You don’t know what you have until it’s gone. . . or you inspect.
A Shareholder / Business Owner’s Right to Inspect Books and Records
If you are a shareholder in a close corporation (i.e. small, private, not publicly traded corp.) or have an interest in a different business organization (such as an LLC), you may be curious about the value of your company – or, perhaps more specifically, the value of your stock or similar interest. Alternatively, you may have concern as to whether the business / corporation is complying with local law. As a person holding such an interest, you may be entitled inspect and copy the business’ books and records to obtain answers to these and other questions.
In Arizona and many other states, if you have a proper purpose and meet certain statutory criteria, the law will allow you to conduct a records inspection.
How do you know if you have a proper purpose to conduct an inspection? While a proper purpose will frequently vary from case to case and state to state, a few generalized examples include, conducting an inspection to: (1) ascertain the true financial condition of your business; (2) determine the value of your stock or similar interest in the business; and (3) assess whether the affairs of the business have been conducted according to the law.
What records can you inspect and copy? Depending upon the state where the business is incorporated (or otherwise created), the type of documentation you can inspect and copy may vary. Frequently, however, a stockholder or person holding a similar interest can inspect and copy:
1. Excerpts of minutes from meetings of the board of directors, committees acting for the board of directors, and shareholders’ meetings (among others);
2. Accounting records of the corporation;
3. Records of shareholders; and
4. The business’ most recent financial statements.
The procedure to initiate and successfully complete an inspection generally requires compliance with state law. Failure to comply with applicable law may result in the corporation / business recovering any fees and costs incurred (including attorneys’ fees and costs) from you. Conversely, if the corporation fails to provide you with the required records after a proper inspection demand, you may be entitled to recover your attorneys’ fees and costs from the corporation.
What else should I know? Laws on this subject vary from state to state and entity to entity. If you are interested in conducting a proper records inspection upon a business or corporation in which you hold an interest, or simply have questions, you may want to consider consulting a licensed attorney.
UPDATE: Recent decisions from the Delaware Court of Chancery indicate a trend towards precluding inspection after a derivative complaint is filed. See post re: The new pre-requisite to filing a derivative complaint – conducting a records inspection.
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