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Online Law Newsletter: Corporate Law

Inspection Rights of Directors and Shareholders

Contrary to popular belief, directors and shareholders do not have the same rights to inspect corporate books, records and physical assets. A director has an absolute right to inspect. However, a shareholder has the burden of showing that the inspection is for "a purpose reasonably related to such shareholder's interest as a shareholder." An inspection to obtain information to help the shareholder compete with the company is unreasonable. An inspection to determine share value is more reasonable. This burden of proof may affect which documents can be inspected by the shareholder. Although the following table references California corporations codes, laws controlling inspection rights exist in all states.

To Be Inspected Director Shareholder
Company's books & records Absolute right to inspect & copy all books & records at any reasonable time. Cal. Corp. Code §1602 Limited right to inspect company's books & records during office hours at company's principal place of business.* Shareholder burden of proof as explained above. Cal. Corp. Code §1601(a).
Articles of Incorporation and By-Laws Absolute right to inspect & copy as above. Cal. Corp. Code §213 Absolute right to inspect during office hours at company's principal place of business.
Company's executed contract including leases and loan documents Absolute right to inspect & copy as above. No statutory right to inspect.
Company's correspondence Absolute right to inspect & copy as above. No statutory right to inspect.
Company's physical assets Absolute right to inspect & copy as above. No statutory right to inspect.
Subsidiary's records Absolute right to inspect & copy as above. No statutory right to inspect.
Company's tax returns Absolute right to inspect income tax return. Shareholder who owns at least 1% of the stock may inspect company's tax return on file with the IRS. Internal Revenue Code §6103(e)

* A shareholder who owns at least 5% of the corporation's stock may request the company to deliver or mail within 30 days the following: (a) an income statement for the one to three quarters ending at least 30 days prior to the request; (b) a balance sheet as of the end of that period; and (c) an annual report for the prior fiscal year (you may not request it until at least 120 days after the fiscal year closed.). If there is no annual report, the 5% shareholder may request the company to deliver or mail within 30 days the following in lieu of an annual report: (1) balance sheet of the corporation's prior fiscal year; (2) an income statement for that same fiscal year; (3) a statement of changes in financial position for the fiscal year; and (4) copies of all quarterly balance sheets, income statements and statements of changes in financial position. (Cal. Corp. Code §1501(c))


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