• Shareholder Rights to Inspect Corporate Documents
  • March 20, 2009
  • Law Firm: Fryar Law Firm, P.C. - Houston Office
  •  I.    Introduction
    Corporations, particularly closely-held corporations (and their officers and directors), owe far-reaching duties to provide 
    information regarding the corporation’s business and its assets to shareholders.  Because of federal statutes and regulations, 
    this issue appears less frequently in the context of public corporations, but shareholders of all corporations have a vital interest in 
    receiving access to accurate information regarding the financial status and management of their company.

    The fundamental principle is that the shareholders own the corporation, including all property possessed by the corporation, 
    including all the information and all the records. Those in charge of the corporation are merely the agents of the stockholders who 
    are the real owners, and the owners are entitled to information as to the manner in which the corporate business is conducted. 
    Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d). “While the corporation holds the 
    legal title to its property, the stockholders are deemed the real and beneficial owners thereof and, as such, are entitled to 
    information concerning the management of the property and business they have confided to the officers and directors of the 
    corporation as their agents. A stockholder's assertion of right to inspect the corporation's books and records is sometimes said to 
    be one merely for the inspection of what is his own.” State ex rel. G.M. Gustafson Co. v. Crookston Trust Co., 22 N.W.2d 911, 915-
    16 (Minn. 1946); accord Guthrie v. Harkness, 199 U.S. 148, 155 (1905). “A minority shareholder has very few rights. By definition, 
    those shareholders who, along with their allies, are in the majority, have sufficient votes to nullify the minority's right of franchise. In 
    such instance, about the only thing left to a dissatisfied minority stockholder is his right to inspect, coupled with his right to 
    denounce any matters disclosed by his inspection.” Perry v. Perry Bros., Inc., 753 S.W.2d 773, 777 (Tex. App.—Dallas 1988, no 
    writ) (Howell, J., dissenting).

    II.    Nature of Shareholder’s Right to Inspect Corporate Records

    A.    Fundamental Shareholder Right

    The shareholder’s right to examine the books and records of the corporation “is a privilege … incident to his ownership of stock.” 
    Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d).   The right to inspect corporate 
    books and records exists so that the shareholder may “ascertain whether the affairs of the corporation are properly conducted and 
    that he may vote intelligently on questions of corporate policy and management.” Id. “The predisposition of the law is in favor of 
    allowing reasonable inspections of corporate books and records.” Citizens Association for Sound Energy v. Boltz, 886 S.W.2d 283, 
    291 (Tex. App.—Amarillo 1994, writ denied), cert. denied 516 U.S. 1029 (1995).

    B.    Not Absolute, But Important

    The “right to inspect the books and records of a corporation, is not an absolute right, regardless of the stockholders' motive.” 
    Guaranty Old Line Life Co. v. McCallum, 97 S.W.2d 966, 967 (Tex. Civ. App.—Dallas 1936, no writ).   In Guthrie v. Harkness, 199 U.
    S. 148 (1905) the United States Supreme Court noted that courts will not compel the inspection of the bank's books under all 
    circumstances. “In issuing the writ of mandamus the court will exercise a sound discretion, and grant the right under proper 
    safeguards to protect the interests of all concerned. The writ should not be granted for speculative purposes, or to gratify idle 
    curiosity, or to aid a blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate purposes.” 
    199 U.S. at 156.  However, the “right of a stockholder as conferred by statute to examine the corporate records, although not 
    absolute, is a valuable right.” Chavco Investment Company, Inc. v. Pybus, 613 S.W.2d 806, 810 (Tex. Civ. App.—Houston [14th 
    Dist.] 1981, writ ref’d n.r.e.).

    C.    Who has the right

    1.    Current Shareholders

    The statutory right of inspection in Texas is limited to current shareholders who have held their shares for at least six months or 
    who holds at least five percent of all the outstanding shares of the corporation. BOC §21.218(b); TBCA art. 2.44(C). However, all 
    shareholders have a common law right of inspection if the inspection is made in good faith for a proper purpose. Williams v. 
    Freeport Sulphur Co., 40 S.W.2d 817, 825 (Tex. Civ. App.—Galveston 1930, no writ) (right of inspection provided “both by the 
    common law and the statutes of this state”); see also Palacios v. Corbett, 172 S.W. 777, 782 (Tex. Civ. App.—San Antonio 1915, 
    writ ref’d)(common-law right to inspect county records). “There can be no question that the decisive weight of American authority 
    recognizes the common-law right of the shareholder, for proper purposes and under reasonable regulations as to place and time, 
    to inspect the books of the corporation of which he is a member.” Guthrie v. Harkness, 199 U.S. at 153.

