Shareholders occasionally ask to see records of a corporation, such as minutes of meetings, financial statements, internal management reports and shareholder lists. The Alaska Supreme Court recently issued a decision in Pederson v. Arctic Slope Regional Corporation[1] that addresses many aspects of shareholder access to company records. This article presents background information, summarizes the decision, and provides additional comments.
Background
Alaska law regulates what information a corporation must provide to shareholders and what rights shareholders have to inspect company records.[2] In connection with a shareholders’ meeting, a corporation is required to prepare a shareholder list identifying the shareholders entitled to vote, including their addresses and number of shares owned.[3] The company is required to make the shareholder list available for shareholders to inspect at least 20 days before the shareholders’ meeting.
In 2011, the Alaska Supreme Court addressed this requirement. In Henrichs vs. Chugach Alaska Corporation[4] it upheld the trial court’s ruling that the shareholder list does not include, and a company is not required to provide access to, telephone numbers and e-mail addresses for shareholders. Also, the court upheld the trial court’s ruling that a shareholder must come to the corporation’s office to inspect records; he cannot require the corporation to deliver the requested records. The author of this article represented Chugach Alaska Corporation in that case.
Alaska law specifies other records a corporation is required to keep, and the right of shareholders to inspect those records. It provides[5] that a corporation must –
- “keep correct and complete books and records of account, minutes of proceedings of its shareholders, board, and committees of the board, and a record of its shareholders . . . . The books and records of account, minutes, and the record of shareholders may be in written form or in any other form capable of being converted into written form within a reasonable time.”
- “make its books and records of account . . . reasonably available for inspection and copying at the registered office or principal place of business in the state by a shareholder . . . . Shareholder inspection shall be upon written demand stating with reasonable particularity the purpose of the inspection. The inspection may be in person . . . , at a reasonable time and for a proper purpose. Only books and records of account, minutes, and the record of shareholders directly connected to the stated purpose of the inspection may be inspected or copied.”
Pederson v. Arctic Slope Regional Corporation clarifies the records that must be kept, and the shareholder’s right to inspect those records.
The Dispute
Rodney Pederson is an original shareholder of Arctic Slope Regional Corporation, holding 100 shares. He asked ASRC to permit him to inspect records relating to purchase of a subsidiary, executive compensation and the transfer of ASRC interests in subsidiaries to its managers. He stated that this information would be used only to persuade his fellow shareholders to adopt two specific changes to the ASRC’s governing documents that would restrict this conduct.
ASRC initially responded that it would provide information only if Pederson signed a broad confidentiality agreement that made him responsible if he disclosed information to another shareholder and that shareholder disclosed the information to the public. After Pederson objected, ASRC said it would be acceptable if Pederson got confidentiality agreements from shareholders to whom he disclosed information. Pederson rejected the proposed confidentiality agreements, and ASRC provided only minimal information or information it had previously distributed to its shareholders, such as its annual reports and proxy statements.
Because ASRC conceded that Pederson stated a proper purpose for his requests, the only issues were the scope of Pederson’s right to inspect ASRC records and ASRC’s right to condition his inspection on signing a confidentiality agreement.
The Court’s Ruling
The Alaska Supreme Court described the balance between allowing shareholders to keep informed about the management of their corporation and protecting the corporation from meddling, interference with its operations and disclosure of information that might harm the shareholders. The court then addressed the three issues in the appeal:
Books and records of account – First, the court dismissed ASRC’s argument that because its financial records were computerized it had no “books.” “Books and records of account” include computerized records. The court also rejected ASRC’s argument that “books and records of account” include only ASRC’s annual reports and proxy statements. The court explained that “books and records of account” encompass
- monthly financial statements
- records of receipts, disbursements and payments
- accounting ledgers
- other financial accounting documents, including records of individual executive compensation and transfers of corporate assets or interests to executives
Minutes – Pederson argued that his right to inspect minutes included reviewing the documents or reports that were used by the board in reaching decisions described in the minutes. The court rejected this, holding that “minutes” refer to an accurate record of the subjects discussed and the actions taken at the meeting, but do not ordinarily include presentations or reports made to the board.
