March 2018

A look at the books. When can a shareholder inspect a company’s books?

Clients often ask us what rights they have to inspect the books of a company in which they own shares. By the same token, company directors also ask what documents they must make available if a shareholder asks to see them.

It’s an interesting question, and the answer is not as simple as you might think. Whether you are a shareholder or a company director, here are some steps to consider.

1. Check the Constitution or Shareholders Agreement

If the company has a Constitution or Shareholders Agreement, it may state what documents, if any, shareholders have a right to access. Check here first. If the Constitution and Shareholders Agreement do not allow a shareholder to inspect documents, then the shareholder will need to think of other ways to get access.

2. The Shareholder may seek approval from the Company or the Board

Under the Corporations Act, the company (by general meeting) or board of directors may pass a resolution authorising a shareholder to inspect the books.[1] “Books” includes a register, any other record of information, financial reports or records, and a document – a broad definition indeed.

Note that the decision to allow or not allow access lies with the company. Unless the constitution expressly allows shareholders to access the books, obtaining approval may be difficult.

That becomes obvious when you consider the circumstances under which a shareholder would typically want access; that is, a desire to scrutinise the conduct of the board or management team. If the directors believe that the shareholder requesting access is likely to be critical of their actions, their cooperation is unlikely.

That said, directors need to be careful about denying such a request, as it may be a breach of their director duties.

3. If all else fails … the Shareholder can make an application to the Court

Under the Corporations Act, a shareholder may apply to the Court for an order to inspect the company’s books.[2] The Court may make such an order where the application is proven to have been made ‘in good faith’ and ‘for a proper purpose’.

So what constitutes ‘good faith’ and ‘proper purpose’? The Courts have previously held that wanting to investigate apparent irregularities in a company’s financial accounts or transactions, or other reasonably suspected breaches of duty, passes the test.

On the other hand, wanting to improve the chances of a takeover bid would be considered an improper purpose.

Hostility between the shareholder and the board of directors does not necessarily mean the applicant lacks good faith. There can be multiple reasons for the inspection, and provided the dominant reason is for a ‘proper purpose’, the Court may grant access to the documents requested, regardless of any hostility between the two parties.

What next?

Whether you are a shareholder wishing to gain access to a company’s books or records, or you are on the board of a company that has received such a request, and you are unsure about what to do next we are here to help.

Authors: Priti Joshi and Michael Cossetto 

 

[1] Corporations Act 2001 (Cth), section 247D

[2] Corporations Act 2001 (Cth), section 247A(1)