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California Legislature Expands Shareholder Inspection Rights

The legislature amended Corporations Code § 1601, which grants shareholders the right to inspect and copy corporate records. The corporations subject to § 1601 are California corporations, foreign corporations having their principal executive office in California, and foreign corporations keeping records subject to shareholder inspection in California.

In Innes v. Diablo Controls (2016), 248 Cal.App.4th 139, a California shareholder sought to inspect and copy corporate records of a California corporation whose records were maintained in Illinois. The court of appeal held that Corporations Code § 1601 does not require that the requested records be brought into California for inspection in California.

AB 2237 (chapter 76, statutes of 2018) is partly in response to the Innes case, and it amends Corporations Code § 1601 in a number of respects.

AB 2237 provides that, if the originals of corporate records subject to shareholder inspection are normally not physically located in California, a shareholder may inspect a true and correct copy of those records at the corporation’s principal office in California.

If the corporation does not have a principal office in California, those records may be inspected at the physical location of the corporation’s registered agent for service of process in California.

If the original records have been lost or destroyed, a shareholder has the right to inspect a copy of the records.

AB 2237 also provides that a shareholder may request that a corporation produce desired documents by mail or electronically if the shareholder pays for the reasonable costs for copying or converting the requested documents to electronic format.

In Jara v. Suprema Meats, Inc. (2004) 121 Cal.App.4th 1238, the plaintiff had sent letters to the corporation numerous times asking it to send him a copy of specified records. The corporation did not respond to his requests. The court of appeal held that Corporations Code § 1601 afforded a shareholder no right other than to inspect and copy records at the company office; it did not require the corporation to copy and send records to him. And the court also held that a corporation could ignore a request for documents to be copied and sent and that a corporation had no duty to notify the shareholder that the records are open for inspection and copying at the corporation’s office.

With the change to Corporations Code § 1601, shareholders will now have the option of asking that the corporation send records subject to shareholder inspection by mail or email.

And in what may be the most significant change made by AB 2237, it now appears that corporate “records” independent of “accounting books” are subject to shareholder inspection. Thus, contract files, employment records, letters, and emails may be available for shareholder inspection, subject to the inspection being “for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust certificate.” The legislative committee analyses of the existing law describe the existing law as though this were already the case, and there is no discussion in the legislative committee analyses of an intention to change the scope of documents subject to shareholder inspection.

This e-bulletin was prepared by Richard Burt, who practices law in San Jose, California. Mr. Burt is a member of the Corporations Committee of the Business Law Section of the California Lawyers Association.

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