Confidentiality agreement – Finally, the court reviewed ASRC’s demand that Pederson sign a confidentiality agreement before ASRC would permit Pederson to inspect ASRC’s records. The court sought to balance the right of shareholders to inspect company information with the harm that could occur if sensitive or confidential information was released by the shareholder to the general public. The court concluded that ASRC could condition release of confidential information to Pederson on Pederson’s signing a confidentiality agreement, provided the agreement
- reasonably defines the scope of what is confidential information that is subject to the agreement, and
- contains confidentiality provisions that are not unreasonably restrictive in light of the shareholder’s proper purpose and the corporation’s legitimate confidentiality concerns
The confidentiality agreement demanded by ASRC did not meet these standards. It covered “all” information being released. Instead, the court ruled, the agreement must identify and differentiate between disclosed information that is confidential and disclosed information that is not confidential. Requiring that Pederson be responsible if other shareholders disclosed confidential information, or requiring Pederson to obtain confidentiality agreements from other shareholders, also was found to be unreasonable.
Comments
Some details in the Pederson ruling warrant special comment.
Books and records – The degree the corporation has to facilitate a records inspection is unclear. The court made a point that Pederson did not ask to use ASRC’s computer to browse ASRC’s accounting software; he asked for printouts. So, it may be sufficient for a corporation to provide printed reports, even if accessing the information through the corporation’s computer may be more efficient or useful for the shareholder. Alaska law requires that electronic “books and records of account” be maintained in a form that can be converted to written form.
On the other hand, Pederson asked for specific information and the court noted that it was possible for someone to query ASRC’s computerized accounting system with little effort. This suggests that the corporation may be required to search for and compile the information for the shareholder. It cannot simply provide a dump from its accounting data, in written or electronic form, that would force the shareholder to analyze using his own computer and software.
The breadth of “books and records of account” was based on information that was thought to be “crucial to shareholders’ ability to monitor the performance of their corporate agents and protect their interests as shareholders.” The list provided by the court may not be exclusive. If other types of financial information address this policy goal, it also may be considered to be “books and records of account.”
Minutes – Even though “minutes” do not ordinarily include presentations and reports made to the board, this is not a bright line. The court said these items “ordinarily” are not part of the minutes, and recognized the possibility that a shareholder may be able to inspect an attachment that was incorporated into the minutes. If a presentation or report is essential, or understanding the minutes requires review of an underlying presentation or report, it still may be possible for a shareholder to inspect the underlying materials.
The court also noted that the minutes need to be accurate. The minutes cannot omit some matter that was discussed or action taken at the meeting simply because the board decides not to include it in the minutes following the meeting.
Confidentiality agreement – The court noted that corporations have some protection from releasing confidential information in response to a shareholder request. For one, only information directly related to a proper purpose needs to be made available. Also, the corporation can seek a judicial protective order to keep the information confidential.
As an additional protection, the Pederson court confirmed that a corporation can require a confidentiality agreement as long as the confidentiality agreement meets the standards described by the court.
The court provided some guidance on what information can be considered “confidential,” and what information cannot. According to the court, confidential information may include documents that are “candid” in the sense of being prepared by the corporation with a reasonable expectation of confidentiality; documents that reveal preliminary deliberations, assessments, or speculation rather than final action, decisions, or outcomes; and documents whose confidentiality has actually been maintained. Confidential information may exclude at least that information that the shareholder already knew, developed independently, acquired from a third party not under an obligation not to disclose the information, or acquired from the public domain. Presumably information provided to the shareholder other than in response to an information request, such as information in the annual report, proxy statement and shareholder list, also would not be confidential.
ASRC’s proposed confidentiality agreements were found to be unreasonable “at least as they related to executive compensation and stock interests.” This was in part because the state proxy regulations already require the disclosure of some executive compensation. Also, the court thought this placed a substantial burden on Pederson when communicating with his fellow shareholders on a proper purpose.
