Your Business Deserves To Thrive

New York Law Update: Shareholders’ Inspection Rights

On Behalf of | Apr 5, 2016 | Business Management, New York Law Update, Uncategorized

In our previous blog series on Shareholders’ Right To Inspect Corporate Books and Records, we discussed under what circumstances shareholders may inspect corporate books and records and what constitutes proper purposes reasonably related to shareholder interests.  For New York law, we looked at Tatko v. Tatko Bros. Slate Co.,[1] which held that a shareholder’s quest to determine the value of his shares was a proper purpose for inspecting the corporation’s financial records, and Ret. Plan for Gen. Employees of the City of North Miami Beach v. The McGraw-Hill Cos.,[2] which affirmed shareholders’ rights to inspect corporate books and records as long as the shareholders sought inspection in good faith and for a valid purpose.

Heller v. Lewis, another recent New York case, is a reminder of the importance of the most basic requirement to be met before a shareholder can inspect corporate books and records—a proper written demand.[3]  In that case, plaintiff sought to restrain other shareholders/directors from misusing corporate funds and to inspect corporate books and records.  Specifically, plaintiff alleged that one of the shareholders misappropriated corporate assets in several ways, including taking almost $28,000 per week in purported salary payments, unauthorized payments of his personal and family expenses, personal attorney’s fees, and payments of cash “bonuses,” among other things.  Plaintiff also alleged that the other shareholder/director knew or should have known of these payments and that, at times, he participated in such misconduct himself.

Plaintiff sought access to the corporation’s books and records and disclosure of all agreements between the corporation and defendants and payments made by the corporation to defendants.  The court acknowledged that under New York law, “shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose.”[4]  Thus, the court said, New York law allows a shareholder, upon at least five days’ written demand, access to certain corporate books and records, including meeting minutes, annual balance sheets, and profit and loss statements.  Moreover, the court said, investigating alleged misconduct and obtaining information that may aid in legitimate litigation are proper bases for an inspection request.  Nevertheless, in this case, the court denied plaintiff’s request for access to the company’s books and records because plaintiff never made a proper written demand.

So shareholders, make sure to make a written demand for books and records inspection upon the corporation before asking the court.

If you have any questions about the content of this blog or other business law issues not discussed here, please contact us.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally Tatko v. Tatko Bros. Slate Co., 173 A.D.2d 917 (3d Dep’t 1991).

[2] See generally Ret. Plan for Gen. Employees of the City of North Miami Beach v. The McGraw-Hill Cos., Inc., 2014 N.Y. Slip. Op. 06154 (1st Dep’t, Sep. 11, 2014).

[3] See generally Heller v. Lewis, 2015 N.Y. Slip Op. 51867(U) (N.Y. Sup. Ct. Dec. 21, 2015).  Unless otherwise noted, all references to the case are from this citation.

[4] See N.Y. Bus. Corp. Law § 624(b).

Archives

Categories