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Has Your Investment Gone South? Take Stock in Your Shareholder’s Rights

 

As a shareholder you have a right to inspect the internal records of the corporation in which you invested.

So that “hot stock” your buddy talked you into buying has turned out to be a dud. The company is sputtering. Rumors abound of its demise. No one answers the phone at corporate HQ. And all you have are these stock certificates to show for it.

How can you shed light on this increasingly obscure situation? Fortunately, as a shareholder–part owner of the corporation that is now ignoring you–you have legal rights that can force the company’s officers and directors to reveal to you the inner workers of the company and why it has begun to struggle.

Corporate law requires companies to preserve a wide range of written data that document the corporation’s activities. Shareholders are entitled to inspect, and copy, those documents by submitting a written notice of their demand to do so at least five business days in advance of the date of inspection and copying.

Which of the corporation’s documents are you entitled to inspect and copy? Regardless of the percentage of the corporation’s stock you possess, you may inspect and copy the following corporate documents:

(1) its articles or restated articles of incorporation and all amendments to them currently in effect;

(2) its bylaws or restated bylaws and all amendments to them currently in effect;

(3) resolutions adopted by its board of directors creating one or more classes or series of shares, and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;

(4) the minutes of all shareholders’ meetings, and records of all action taken by shareholders without a meeting, for the past ten years;

(5) all written communications to shareholders as a group within the past three years, including the financial statements furnished for the past three years;

(6) a list of the names and business addresses of its current directors and officers;

(7) its most recent annual report delivered to the Department of Revenue.

And this is not an exhaustive list. If you possess a “proper purpose” for digging further into the corporation’s internal dealings, as a shareholder you may demand to inspect and copy the following additional records:

(1) excerpts from minutes of any meeting of the board of directors, records of any action of a committee of the board of directors while acting in place of the board of directors on behalf of the corporation, minutes of any meeting of the shareholders, and records of action taken by the shareholders or board of directors without a meeting;

(2) accounting records of the corporation; and

(3) the record of shareholders.

So what, exactly, is a “proper purpose” to gain access to these records? Well, if you have evidence that the corporation may have suffered from internal fraud, self-dealing, or mismanagement by the Board of Directors, you almost certainly have a “proper purpose” to inspect and copy these documents.

Now that you’ve lifted the veil of secrecy from the corporation, however, what are you to do with this information? Well, it depends what you find. You could well be in a position to bring a derivative action on behalf of the corporation itself against the Board of Directors for destroying the corporation’s value. Or, perhaps, you may be able to bring a class action on behalf of the corporation’s shareholders for the loss of their stock value.

But those are different topics for another day…

Graham Newman is an attorney with Chappell Smith and Arden, P.A. who focuses on complex litigation in non-traditional areas of plaintiff’s work, including corporate fraud.

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