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Shareholders Rights and Responsibilities

Shareholders have many legal rights, but they are not all of equal significance.

First, it is important to note that in California, shareholders of closely held corporations have the same rights as those with interests in ordinary corporations. Minority shareholders have the right to inspect a corporation’s record of shareholders. Those who hold either (a) 5% of the shares; or (b) 1% of the shares and have filed a federal Schedule 14b relating to the election of directors, have an absolute right, on 5 business days’ notice, to both: (1) inspect and copy the record of shareholders; and (2) to obtain a current list of the names, addresses, and share holdings of the voting shareholders. Furthermore, any shareholder who does not qualify under either (a) or (b) above, with a written demand, has a right to access a corporation’s record of shareholders if the acquisition of such records is directed toward an end deemed “reasonably related” to the holder’s interest.  

Under the statute, shareholders are also entitled to “accounting books and records” and minutes of shareholder, board, and board committee meetings. Access to this information, though, is predicated on the shareholder stating, in writing, a “reasonable relationship” between its interest as a shareholder and the purpose of its inspection of the information.

Schnabel v. Superior Court (1993) 5 Cal. 4th 704 illustrates several factors that favor a Plaintiff’s right to inspection. In Schnabel, the Plaintiff, a party to a divorce action in which the married couple’s stock holdings needed to be valued and divided, articulated through the testimony of an accountant that each record requested reasonably related to the corporation’s value. Further, the Plaintiff limited the time period of her request to information related to the current value of the underlying assets, as opposed to an excavation of financial records.  This case teaches that a proper shareholder request should (1) articulate a purpose for seeking records that is reasonably related to the person’s interests as a shareholder; (2) identify and narrow the scope of records sought to information related to the purpose articulated above; (3) limit the time periods for the records sought to those related to the purpose above; and (4) should court enforcement of the demand become necessary, the shareholder should be prepared to support the demand with a declaration, such as from an accountant, explaining the necessity of each record sought.  

In addition, the role of shareholders are includes  an entitlement to participate in the governance of the corporation through the election of directors and through acting on matters properly brought before them at shareholder meetings. If a corporation fails to hold an annual shareholders’ meeting at which the shareholders have the opportunity to vote to elect directors, any shareholder can seek to compel the corporation to hold an annual meeting of the shareholders. Further, if a corporation is going to be acquired by or merged with another company, a shareholder may have the right to be cashed out in a merger or acquisition transaction, referred to as “dissenting shareholder” rights.

If a lawful demand for inspection is refused without justification, the court can intervene and compel the corporation to forfeit the requested information. In some cases, the courts have exercised the power to award complaining shareholder with reasonable expenses, including attorney’s fees. If you are a shareholder and you believe you are not awarded the rights to which you are entitled, or if you represent a corporation with questions about your obligations, contact an experienced attorney at Bremer Whyte Brown & O’Meara, LLP to discuss the facts of your matter and determine your next course of action.

Fiduciary Duties

Contrary to popular belief, pursuant to Jones v. H.F. Ahmanson & Co. (1969) 1 Cal. 3d 93, shareholders do not owe a fiduciary duty either to other shareholders or to the corporation solely because they are shareholders. However, there are some circumstances under which a fiduciary duty is imposed on a shareholder under California law. This can occur, for example, if a majority shareholder in a company usurped an opportunity which should have belonged to the corporation, harming the minority shareholders. If a majority shareholder otherwise acts in a way that harms minority shareholders, the majority shareholder may also have breached a fiduciary duty.

Further, when a corporation is closely held and a shareholder is a controlling shareholder, that controlling shareholder can also owe a fiduciary duty to the corporation as well as to minority shareholders. In addition, when shareholders serve as executives, board members, directors, or otherwise take an active role in the management of the company and business operations, they also owe a fiduciary duty in this capacity to other shareholders.

A Plaintiff who prevails in a breach of fiduciary lawsuit typically will recover for actual damages incurred, but also may recover punitive damages if the breach can be proven to have been committed out of malice or fraud. If you suspect a breach of fiduciary duty, you may want to consult with an experienced attorney, as such breaches can have disastrous consequences.