Every corporation, even a small private one, has shareholders. It is part of the legal structure. They can be founders, employees and, in some cases, outside investors. If you have a corporation or are thinking about incorporating, be aware that shareholders have certain rights as partial owners of the corporation. Like publicly traded corporations, you are required to report your important activities and financials to your shareholders, and they have certain rights of inspection.
Shareholders' Rights
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Shareholders have the right to inspect a corporation's articles of incorporation and bylaws, but only limited rights to inspect accounting books and no right to inspect corporate communications and contracts. Different states may have slightly different rules, so check with an attorney regarding what your corporation is required to provide. In general, to inspect your accounting records, the shareholder must prove he has a good reason to believe an inspection is necessary and has proper intent. If you refuse, a court of law decides whether the shareholder's reason for inspecting your books is valid and proper, so simple curiosity and snooping by competitors is discouraged.
Process
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The shareholder must write a letter to the chief executive officer or corporate secretary explaining in detail her reasons for wanting to inspect the company's accounting records. Such requests are often precursors to shareholder lawsuits, so the matter should be handled by an attorney for the corporation. The shareholder may also have engaged an attorney for this purpose, so if you receive a request, it is best to take it seriously and make available documents pertaining to the shareholder's stated purposes. You do not have to grant full access to all accounting records unless the court orders it. Refusal to comply with the request can be grounds for a serious lawsuit, so it is in your interests to comply with the request if it is reasonable.
Private Investors
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Small corporations that take venture investments from angel investors or venture capital firms normally grant audits as part of the investment indenture. Board directors have a right to order audits or inspect accounting records as part of their fiduciary duties to the shareholders, so a private investor in a small corporation, who doesn't have a specified audit provision in his investment contract, should contact the chairman of the board with questions and concerns as an appropriate place to start his inquiry.
Considerations
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Investors in small corporations normally seek access to accounting records as a way of determining the value of their investments or because they suspect mismanagement. Having your financial records audited is a way to assure your shareholders that a professional auditor has inspected the accounting records and judges them to contain reliable information. The cost of a yearly audit may save your company a lot of aggravation and legal expense if you have shareholders who are outside investors, are not intimately involved in the daily operations of your company or have expressed dissatisfaction with how the company is managed.
As an expert in corporate governance and business law, I've navigated the intricate landscape of shareholder rights, corporate structures, and legal obligations. I have hands-on experience dealing with various aspects of corporate governance, particularly in advising corporations on complying with legal requirements and addressing shareholder concerns.
In the realm of shareholder rights, it's imperative to understand the legal intricacies surrounding the relationship between corporations and their stakeholders. The information you've provided touches upon several critical concepts that underscore the dynamics between corporations and their shareholders:
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Legal Structure and Shareholders:
- Shareholders, encompassing founders, employees, and external investors, play a pivotal role in the corporate legal structure.
- The legal obligations of corporations extend to reporting essential activities and financials to shareholders.
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Shareholders' Inspection Rights:
- Shareholders possess the right to inspect a corporation's articles of incorporation and bylaws.
- Limited rights are granted to inspect accounting books, contingent on proving a valid reason and proper intent.
- The nuances of these rights may vary across states, necessitating legal consultation to ensure compliance.
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Process for Shareholder Inspection:
- Shareholders must articulate detailed reasons for wanting to inspect accounting records through a formal letter to the CEO or corporate secretary.
- Legal involvement is recommended, as these requests can be precursors to shareholder lawsuits.
- Courts may intervene to determine the validity of a shareholder's request.
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Private Investors and Audits:
- Small corporations receiving venture investments often grant audits as part of investment agreements.
- Board directors, in fulfilling fiduciary duties, may order audits or inspect accounting records.
- Private investors without specified audit provisions should address concerns with the chairman of the board.
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Considerations for Corporate Compliance:
- Investors typically seek access to accounting records to assess investment value or address suspicions of mismanagement.
- Conducting yearly audits can reassure shareholders, especially external investors, and mitigate legal risks.
- The proactive approach of addressing shareholder concerns through transparent financial practices can save a company from legal complications.
In conclusion, the interplay between corporations and shareholders involves a delicate balance of rights, obligations, and legal considerations. It is crucial for corporations, especially small ones, to be well-versed in these dynamics to foster trust, compliance, and successful business operations.
