In family businesses, disputes may arise concerning access to company information. Owners who work day-to-day in the business typically have unfettered access to this information, while passive shareholders may feel they are “in the dark” as to the company’s decision-making and performance. Passive shareholders depend on the “insider” owners to provide them with full and accurate information and may become suspicious of the insider owners when the information provided is delayed or incomplete. For their part, the active owners may believe that information requests from other owners are a burden or a distraction to the company’s operation. So, what documents are corporate shareholders entitled to review?

In the absence of a specific provision in the company’s by-laws, the company’s and shareholders’ rights and responsibilities are typically provided by statute. For example, in Massachusetts, General Laws Chapter 156D, § 16.01 – 16.04 set forth the statutory requirement for corporate recordkeeping and shareholder access. Under Section 16.01(e) of that statute, a corporation must keep copies of its articles of organization, its by-laws, the minutes of all shareholders’ meetings for the past three years, all written communications to shareholders generally within the past three years, a list of the names and business addresses of its current directors and officers and its most recent annual report. Shareholders have the right to inspect and copy those records, without exception, with advance written notice.

Under Section 16.01(b), a corporation also must keep all minutes of meetings of its board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors on behalf of the corporation. A corporation also is required to keep “appropriate” accounting records and a record of its shareholders, organized by name and number and class of shares held.

A shareholder must meet a heightened standard in connection with a request to inspect records kept pursuant to Section 16.01(b). Specifically, a shareholder may receive such documents only if:

  1. his demand is made in good faith and for a proper purpose;
  2. he describes with reasonably particularity his purpose and the records he desires to inspect;
  3. the records are directly connected to his purpose; and
  4. the corporation shall not have determined in good faith that disclosure of the records sought would adversely affect the corporation in the conduct of its business . . .

Courts have held that determining the value of a shareholder’s interest in the company and investigating potential mismanagement by the corporate officers or directors are “proper purposes” for making a records request.

Courts will typically order the production of those financial records needed to determine the value of a shareholder’s shares, although perhaps with the production limited to high level financial statements, as opposed to granular data such as non-shareholder employee salaries and specific invoices supporting accounts payable and receivables. With respect to demands in support of claims of potential mismanagement, however, courts will impose a higher burden on the requesting shareholder, so as not to permit an expensive and intrusive fishing expedition designed solely to disrupt the business or to satisfy a shareholder’s idle curiosity.

The question then becomes: what does a shareholder need to show in support of a claim of mismanagement in order to receive the requested documents? As one Massachusetts trial court judge recently wrote in the context of a shareholder’s request for records from a close corporation, “[a] reasonable articulation of suspected facts, not mere speculation, supporting an inference of possible mismanagement or wrongdoing should be enough.” See Bernstein v. Pritsker.

How this “reasonable articulation” will play in court will depend on the facts of each case. For example, in applying this standard in another recent case (Chitwood v. Vertex Pharmaceuticals, Inc.), the trial court judge rejected a shareholder’s request for company documents concerning an investigation by a special committee of the board into the stock trading activity of certain company officers or directors. In that case, the Court determined that the shareholder “offered no evidence at trial calling into question the independence of the Special Committee or the diligence of its efforts” in its investigation. This case is currently on appeal to the Supreme Judicial Court, with one of the issues being whether the trial court applied the proper standard in determining if there was “some evidence” to support a credible basis for inferring possible misconduct. Regardless of the outcome of the Chitwood case on appeal, it remains clear that if a shareholder is claiming a need for records to investigate misconduct, he should spell out in as much detail as possible the precise documents he seeks and the particular purpose for which he seeks each category of documents.

For its part, the company should carefully review any request it receives from a shareholder for a corporation’s records and determine whether the request is made in good faith and for a proper purpose. For example, in a recent case in the Delaware Court of Chancery (Bizzari v. Suburban Waste Services, Inc.), the Court rejected a document request by a corporate director, who was also a shareholder, based on a finding, after trial, that the company properly refused production because the director’s primary purpose in requesting the documents was to use the information obtained to compete with the company and to damage its business reputation. Companies clearly need to protect against inappropriate use of business records and information and likely will want to resist a shareholder request where it appears that the shareholder is seeking to harm the company through access to company information.

A family business may be able to avoid many disputes over requests for inspection of documents by implementing consistent practices with respect to access to the company’s records and by developing a culture of transparency with its owners, whether active or passive. When disputes arise, however, companies and their shareholders should know the standards by which any later request for, production of, or refusal to produce company documents will be evaluated.