New York: Proper Purposes.
The New York statute provides that a shareholder has the right to examine corporate books and records upon at least five (5) days’ written demand for any purpose reasonably related to such person’s interest as a shareholder.[1] Inspection, however, may be denied if the shareholder refuses to furnish an affidavit to the corporation that such inspection is not desired for a purpose which is in the interest of a business or object other than the business of the corporation and that he has not within five (5) years sold or offered for sale any list of shareholders of any corporation of any type or kind.[2]
In Tatko v. Tatko Bros. Slate Co.,[3] the court addressed what purposes are proper under New York law. In that case, a shareholder wished to sell his shares in a closely held corporation and sought to inspect certain corporate documents in an attempt to ascertain the true value of his shares; the corporation responded by furnishing some documents, but suspecting that the shareholder’s demand was driven by bad faith, refused to provide others.[4] The court said that, generally, proper shareholder purposes may “include, among others, efforts to ascertain the financial condition of the corporation, to learn the propriety of dividend distribution, to calculate the value of stock, to investigate management’s conduct, and to obtain information in aid of legitimate litigation.”[5] In contrast, the court said, improper purposes are “those which are inimical to the corporation for example, to discover business secrets to aid a competitor of the corporation, to secure prospects for personal business, to find technical defects in corporate transactions to institute “strike suits”, and to locate information to pursue one’s own social or political goals.”[6] Accordingly, the court found that the shareholder’s quest to determine the value of his shares to be a valid reason for inspecting the corporation’s financial records, but remanded to the lower court to determine the reasonable scope of documents to be inspected.[7]
In Ret. Plan for Gen. Employees of the City of North Miami Beach v. The McGraw-Hill Cos., Inc.,[8] a more recent case, shareholders made a written demand to inspect certain books and records relating to the corporation’s board of directors, with a stated purpose of investigating potential wrongdoing and mismanagement by the board of directors, among other things.[9] The lower court denied the shareholders’ petition to inspect the documents, finding that the shareholders should have commenced a shareholders’ derivative action instead.[10] The appeals court disagreed, affirming the shareholders’ statutory and common law rights to inspect corporate books and records as long as the shareholders seek the inspection in good faith and for a valid purpose.[11] Moreover, the court found that the shareholders were acting in good faith in seeking to enforce their right to inspection and that investigation of alleged mismanagement and breaches of fiduciary duty by the board of directors was a proper purpose under New York law.[12]
This post was a part of a multi-part blog series on shareholder inspection rights and the limits thereof. In our next post, we will look at Texas law.
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.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] N.Y. Bus. Corp. Law § 624(b) (emphasis added). New York shareholder’s right to inspection also stems from common law, which is broader than the statutory right.
[2] Id. § 624(c).
[3] Tatko v. Tatko Bros. Slate Co., 173 A.D.2d 917 (3d Dep’t 1991).
[4] Id. at 917.
[5] Id. at 918.
[6] Id. at 917–18.
[7] Id. at 918–19.
[8] 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).
[9] Id. at 3.
[10] Id. at 4.
[11] Id. at 5.
[12] Id.