Minority shareholders in closely held corporations are frequently denied information necessary to determine whether there is wrongdoing by entrenched management. The shareholder may suspect that there is wrongdoing but cannot elicit sufficient evidence. Fortunately the Massachusetts corporate statute enables a shareholder to readily and effectively get a wide variety of information about the shareholder’s corporation. This right can be enforced in the courts.

By statute, a shareholder may inspect and copy the following records of the corporation, during regular business hours, at the place where the records are kept, on 5 business days’ written notice:

  1. its charter documents
  2. its bylaws and amendments,
  3. resolutions of the board creating stock and fixing shareholder rights,
  4. shareholder minutes for the past 3 years,
  5. a list of the names and business addresses of its directors and officers, and
  6. a copy of its most recent annual report filed with the Secretary of the Commonwealth.

There is no requirement that the shareholder make any showing of purpose or the like. The shareholder is simply entitled to these records. This right, however, is relatively meaningless because, except for the bylaws and their amendments, all of this information may be gleaned on line primarily from the Secretary of the Commonwealth’s website.

But there is a more substantial right granted by the statute. A shareholder is entitled to inspect the following, during regular business hours, at a location specified by the corporation, upon 5 business days’ written notice, the following:

  1. excerpts of directors’ (including committees) and shareholders’ actions,
  2. accounting records of the corporation.[1] and
  3. the shareholder list required to be kept by law.

The catch, is that to receive these records the shareholder must demonstrate:

  1. That the shareholder’s request is made “in good faith and for a proper purpose”,
  2. That the request describes with “reasonable particularity” the purpose and the records to be inspected, and that the records are directly connected with the shareholder’s purpose.

Even if the shareholder demonstrates the foregoing, the records may be produced only if corporation hasn’t determined in good faith that disclosure of the records would adversely affect the corporation’s business.[2]

The two battleground areas are (a) what is “in good faith and for a proper purpose” for inspection and (b) what type of information would, if disclosed, adversely affect the corporation’s business.

What then is a “in good faith and for proper purpose”? The drafters of the statute stated that “the phrases . . . are traditional and well understood”. “A ‘proper purpose’ means a purpose that is reasonably relevant to the demanding shareholder’s interest as a shareholder.”

Obtaining a shareholders’ list for the solicitation of proxies in order to change management was deemed a “proper purpose”.  On the other hand, obtaining a shareholders’ list to determine if others were willing to sell the shareholder stock was not. This demand was for “personal investment concerns” not related to the shareholder’s interest as a shareholder in the corporation. Seeking a list to contact other shareholders to elect a management that would seek a merger is a “proper purpose”. That is an interest of the shareholder in the corporation.

A shareholder without a “proper purpose” should check the corporation’s bylaws (or articles of organization, both of which can be obtained without the showing of “proper purpose”). Although the right cannot be limited by the bylaws (or articles), it can be expanded to require less than the “proper purpose” or for that matter no purpose.

The second caveat is that a corporation need not disclose information that adversely affects its business. There is little in the way of reported decisions on what type of information adversely affects business. I had, however, some success in prohibiting disclosure to a shareholder who had a competing business.

In the event that the foregoing statutory right does not give the shareholder the information desired there is a “common law” right for inspection. The breadth of that right has not been fully determined and, of that matter, that right has not been defined in recent reported decisional law.

[1]           If financial statements are audited, inspection is limited to the financial statements and the supporting schedules reasonably necessary to verify any line item thereon.

[2]           In the case of a public corporation, also excluded is information which would constitute “material non-public information”, at the time the request was made.

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