The Alabama Business Corporation Law, in its many details, governs the formation and conduct of corporations. This article will focus on the portions of the law giving shareholders the right to examine corporate records.
Basic Corporate Records
Section 10A-2-16.01 of the Alabama Code requires an Alabama corporation, as well as any foreign corporation having its principal office in Alabama, to keep certain basic records at its principal office. Section 16.02(a) gives every shareholder of the corporation the right to inspect many of those basic records, including:
- Articles of incorporation
- Current bylaws
- Corporate resolutions affecting the rights of shareholders
- Minutes of shareholders’ meetings for the past three years
- Records of all actions taken by shareholders without a meeting for the past three years
- Written communications to shareholders, including financial statements, for the past three years
- A list of the names and business addresses of current directors and officers
- The most recent annual report delivered to the Secretary of State or the information filed with the Department of Revenue in lieu of the report.
A shareholder’s right to inspect and copy this limited list of documents is subject to no real limitation. Indeed, in order to inspect and copy any of the described documents, a shareholder need only give the corporation written notice of a request for inspection at least five business days before the date on which he or she wishes to inspect and copy. It is not unreasonable to require a corporation to maintain these basic documents, nor does it seem that their production is likely to be unduly burdensome or controversial. However, the same cannot necessarily be said with regard to the broader right of access to corporate records afforded certain shareholders.
Other Corporate Books and Records
A much broader right of inspection is afforded by Section 10A-2- 16.02(b) to any “shareholder of a domestic corporation or a foreign corporation with its principal office within [Alabama] who shall have been a holder of record of shares for 180 days preceding his or her demand or who is the holder of record of at least five percent of the outstanding shares.” Such shareholder “is entitled to inspect and copy . . . for any proper purpose, all of [the corporation’s] books, papers, records of account, minutes, and record of shareholders.” (Emphasis added). In order to exercise this right, the shareholder need only give “the corporation written notice of his or her demand, stating the purpose therefore, at least five business days before the date on which he or she wishes to inspect and copy.” (Emphasis added). Also, a proper request must adequately identify the documents to be inspected.
The statute leaves open an important question - - what is a “proper purpose” for the inspection of corporate documents? The legislature has not provided a definition of the term, and there is little guidance in the decisions of our appellate courts. The Alabama Court of Civil Appeals has indicated that the valuation of a stockholder’s shares can be a legitimate purpose for which to inspect corporate records. See Pearson v. The Westervelt Co. [Ms. 2140546, January 8, 2016] ___ So.3d ___ (Ala. Civ. App. 2016) (citing Hillman v. Douglas Eng’g Co., 702 So.2d 156, 160 (Ala. Civ. App. 1997)). Also, in Westervelt, the Court indicated, without actually holding, that the investigation of possible corporate waste or mismanagement may be a proper purpose for inspection. The propriety of such a purpose is supported by language in an earlier decision of the Alabama Supreme Court. See Bank of Heflin v. Miles, 318 So.2d 697, 700 (Ala.1975) (“The purpose of the statute . . . is to protect small and minority shareholders against the mismanagement and faithlessness of their agents and officers, by furnishing the mode and opportunity to ascertain, establish, and maintain their rights.”). Unfortunately, there does not appear to be any other Alabama case law identifying a “proper purpose” under Section 10A-2-16.02(b). However, the Alabama cases have recognized some implied limitations on the statutory right of inspection.
Implied Limitations on the Broad Right of Inspection
In Westervelt, the Court of Civil Appeals cited several decisions of the Alabama Supreme Court for the proposition that the statutory right of inspection is subject to an implied limitation that it must not be exercised from idle curiosity or for improper or illegal purposes. The cases are clear that a shareholder is not entitled to request records merely for the purpose of harassing or annoying the corporation or its officers. Further, a request may not be made for the purpose of financially harming the corporation. Obviously, these limitations raise issues regarding a shareholder’s subjective intent and, unfortunately, can lead to a dispute between a company and its shareholder concerning the propriety of the stated purpose for the document inspection. These disputes sometimes end up in litigation.
