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Author: Shelby White, Attorney
TLDR: If your startup is a Delaware corporation doing business in California, then both Delaware and California laws give each shareholder rights to access company information, including corporate records, financials and stockholder lists, but only if a proper written demand is made for a proper purpose. California law also requires some companies to send annual financial reports unless this obligation is waived in the bylaws. Companies also must honor any additional contractual information rights granted to investors. To stay compliant and avoid unnecessary exposure or administrative burdens, it’s essential to understand these legal obligations and consult with experienced startup counsel.
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Whether you’re onboarding co-founders and team members, pitching your company to investors or preparing for a possible exit, it’s important to know what type of information your company’s stockholders are legally entitled to receive by law (in addition to whatever they are entitled to receive by contract).
Assuming your company is a Delaware corporation and qualified to do business in California, there are several key considerations regarding stockholder information rights. Below, we break down the information that stockholders are entitled to under both Delaware and California corporate law, as well as the company’s governing documents.
Stockholder Information Requests:
Generally, your company is not required to provide information to a stockholder unless the stockholder makes a written demand to your company for information. If the stockholder has properly asked for specific information, then your company should provide the reasonable information that has been requested, provided that disclosing the information will not cause your company to breach any of its confidentiality or other contractual obligations to third parties.
As a practical matter, many companies often voluntarily provide limited, high-level company information to their stockholders (and especially investors) on a regular basis to maintain good stockholder relations and promote corporate transparency. Also, in venture-backed companies, it is customary for major equity investors to receive periodic financial and other information such as quarterly and annual financial statements as set forth in the model investors’ rights agreement published by the National Venture Capital Association (the “NVCA”).
Requirements Under the Company’s Corporate Records
As a first step, you will need to review the company’s Bylaws to confirm whether they contain any specific stockholder information rights outside of what is required under Delaware and California corporate law.
In addition to the company’s Bylaws, you will need to check your company’s outstanding agreements to identify any contractual obligations to provide certain information to stockholders. For example, major preferred stock investors often negotiate and require certain information rights in connection with their investments, which typically require that you provide copies of your company’s periodic financial statements (i.e., monthly, quarterly and annual financial statements), an annual budget and periodic management reports and updates.
Requirements Under Delaware Corporate Law:
For a Delaware corporation, all of the company’s stockholders (including minority stockholders) have the right to inspect (and make copies of) certain company records, unless these rights have been expressly waived by any such stockholder in a written agreement. These stockholder rights also apply to the records of the company’s subsidiaries. The right of inspection may be exercised by any stockholder of the company, regardless of the number of shares owned or the duration of ownership.
Under Section 220 of the Delaware General Corporate Law (the “DGCL”), a stockholder has the right to inspect, during business hours, and make copies of (i) the company’s stock ledger, (ii) a list of the company’s stockholders and (iii) the company’s books and records.
The DGCL has recently been amended to limit the meaning of “books and records” to:
- Certificate of Incorporation
- Bylaws
- Minutes of prior meetings of the stockholders
- Stockholder communications within the last three years
- Minutes of prior meetings of the Board (or a Board committee) and any related materials provided to the Board or Board committee in connection with actions taken at such meeting
- Annual financial statements for the last three years
- Certain corporate contracts with such requesting stockholder
- Director and officer independence questionnaires, which are customary for public companies
The DGCL further requires the requesting stockholder to (1) make a good faith demand for a proper purpose, (2) describe with reasonable particularity the purpose for the request and the books and records that the stockholder seeks to inspect, and (3) demonstrate how the books and records requested are specifically related to the stockholder’s purpose.
A proper purpose reasonably relates to the demanding stockholder’s interest as a stockholder of the company (e.g., investigating possible mismanagement, valuing shares, evaluating the company’s corporate health, etc.). Additionally, the demand made upon the company must be in writing and made under oath.
The DGCL does provide, however, that the company may omit any information that would cause the company to breach any of its confidentiality or other contractual obligations to third parties. To protect against any violations of its confidentiality obligations, a company may impose reasonable restrictions on the use or distribution of the books and records or redact certain portions of the books and records, so long as the company is still providing information that is responsive to the stockholder’s demand in line with the proper purpose stated.
As a practical tip, you should first ensure that the demand being made sets forth a particular purpose for the inspection request, is not overly broad in nature and there are no potential confidentiality issues at stake.
Requirements Under California Corporate Law:
If your company is qualified to do business in California as a foreign (Delaware) corporation, then your company is also subject to certain stockholder information rights under California corporate law. Accordingly, your company must comply with both the requirements regarding stockholder rights under the DGCL described above, and those further described below.
Under Section 1601 of the California Corporations Code (the “CCC”), stockholders have the right to inspect (and make copies of) the following corporate records:
- Articles of Incorporation (or similar charter document)
- Bylaws
- Prior meeting minutes of Board and stockholder meetings
- Accounting books and records
- A record of the company’s stockholders (including both names and addresses)
Similar to the DGCL, the CCC requires that the requesting stockholder demonstrate a proper purpose for the request and that the request be made in good faith. This requirement similarly applies to any request involving any subsidiary of the company.
The CCC also provides similar protections for the company to protect against confidentiality concerns by redacting or requiring the requesting stockholder to agree to certain confidentiality obligations.
Five Percent Stockholders:
Under the CCC, a stockholder holding at least five percent (5%) of the outstanding capital stock of the company has the right to inspect and copy the company’s record of stockholder names and addresses and their respective holdings (i.e., the company’s cap table).
Annual Report Requirement:
Section 1501 of the CCC requires companies to provide an annual report to its stockholders providing certain specified annual financial information (i.e., a balance sheet, income statement and statement of cash flows). This annual report requirement does not apply, however, if your company has less than 100 stockholders and your company’s Bylaws expressly waive the requirement to send an annual report. It is therefore important to check your company’s Bylaws to make sure that the necessary waiver language is in place. If the waiver language is not in place, then you will need to amend your company’s Bylaws to include the waiver language to avoid this additional administrative burden.
Conclusion:
Engaging experienced startup counsel can help ensure that your company is complying with its obligations to share information with its stockholders while also protecting against overly burdensome annual reporting requirements.
Contact us today to learn more about startup corporate governance and how to work with and manage your company’s stockholders.
Clients Also Ask Us:
What information are Delaware corporations required to share with stockholders?
Under Delaware law (Section 220 of the DGCL), stockholders have the right to inspect and copy certain records, like the company’s charter, bylaws, board minutes, financials and stockholder lists, but only if they make a written demand stating a proper purpose.
Do California laws apply to Delaware corporations doing business in California?
Generally, yes. If a Delaware corporation is qualified to do business in California, it must also comply with California’s stockholder inspection rights under Section 1601 of the Corporations Code, which includes access to board minutes, accounting records and stockholder information.
Can a company refuse a stockholder’s request for information?
A company can deny overly broad or improper requests for information, and may redact or restrict access to sensitive information to avoid breaching confidentiality obligations. However, the company must still comply with valid and properly framed demands.
Are startups in California required to send annual reports to stockholders?
California requires companies to send annual financial reports unless the company has fewer than 100 stockholders and its bylaws contain a specific waiver. Many startups include this waiver in their Bylaws to avoid the reporting burden.