A Few More Points
It is critical to recognize that Pederson is not the final word on shareholder inspection. It was based on the statutory shareholder inspection right. Companies may have other obligations to permit inspection, including:
- Directors of a corporation have an “absolute” right to inspect company records, and these records are not limited to books and records and minutes.[6]They include “all books, records, and documents of every kind.”
- A.S. 10.06.433 requires that a corporation provide certain information to its shareholders: annual financial reports; transactions involving more than $40,000 with officers, directors or major shareholders or related entities; advances made to indemnify officers and directors; and interim financial reports.
Corporations that receive a shareholder’s request to inspect should be aware that Alaska law provides that an officer or agent, or corporation, that refuses to allow a shareholder to inspect company records is liable to the shareholder for a penalty in the amount of 10% of the value of the shares owned by the shareholder, but not less than $5,000.[7]
Finally, entities other than corporations need to consider the effect of this ruling. Limited liability companies, for example, are subject to a similar statutory inspection right.[8] Members are entitled to inspect “books and records of account, minutes, and the record of members” for a proper purpose. More broadly, the LLC management is directed to provide “to the extent just and reasonable under the circumstances, true and full information of all matters that affect the members . . . .”[9] Using very broad language, partnerships are required to “provide partners . . . access to its records” and to furnish to each partner “any information concerning the partnership’s business and affairs reasonably required” by the partners and “any other information concerning the partnership’s business and affairs” requested by the partner unless the demand is unreasonable or otherwise improper. [10] Nonprofit corporations are required to keep correct and complete “books and records of account,” minutes and a membership record, and “all books and records of a corporation may be inspected by any member . . . for any proper purpose.”[11]
Responding to a Shareholder Request
Our experience is that reasonable policies consistently and fairly applied are a corporation’s best protection against claims such as those asserted by Pederson. There are several steps a corporation should take respecting shareholder requests for inspection:
First, the corporation should develop a form for shareholders to request inspection and a policy for processing the request. Corporations also should develop a draft confidentiality agreement that can be tailored to a specific information request, if appropriate. An inspection policy may identify company records that are confidential and records that are available for shareholder inspection.
Second, every shareholder seeking to inspect company records, other than a shareholder list in connection with a shareholders’ meeting, should use the form to make a written demand identifying the records sought to be inspected and stating with reasonable particularity the purpose of the inspection.
Next, the corporation must consider what records it has that are responsive to the request, whether those records are “books and records of account, minutes, or the record of shareholders,” whether the stated purpose is “proper,” whether the information requested by a shareholder relates to the shareholder’s stated purpose, and whether the corporation has an interest in keeping any such records confidential.
If confidentiality is warranted, then the specific records that should be kept confidential need to be identified and the degree of confidentiality should be considered. A confidentiality agreement can be revised to fit the specific situation and provided to the shareholder. The confidentiality agreement should apply only to confidential information and must strike a balance between maintaining confidentiality while giving the requesting shareholder adequate information to achieve the stated purpose.
All of this must happen within a reasonable period of time. Having forms and procedures in place will permit the corporation to focus on the core issues and allow a timely response.
Each of these steps requires judgment, especially if the corporation desires to restrict, qualify or withhold information. As to any shareholder request that relates to confidential or sensitive information, senior management, perhaps also with the board of directors, should consult with the corporation’s attorney.
[1] Op. No. 6939, August 8, 2014. The case is available at the ANCSA Resource Center
[2] As to Alaska Native corporations, the Alaska Native Claims Settlement Act also requires that Alaska Native corporations have an annual audit performed in accordance with generally accepted auditing standards by independent certified accountants, and that the audit report, or a fair and reasonably detailed summary of the audit report, be sent to each shareholder. 43 U.S.C. § 1606(o).
[3] A.S. 10.06.413
[4] 260 P.3d 1036 (Alaska 2011). The case is available at the ANCSA Resource Center
[5] A.S. 10.06.430
[6] A.S. 10.06.450
[7] A.S. 10.06.430(c)
[8] A.S. 10.50.870
[9] A.S. 10.50.880
[10] A.S. 32.06.403
[11] A.S. 10.20.131