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Company books: Access for shareholders

September 25, 2018

 

Companies may be asked by shareholders for “access to the company books”.  As a general rule, shareholders have limited rights to access a company’s books. 

 

What are the “books”?

 

Section 9 of the Corporations Act 2001 (Act) defines “books” to include a register, any other record of information, financial reports or financial records, and documents the property of the company however does not include certain documents relating to expert’s reports in takeovers.

 

“Books” are not restricted to paper items. The definition of “documents” in section 9 states that the books may be in the form of a disc or tape or any other article from which sounds, images or messages are capable of being reproduced, either with or without the aid of any other article or device. 

 

The term “financial records” is also defined to include invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; primary documents; and working papers needed to explain the methodology by which the financial statements are prepared.

 

Access

 

Access to financial records

 

While small proprietary limited companies are exempt from producing financial reports, section 293 of the Act provides that shareholders holding 5% or more of voting shares may direct the company to prepare a financial report and directors' report for a financial year.  These documents must be sent to all shareholders the later of 4 months after the financial year or 2 months after the shareholder request.

 

A “small proprietary company” is a company that, for a financial year, satisfies two of the following three requirements:

  • consolidated revenue is less than $25 million;

  • consolidated gross assets are less than $12.5 million; and

  • fewer than 50 employees.

 

Access to books

 

The replaceable rule in section 247D of the Act allows for the directors or the company by a resolution passed at a general meeting, to authorise a shareholder  to inspect books of the company. 

 

The company constitution, or shareholder agreement if one exists, may also grant access rights.

 

Should these steps fail, section 247A of the Act provides a statutory right for shareholders to access the company books. 

 

A shareholder may apply to the court under section 247A of the Act for an order to inspect the books of the company.  The court must be satisfied that the shareholder is acting in good faith and the inspection is for a proper purpose.  “Good faith” and “proper purpose” have been interpreted as an composite notion and the court will apply an objective test to determine  whether each has been demonstrated.

 

In looking at “good faith” the court must be satisfied that  the alleged proper purpose is not a ruse or pretence and the application is made with honesty and without an ulterior motive.

 

In the recent case of Engel v National Biodiesel Ltd, the Court considered the definition  of company “books" in the context of whether the documents are "books of the company", that is, whether a document is the property of the company.  The Court was satisfied that Mr Engel’s application was in good faith and for a proper purpose, as he was seeking the inspection to investigate the circumstances surrounding certain transactions to determine whether he should commence proceedings.  The Court reference Mr Engel’s genuine concern about the transactions he described in his evidence.

 

 

Key lessons

 

Companies receiving a request from a shareholder to inspect the books of the company, should consider carefully the scope and merit of the request.  The definition of books remains broad with the scope connected to the purpose for which access is requested.

 

From a practical perspective, companies often seek to accommodate requests to access the books.   Where an agreement can be reached with the shareholder on the appropriate category of documents to be disclosed, and the conditions on which disclosure is granted, this may avoid the cost, adverse publicity and distraction of court proceedings with defending an application.

    
Where a company  rejects a shareholder’s request and the shareholder brings a application under section 247A of the Act, should the shareholder be successful, the company may be responsible for the costs of the application.

 

Opportuna Legal can provide advice and assistance on this issue to shareholders seeking to access company books and companies in receipt of a request. 

 

 

 

Disclaimer

Opportuna Legal communications are intended to provide commentary and general information. They should not be relied upon as legal advice. If you would like further information in relation to this matter or other legal matters please contact Opportuna Legal.

 

 

 

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