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California Startups Must Disclose Financial Information to Shareholders

Many startups organized as private corporations keep the value of corporate shares a well-protected secret. Telling the public that share values have soared in recent years or that they recently dropped after a new product announcement could greatly affect a company’s success. In recent years, however, many shareholders have sought to learn more about startups’ financial information. What startup owners may not know is that private corporations organized under California law must disclose financial information to their shareholders.

The California Corporations Code permits shareholders of any California corporation to request access to the corporation’s accounting books and records, as well as minutes from any board or shareholder meeting. Corporations Code § 1601(a). It is necessary that the shareholder’s request be reasonably related to his interests as a shareholder (such as for the purpose of valuing his shares in the corporation). Id. Delaware and other states’ laws have similar requirements.. Many courts have struck down shareholder requests for records on the grounds that the request was not related to shareholder interests. See, e.g., Hartman v. Bandini Petroleum Co. (1930) 107 Cal.App. 659; Havlicek v. Coast-to-Coast Analytical Services (1995) 39 Cal.App.4th 1844.

Making a request for records in California is straightforward. The request must be in writing and should request inspection during business hours by the shareholder or his agent or attorney. While inspecting the records, the shareholder may make copies. Corporations Code § 1601(a), (b).

Startups that wish to keep financial records private may not restrict shareholders’ access in the corporation’s articles of incorporation or bylaws. Corporations Code § 1601(b). Further, shareholders owning more than 5 percent of the corporation’s shares have the rights to access a list of shareholders and to receive quarterly financial information on the corporation. Corporations Code §§ 1600, 1501.

A corporation’s failure to allow a shareholder to inspect records may subject the corporation to liability. In order to avoid this situation, many corporations require shareholders to sign nondisclosure agreements regarding the contents of the financial records. Nationwide, private corporations have begun conditioning stock awards on employees’ agreement to waive their right to inspect records, which may not be legal.

If your startup has received a shareholder request for records, learn more about private corporations’ duties of disclosure by contacting an experienced business lawyer to assist you. Knowledgeable about corporations in California, Michael Leonard, Esq. of San Diego Corporate Law, can help. Contact Mr. Leonard by e-mail or calling (858) 483-9200.

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