The North Carolina Business Corporation Act gives shareholders what are called “inspection rights.” This is the right of shareholders to inspect the books and records of companies in which they own stock. This post explains the statutory authority for shareholder inspection rights and what information may be inspected by a shareholder.
Corporations formed under North Carolina law are governed by the North Carolina Business Corporation Act, G.S. §§ 55-1-01, et seq. This name is shortened to the “Corporation Act” for purposes of this post. The Corporation Act sets the default rules for many aspects of corporate law. One of the most important provisions of the Corporation Act is the right of shareholders to inspect the books and records of a company of which they own a part.
There are many reasons that a shareholder may want to inspect a corporation’s books and records. One of the primary reasons is because of concerns about mismanagement or minority oppression. This is where majority stockholders unfairly prejudice a minority stockholder by depriving them of some of the benefits of holding their shares. There are many creative ways to do this, some examples being the failure to pay dividends, forcing of stock sales, overpaying officers, or terminating the minority shareholder’s employment.
The key section of the Corporation Act that permits shareholder inspection rights is G.S. § 55-16-02. The section states that with five days’ notice, a shareholder is entitled to inspect the following documents of the corporation:
Articles of incorporation,
Bylaws or restated bylaws and all amendments to them currently in effect,
Resolutions creating classes of stock and the rights appurtenant to them,
Minutes of all shareholder’s meetings for the past three years,
All financial statements and communications to shareholders for the past three years,
Names and addresses of all officers and directors, and
Most recent annual report.
For the preceding items, there is no requirement that any dispute be made, nor need the shareholder give a reason for their request.
In addition to the preceding items, the shareholder may demand additional information if the request is made in good faith for a proper purpose, and if the records requested are directly connected to that purpose. In that case, a shareholder may also obtain the following:
Records of any action taken by the board of directors or any committee, and the minutes of any shareholder meeting,
Accounting records of the corporation, and
The list of shareholders.
Shareholders thus have additional rights to dig deeper into an issue if they can explain why the request is not just a fishing expedition.
One court explained that a proper purpose includes determining whether “any improper transactions have occurred and to determine any possible mismanagement of [the Company] or any possible misappropriation, misapplication, or improper use of any property or asset of [the Company].” Furthermore, the burden is on the corporation resisting production of records to show that the shareholder has an improper purpose.
The practical aspects of making a shareholder inspection request are also defined by the Corporation Act. For instance, a shareholder’s attorney has the right to make a request. And, the corporation may charge the shareholder reasonable fees for producing or copying the records.
If there is a dispute between the shareholders, the corporation may want to avoid producing the requested information. What then? In short, too bad. Under G.S. § 55-16-04, a North Carolina Superior Court judge can order that it be provided at the corporation’s expense. The judge can also order that the corporation pay the shareholder’s costs and attorney’s fees. The statute also says that the hearing will take place on an “expedited basis.” Whereas in a normal lawsuit it may take weeks to get a decision, in a shareholder inspection request it will be much sooner.
There’s always a catch, though. Here, the catch is that a shareholder’s inspection rights depend on the person being a “qualified shareholder.” Not all shareholders can obtain the information described in this post. Rather, the shareholder must meet one of two requirements. The shareholder either (a) must own at least 5% of “outstanding shares of any class, or (b) must have owned stock for at least six months. This prevents people from going around buying stock and making inspection requests for no good reason.
As you can see from the foregoing, shareholders’ inspection rights under the Corporation Act give them a significant amount of power. Information is power, after all. By reviewing the types of documents listed above, a shareholder and their attorney may be able to determine whether the corporation has acted properly, or whether further action may need to be taken.
DYE CULIK PC is a Charlotte, North Carolina business, corporate, and litigation firm. We represent businesses, entrepreneurs, and franchisees throughout North Carolina. If you have a question about a business law issue, contact us at 980-999-3557 to see how we can help.