Corporate Records Litigation
If a corporation does not within a reasonable time allow a shareholder to inspect and copy any record requested pursuant to Section 10A-2-16.02(b), the shareholder may apply to the circuit court for an order permitting inspection and copying of the records demanded. If the court orders inspection and copying of the records, the corporation may face financial penalties. A finding by the court that the corporation had no reasonable cause to refuse to produce the records subjects the corporation to liability for a penalty in an amount not to exceed ten percent of the value of the shares owned by the shareholder. Further, a prevailing shareholder is entitled to recover his or her costs and reasonable counsel fees unless the corporation proves that it refused inspection based on a reasonable basis for doubt about the shareholder’s right to inspect the records demanded.
A look at a recent case may be instructive. Our firm represented The Westervelt Company (“Westervelt”) in the corporate records case filed against it by Pearson, one of its shareholders. Although it is difficult to distill any specific legal principles from the appellate court’s decision, the opinion clearly reveals two important points, namely: (1) the outcome of a corporate records case is likely to turn upon the trial court’s resolution of factual issues, and (2) the trial court’s decisions on the factual issues will not be second-guessed by the appellate court.
The dispute began when Pearson, a minority shareholder, sent a letter to Westervelt demanding that the company produce for her inspection and copying two categories of documents: (1) the company’s most recent financial statements; and (2) all documents reflecting compensation paid to four company executives for the preceding five years. The stated purpose for the inspection was the valuation of Pearson’s shares in Westervelt. The company responded that it would provide its financial statements after Pearson executed a reasonable confidentiality agreement. With regard to the compensation paid to the designated executives, Westervelt offered to provide salary information in the aggregate, but not individually. Dissatisfied with the company’s responses, Pearson filed an action seeking an order compelling the production of the financial statements and compensation documents.
The trial court readily agreed with Westervelt that it had a legitimate business interest in maintaining the confidentiality of its financial records. Therefore, the court entered a protective order imposing reasonable restrictions on the use and distribution of the financial statements. Westervelt then produced audited financial statements to Pearson subject to the confidentiality restrictions in the protective order and agreed that it would continue to do so. The company had gotten the protection it needed, and Pearson had no substantial complaint about the restrictions in the protective order. Therefore, only the dispute over the production of the compensation records remained for the court’s decision.
The trial court conducted a hearing on the merits of Pearson’s claim that she was entitled to the specific compensation information regarding each of the four named individual officers. Pearson testified on her own behalf, and an expert on business valuation testified on behalf of Westervelt. The trial court denied Pearson’s request for an order requiring the company to allow her to inspect the compensation records. Pearson appealed.
The Court of Civil Appeals affirmed the judgment of the trial court. The trial court had found that, although Pearson had cited other reasons for doing so, she actually had made her request for the specific compensation records for the purpose of harassing Westervelt and the officers. The appellate court found that the trial court’s conclusion was supported by sufficient evidence. That evidence included: (1) Pearson, an attorney, was simply of the opinion that she needed the compensation information to value her stock, but she presented no evidence from an accountant or other similar witness that the records she requested were actually necessary for that purpose; (2) Westervelt presented the testimony of a credible and highly qualified financial expert who opined that the compensation records were not needed for the valuation of Pearson’s minority interest in the company; (3) Pearson had made her request for the records only a few weeks after she had lost an earlier action against Westervelt, the chairman of its board of directors, and others; (4) Pearson had focused her request on specific officers rather than asking the company to identify and allow her to inspect records concerning its highest paid officers; and (5) although Pearson denied that she had an improper purpose in seeking to inspect the requested records, the trial court, having had the opportunity to observe her and to assess her demeanor and credibility, was entitled to find that her testimony was not credible.
In making or responding to a shareholder’s request to inspect and copy corporate records, shareholders and corporations alike should be mindful of the rights and responsibilities set forth in the Alabama Business Corporation Law at Sections 10A-2-16.01 through 16.04. Many shareholders have a quite broad, but not unlimited, right to corporate records. On the other hand, corporations have a legitimate interest in the confidentiality of their sensitive financial and business information and are entitled to insist that such interest be protected. Hopefully, properly motivated shareholders and companies can fulfill the legitimate needs of both without having to resort to litigation. However, if litigation is necessary, circuit courts have the jurisdiction to resolve the dispute.