Shareholder Inspection Rights

Shareholder Rights of Inspection

Corporations, particularly closely-held corporations (and their officers and directors), owe far-reaching duties to provide information regarding the corporation’s business and its assets to shareholders for inspection.  Because of federal statutes and regulations requiring financial disclosure for pubic companies, the issue of shareholder inspection rights appears less frequently in the context of public corporations, but shareholders of all corporations have a vital interest in receiving access to accurate information regarding the financial status and management of their company. Among the various “squeeze-out” or “freeze-out” tactics that the Texas Supreme Court specifically noted in the Ritchie v. Rupe opinion that controlling shareholders commonly use “to deprive minority shareholders of benefits, to misappropriate those benefits for themselves, or to induce minority shareholders to relinquish their ownership for less than it is otherwise worth” for which “Texas law should ensure that remedies exist to appropriately address such harm when the underlying actions are wrongful” is denial of access to corporate books and records. The Court held: “A common complaint of those alleging shareholder oppression is the denial of access to the corporation's books and records. Our Legislature has expressly protected a corporate shareholder's right to examine corporate records, provided penalties for a violation of those rights, and identified applicable defenses in an action to enforce those rights. … These statutory rights and remedies adequately protect a minority shareholder's access to corporate records….”

Nature of Shareholder Inspection Rights

The shareholder’s right to examine the books and records of the corporation “is a privilege . . . incident to his ownership of stock.”  The right to inspect corporate books and records exists so that the shareholder may “ascertain whether the affairs of the corporation are properly conducted and that he may vote intelligently on questions of corporate policy and management.”  “The predisposition of the law is in favor of allowing reasonable inspections of corporate books and records.”

The “right to inspect the books and records of a corporation, is not an absolute right, regardless of the stockholders’ motive.”  In Guthrie v. Harkness,  the United States Supreme Court noted that courts will not compel the inspection of a bank’s books under all circumstances. “In issuing the writ of mandamus the court will exercise a sound discretion, and grant the right under proper safeguards to protect the interests of all concerned. The writ should not be granted for speculative purposes, or to gratify idle curiosity, or to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate purposes.”  However, the “right of a stockholder as conferred by statute to examine the corporate records, although not absolute, is a valuable right.”

Statutory Inspection Rights

The principal inspection rights granted to shareholders are in the Texas Business Organizations Code. Section 3.151 requires:

Each filing entity shall keep:
(1) books and records of accounts;
(2) minutes of the proceedings of the owners or members or governing authority of the filing entity and committees of the owners or members or governing authority of the filing entity;
(3) at its registered office or principal place of business, or at the office of its transfer agent or registrar, a current record of the name and mailing address of each owner or member of the filing entity; and
(4) other books and records as required by the title of this code governing the entity.

Section 3.153 provides:

Each owner or member of a filing entity may examine the books and records of the filing entity maintained under Section 3.151 and other books and records of the filing entity to the extent provided by the governing documents of the entity and the title of this code governing the filing entity.

Section 21.218(b) provides:

Subject to the governing documents and on written demand stating a proper purpose, a holder of shares of a corporation for at least six months immediately preceding the holder's demand, or a holder of at least five percent of all of the outstanding shares of a corporation, is entitled to examine and copy, at a reasonable time, the corporation's relevant books, records of account, minutes, and share transfer records. The examination may be conducted in person or through an agent, accountant, or attorney.

Who Has the Right to Inspect Books and Records?

  • Current Shareholders

The statutory right of inspection in Texas is limited to current shareholders who have held their shares for at least six months or who hold at least five percent of all the outstanding shares of the corporation.  However, all shareholders have a common law right of inspection if the inspection is made in good faith for a proper purpose.  Texas courts have held that the passage of a legislative right of inspection does not negate the preexisting common law right.  Similarly, the inspection statute makes clear that, while the statutory remedies are limited to certain shareholders, the statute is not intended to limit the common law rights of all shareholders:

This [statute] does not impair the power of a court, on the presentation of proof of a proper purpose by a beneficial or record holder of shares, to compel production for examination by the holder of the books and records . . . regardless of the period during which the holder was a beneficial holder or record holder and regardless of the number of shares. 

The shareholder right of inspection extends to both common and preferred shareholders. 

  • Record Owner

A shareholder of record (not necessarily the actual owner) is entitled to inspection even if not the beneficial owner of the shares. Texas courts have not addressed this issue, but the Delaware courts have held a record owner is entitled to inspect the stock ledger even if only a nominee.

  • Beneficial Owner

A holder of a beneficial interest in a voting trust is regarded as a holder of the shares represented by such beneficial interest for the purposes of statutory inspection rights.

  • Contractual Right to Shares

An individual who is entitled to be issued shares under a subscription agreement or other contract has rights of inspection, even if the shares have not been issued.

  • Applies To Pledged Shares

Shareholders who have pledged their shares as collateral for a debt retain their inspection rights.

Other Statutory Inspection Rights To Corporate Records

In addition to the general shareholder inspection rights, the Business Organizations Code and other laws provide serveral other specific inspection rights in a variety of situations.

  • Shareholder Lists

In addition to the general right of inspection, there is also a statutory right to inspect a shareholders list before the any meeting of the shareholders.  Not less than ten days before the meeting, the corporation is required to make available for inspection at its principal place of business (or post on the internet) a complete, alphabetical list of the shareholders entitled to vote at the meeting, with the address of and the number of shares held by each. The corporation does not have to provide telephone numbers or email addresses. The list must be continuously available during normal business hours for a period of at least ten days. Shareholders are entitled to inspect and copy the list without a written demand, proper purpose or prior notice.

  • Voting Trust Agreements

Copies of voting trusts and voting agreements must be deposited with the corporation and be kept available for inspection by shareholders, but the shareholder must follow the same procedures as with other books and records.

  • Annual Reports

In addition, a corporation must mail its most recent annual and interim financial statements to any shareholder who requests them in writing.

  • State and Federal Tax Returns

A shareholder of record who owns at least 1% of the corporation’s outstanding stock has the right to inspect the corporation’s federal income tax returns.  Any shareholder has the right to inspect Texas franchise annual reports. Returns may be obtained directly from the IRS and State Comptroller's Office.

  • Notice of indemnification

If the corporation has agreed to indemnify or advance expenses to any director, the corporation must report that fact to the shareholders in writing with or before the notice of the next shareholders’ meeting, and in any case within twelve months of the indemnification or advance.