A common query received from clients is whether, as a shareholder (but not as a director) of a company, they have automatic access to the books and records including the financial records of that company.
There is a great deal of uncertainty and myths regarding access to information about a company in which you are a shareholder. Make no mistake, the need to access such information is mostly genuine. Frequently, such requests arise from a breakdown in the relationship between the shareholder and the directors or as a need for accountability when there are concerns of mistrust or misconduct, or even potential impropriety. Dissatisfied or disgruntled shareholders are prevalent and their common concerns relate to the management and dealings of the company.
Put simply there are many reasons why a shareholder would want access to the books of a company.
Believe it or not, and contrary to popular belief, a shareholder does not have an automatic right to inspect the books and records of a company in which they are a shareholder.
Without the consent of the company (which is frequently refused), or a contractual right to inspect under a shareholder agreement (which are more the exception than the rule), a shareholder is often left with the remedy of needing to make an application to court seeking a formal order for inspection. In other words, the pursuit of a statutory remedy.
Leaving aside for now the enormous expense involved in such an application, it is not guaranteed to succeed. There is general unease by the courts to grant these applications unless the shareholder is able to show a well-founded cause for concern. The two criteria that must be satisfied are firstly that the shareholder is acting in good faith, and secondly that the need for inspection is for a proper purpose. These criteria are enshrined in section 247A of the Corporations Act 2001 (Cth).
Overcoming these two thresholds is not an easy task and there have been many court decisions over the years which have attempted to identify what actually satisfies these criteria. But one thing is for certain: idle curiosity, nefarious intent or the potential to breach confidential information do not meet the proper purpose threshold, let alone the good faith test.
In summary, when it comes to the court’s power to order the inspection of books under section 247A, there needs to be a balance between the necessity for shareholders to have a real and meaningful ability to keep their company (and its directors) honest and accountable, and the legitimate commercial requirement that a company be able to operate its business without being required to disclose potentially confidential documents to dissatisfied shareholders. It’s a thin line that needs to be carefully navigated.
Shareholders needing assistance or advice in seeking to inspect the books of a company should contact David Vilensky or Bronté Foale of our corporate advisory team on 9325 9644
