Entrepreneur’s Question on Stockholders:
“Could you please clarify for us what type of information our company is legally obligated to provide to (minority) Stockholders, and how often (e.g., Financial Statements, Cap Table, etc.)?”
As the Founder of a Privately-Held Company, this Entrepreneur did not know the type of information that he was required to provide to the company’s other Stockholders and how frequently he would need to provide any required information to the Stockholders. As you might imagine, this situation is fairly common for many Founders and small business owners: you start a company with some Co-Founders; your company then adds some more Stockholders along the way; and out of the blue one of the Stockholders asks to see all of the company’s Books and Records. What do you do? How do you respond to this Stockholder? What information must be provided? How often do you need to provide information to this Stockholder?
In response to the Entrepreneur’s question, the following input relates specifically to his company, a Delaware corporation with its principal executive offices and assets located in California.
As a first step to answer these questions, you will need to review the company’s Bylaws and the relevant provisions of applicable corporate law (in this case the corporate laws of Delaware and California) related to Stockholder Information Rights. This review will help you identify the company’s legal obligations to provide certain information to its Stockholders under Delaware and California law.
As a general comment, 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 asked for specific information, then your company should give to the Stockholder 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 Privately-Held Companies voluntarily provide limited, high-level company information to their Stockholders, in order to maintain good Stockholder relations. In any case, it is a good idea to have the Stockholders sign Non-Disclosure Agreements, so that they are obligated to protect your company’s Confidential Information and not disclose it (please see why NDAs need to be part of your business NDA).
Delaware Corporate Law
As a Delaware corporation, all of the company’s Stockholders (including Minority Stockholders) have the right to inspect and make copies of the company’s Stock Ledger and its Books and Records upon a written demand to the company. The Stockholder’s Inspection Rights also apply to the company’s Subsidiaries. Although Delaware Corporate Law does not specify the types of Books and Records that the Stockholders may inspect, these rights extend, at a minimum, to the company’s financial records and Corporate Minute Book.
In addition, under Delaware Corporate Law, your company does not need to give to its Stockholders any information that would cause your company to breach any of its confidentiality or other contractual obligations to third parties.
California Corporate Law
Because your company’s principal executive offices and assets are located in California, your company also is subject to certain Stockholder Information Rights under California Corporate Law. Accordingly, your company must comply with the Stockholder Information Rights under both Delaware Corporate Law and California Corporate Law.
Under California Corporate Law, a Shareholder holding at least five percent (5%) of the Outstanding Voting Shares of your company has an absolute right to inspect and copy the company’s record of Shareholder names and addresses and their respective shareholdings (i.e., Cap Table). Also, all of the company’s Shareholders have the right to inspect the company’s record of Shareholder names and addresses.
Additionally, under California Corporate Law, your company’s Shareholders have a right to inspect the company’s accounting Books and Records (i.e., Financial Statements) and its Corporate Minute Book upon a written demand to the Company. These Inspection Rights also extend to the Books and Records of any of the company’s Subsidiaries.
California Corporate Law also requires that your company provide an Annual Report to its Shareholders with certain specified information. This Annual Report requirement does not apply, however, if your company has less than 100 Shareholders and your company’s Bylaws expressly waive the requirement to send an Annual Report. It therefore is important to check your company’s Bylaws in order to make sure that the necessary waiver language is in place. If the waiver language is not there, then you will need to amend your company’s Bylaws and include the waiver language, so that your company can avoid this additional administrative burden.
Contractual Obligations to Provide Information
In addition to the corporate law requirements, you will need to check your company’s outstanding agreements in order to identify the contractual obligations to provide certain information to Stockholders. For example, many Investors often will negotiate and require Investor Information Rights in connection with their investments, so that they receive copies of your company’s periodic Financial Statements (i.e., monthly, quarterly and annual Financial Statements), the annual budget and periodic management reports and updates.
What information do you provide to your company’s Stockholders? Do you have any best practices that balance the administrative burden of preparing company information and distributing it to Stockholders with the goal of keeping your Stockholders sufficiently informed and happy? Please share your tips and experiences, so that other Entrepreneurs can learn from you about what works in practice.