Minority Shareholder Rights to Financial Statements
Minority shareholder rights to financial statements involves federal and state law, which gives shareholders rights to ensure each have company information.3 min read
Minority shareholder rights to financial statements involve federal and state law, which grants the right to shareholders to ensure each has sufficient information about the company.
About Minority Shareholder Rights
A shareholder is an individual who owns stock in a corporation even if it is only one share. As a shareholder, each has certain rights and privileges. These include:
- Attending shareholder meetings.
- Inspection rights of financial and accounting records.
- The right to see tax records.
Most states allow a reasonable inspection of a company's books. For many small corporations, which do not have financial audits, tax records prove to be a valuable source of financial information. This means access to tax records is reasonable. Some states have laws in place that limit the right of inspection. This is done to protect a corporation from a minority shareholder getting information and then using it in a negative way.
An example of the limitation of inspection rights is as follows. Company A wants to buy a property. Company B wants to buy the same company. Jake is a minority shareholder in Company A and a majority owner in Company B. Jake wants to inspect the books of Company A to find anything he can use as leverage to increase the chances for Company B obtaining the property. In many states, Jake would not be allowed to access the records of Company A.
Inspection rights may also have limits placed on them in some states. Texas, for example, limits the legal right of inspection by allowing only those who own at least five and have been a shareholder for at least six months or more. Other states take a different approach by requiring a formal request to inspect the records to be made in advance and in writing. This allows the managers or majority owners to prepare information or retrieve information to present.
S Corporations and C Corporations
The IRS requires that all S Corporations must prepare and send a copy of Schedule K-1 to each shareholder. This form contains the corporation's financials, including its taxable revenue, income, and expenses. If an S corporation fails to provide shareholders with a Schedule K-1 by the due date, it can result in severe penalties.
C corporations are the opposite of S corporations in that there are no legal tax requirements that say the corporation must provide information about their tax returns with shareholders.
Minority Shareholder Issues
When the relationship between a minority shareholder and a majority shareholder is strained, it is the minority shareholder who is usually impacted the most. One of the first things a minority shareholder may experience is being denied essential information about the business.
In many cases, minority shareholders either feel they have been excluded or have been put in a state of exclusion. When this happens, the shareholder is cut-off from corporate information. This puts the shareholder in the dark about how the business is performing financially. This is not only unfair to someone who has a vested interest in the business, but it is also illegal.
Georgia Shareholder Rights
Using Georgia as an example, the state statute provides shareholders with the right to copies of certain records upon request during business hours at the principal office of the corporation. In Georgia, shareholders can copy the following records:
- All communications to shareholders within a three-year period including financial statements.
- Articles of Incorporation.
- Executed waivers of notice of meetings.
- Names and residential addresses of all board members.
- Minutes of shareholder meetings.
- Resolutions adopted by the board of directors or shareholders.
A corporation is not allowed to use its bylaws or its Articles of Incorporation to interfere, abolish, or limit a shareholder's right to inspect the records and make copies.
Ontario Shareholder Rights
The Ontario Business Corporations Act under Section 140 requires corporations to prepare and maintain specific records. Corporations are not permitted to impose any conditions on shareholders and their right to inspection. Shareholders are also allowed to retain the services of accountants to examine the records on behalf of the shareholder.
Minnesota Shareholder Rights
The Minnesota Business Corporation Act allows shareholders access to records based on whether the corporation is privately or publicly held. For a publicly held corporation, the shareholder must send a written and notarized demand to the corporation's registered office stating the purpose for the request.
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