California Appellate Court Affirms that Only Shareholders of Record (And Not Beneficial Shareholders) Can Assert Statutory Inspection Rights Under California Law

On July 2, 2021, a three-judge panel of the California Court of Appeal, First Appellate District, Division Three, in Ramirez v. Gilead Sciences, Inc., affirmed the trial court’s denial of plaintiff’s petition for writ of mandate to compel Gilead Sciences, Inc., a Delaware corporation headquartered in California, to allow the plaintiff to inspect certain of its books and records under California statutory and common law.

Section 1601(a) of the California Corporations Code confers upon any “shareholder” the right to inspect certain corporate records of a California corporation or a corporation formed outside California keeping any records here or having its principal executive office here, for a purpose reasonably related to the shareholder’s interests as a shareholder. Section 185 of the California Corporations Code defines “shareholder” to mean one who is a holder of record of the shares.

In this case the plaintiff was a beneficial, not a record, holder of the shares in that the shares were not issued in his name but instead were held indirectly in “street name” through a bank, broker-dealer or other nominee, a common practice for shares of publicly-held companies.

The appellate court held that since Section 1601, when read together with Section 185, clearly conferred inspection rights only on shareholders of record, plaintiff lacked standing to pursue his California statutory inspection claim. (In an unpublished opinion in 1978, Monitor Technology, Incorporated v. Hetrick, the California Court of Appeal, First Appellate District, Division Three, reached a similar conclusion.) The Gilead court also held that the clear language of the statute modified any California common law right of inspection that may have been available to beneficial owners. Having decided that the plaintiff had no standing to pursue his claim, thecourt determinedthat there was no need to address the trial court’s basis for denying the plaintiff’s petition, that California was an improper forum in light of the provision in Gilead Sciences, Inc.’s certificate of incorporation mandating that claims governed by the internal affairs doctrine be heard exclusively in a Delaware court.

Although the appellate court affirmed that the plaintiff had no inspection rights under California law, Gilead Sciences, Inc. was incorporated in Delaware, and plaintiff was more successful in obtaining certain corporate records under Delaware law through court proceedings in that state. Section 220 of the Delaware General Corporation Law provides that beneficial stockholders, and not just stockholders of record, can assert inspection rights.

Beneficial owners of shares who want to assert statutory inspection rights but can’t avail themselves of laws such as Delaware’s may wish to consider having their shares re-registered into their name or request that the record holder assert inspection rights on the beneficial owner’s behalf.

This e-Bulletin was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP. Mr. Ross is a member and past co-chair of the Corporations Committee of the Business Law Section of the California Lawyers Association.