Some Basics on Shareholder Inspection Rights in California

April 9, 2022

Shareholders (also known as stockholders) own shares of a company's stock. Since shareholders basically own the company, they reap the benefits of the company's success. Stockholders also have the right to access the records and books of a company in which they hold stock. The general rule is that stockholders have the right to know how the affairs of the business, of which they are part owners, are being conducted. The following is a look at the inspection rights that shareholders have in California.

In California, shareholders have the right to inspect a corporation’s bylaws and articles of incorporation, also known as the corporate charter. Shareholders are entitled to the results of the vote at a special, regular, or annual meeting. Also, in California, stockholders that own at least 5% of corporate shares have the right to access quarterly financial information and shareholder lists.

However, shareholders have limited rights to inspect accounting records. If a shareholder wants to inspect a company's accounting records, they must write a letter to the chief executive officer or corporate secretary. In the letter, the shareholder must explain their reasons for wanting to inspect the accounting records. Generally, to access a company's accounting records, a shareholder must establish a reasonable relationship between their interest as a shareholder and the purpose of inspection. In other words, to inspect a company’s accounting records, a shareholder must show they have proper intent and a good reason to believe an inspection is necessary.

The California Corporation Code does not explicitly deny shareholders the right to access other information. Whether or not a shareholder can access other information is usually decided on a case-by-case basis.

As already mentioned, even though shareholders have the right to access company information, those rights are limited. For example, as stated above, the right to inspect accounting records is limited to situations in which a shareholder shows a reasonable relationship between their interest as a shareholder and the purpose of the inspection. Also, shareholders do not have the right to inspect corporate communications, including attorney-client communications. If a shareholder requests to inspect such communications, the company can reject that request.

A corporation can also reject a shareholder's request to inspect records if the request does not adhere to the statute's technical requirements. In the case of Jara v. Suprema Meats, Inc., the court held that a shareholder only has the right to inspect and copy records at the company office. This is pursuant to Corporations Code Section 1601. In this case, the corporation received request letters from the plaintiff requesting a copy of some records. After the matter went to court, the court decided that the corporation was not required by law to copy and send the records. Also, it was decided that the corporation had the right to ignore the request and no duty to inform the shareholder that the records were open for inspection and copying at the corporation’s office.

If you need more information on shareholder inspection rights, our lawyers at SAC are here for you. Call us today at (408) 436-0789 to schedule a consultation.