender for cannibals, ‘‘ Manburger Helper’’. Robinson Crusoe, a 1% shareholder, believes that the directors are cooking the books; however, they refuse to allow him to see the corporation’s books to find out if he’s right.

Case discussion Legal issue –Under the prevailing approach, does Crusoe have a right to examine the corporation’s accounting records for this purpose?

Concerning legal provisions Article 34 The shareholder shall be entitled to consult and copy the articles of association, records of the shareholders' meetings, resolutions of the meetings of the board of directors, resolutions of the meetings of the board of supervisors, as well as financial reports. The shareholder may request to consult the accounting books of the company. Where a shareholder requests to consult the accounting books of the company, it shall submit to the company a written request which shall state its motives. If the company, pursuant to any justifiable reason, considers that the shareholder's request to consult the accounting books for any improper purpose may damage the legitimate interests of the company, it may reject the request of the shareholder, and shall, within in 15 days after the shareholder submits a written request, give it a written reply which shall include an explanation. If the company rejects the request of any shareholder to consult the accounting books, the shareholder may plead the people's court to demand the company to approve consultation.

Concerning legal provisions Article 98 The shareholders shall be entitled to refer to the articles of association, register of the shareholders, counterfoil of corporate bonds, records of the shareholders' meeting meetings, records of the meetings of the board of directors, records of the meetings of the board of supervisors and financial reports, and may bring forward proposals or raise questions about the business operation of the company.

Reference Nowadays corporate laws in various countries have allowed the shareholder examine the corporation’s books and records, provided that this is not being done for an ‘improper’ purpose (e.g., stealing the corporation’s secrets so as to compete with it). Confirming or refuting one’s suspicions that the books are being cooked certainly qualifies as a proper purpose, so Crusoe should be able to get a court order compelling the company to allow the inspection.

Reference Crusoe should be allowed to inspect the accounting records, but only if: (1)he made his demand ‘in good faith and for a proper purpose’ (satisfied here); (2) he described with ‘reasonable particularity’ why he wanted to do the inspection (e.g., ‘I think the books are being cooked,’ which he could honestly say here); and (3) the records are ‘directly connected’ with his purpose (satisfied here). So Crusoe would get the inspection and the corporation would probably have to pay his legal fees in getting the court order.

More details Who may inspect? What records may be examined? What is a proper purpose?

Shareholder Not only shareholders who are of record but also beneficial owners of shares have the right of inspection. Size or length of holding requirements

Records The corporation’s records in general that have a reasonable bearing upon his investment. –Accounting records

Purpose A purpose reasonably related to such person’s interest as a stockholder Categories –Evaluation of investment –Pursuit of unrelated personal goals –Deal with shareholders as investors –Pursuit of social and/ or political goals