    Texas courts have held that the passage of a legislative right legislative right of inspection does not negate the pre-existing 
    common law right. Texas Infra-Red Radiant Co. v. Erwin, 397 S.W.2d 491, 493 (Tex. Civ. App.–Eastland 1965, writ ref'd n.r.e.). 
    Similarly, the inspection statute makes clear that, while the statutory remedies are limited to certain shareholders, the statute is 
    not intended to limit the common-law rights of all shareholders:  “Nothing herein contained shall impair the power of any court of 
    competent jurisdiction, upon proof of proper purpose by a beneficial or record holder of shares, irrespective of the period of time 
    during which such holder shall have been a beneficial or record holder and irrespective of the number of shares held by him, to 
    compel the production for examination by such holder of the books and records of account, minutes, and share transfer records of 
    a corporation.” TBCA art. 2.44(E).  BOC §21.218(c) is essentially the same.

    2.    Applies to pledged shares

    Shareholders who have pledged their shares as collateral for a debt retain their inspection rights. Fort Worth KJIM, Inc. v. Walke, 
    604 S.W.2d 362 (Tex. Civ. App.—Fort Worth 1980, writ ref’d n.r.e.).

    3.    Record Owner

    A shareholder of record is entitled to inspect even if not the beneficial owner of the shares. Texas courts have not addressed this 
    issue, but the Delaware courts have held a record owner is entitled to inspect the stock ledger even if only a nominee.  State ex rel. 
    Healy v. Superior Oil Corp., 13 A.2d 453 (Del. Super. Ct. 1940).

    4.    Beneficial Owner

    A holder of a beneficial interest in a voting trust is regarded as a holder of the shares represented by such beneficial interest for 
    the purposes of statutory inspection rights. BOC §21.218(a); TBCA art. 2.44(G).

    5.    Contractual Right to Shares

    An individual who is entitled to be issued shares under a subscription agreement or other contract has rights of inspection, even if 
    the shares have not been issued. Horton v. Robinson, 776 S.W.2d 260, 267 (Tex. App.—El Paso 1989, no writ).

    III.    Exercising the Right of Inspection

    A.    Written Demand

    The demand for inspection must be in writing. BOC §21.218(b); TBCA art. 2.44(C).   There is no requirement that the demand be 
    sworn or notarized.  Typically, written demand is delivered by a certified letter to an officer of the corporation or to its registered 
    agent; however, neither the statute nor the common law prescribes any particular format or method of delivery.  Presumably, email 
    to an officer or director would be just as effective.

    B.    Statement of Purpose

    The Texas statute provides that the demand must state the purpose of the inspection, and the purpose must be a proper purpose. 
    BOC §21.218(b); TBCA art. 2.44(C).  (What constitutes a “proper purpose” is dealt with at length below.)  In order to exercise his 
    statutory rights, the shareholder need not demonstrate, show proof, or otherwise convince the corporation of a proper purpose.  He 
    is required merely to “state” the purpose. Texas Infra-Red Radiant Co. v. Erwin, 397 S.W.2d at 493. The statement of purpose is 
    important because the corporation’s duty to permit inspection is limited to records reasonably related to the stated purpose.  See 
    Kaufman v. CA, Inc., 905 A.2d 749, 753 (Del. Ch. 2006).  However, the shareholder does not forfeit the right of inspection by failure 
    to state a proper purpose.  If the corporation refuses to allow inspection, then the shareholder is still entitled to enforce his 
    common-law inspection rights in court, but will be required to introduce proof of a proper purpose.  Texas Infra-Red Radiant Co. v. 
    Erwin, 397 S.W.2d at 493.

    C.    Description of Documents Requested

    The statute does not require the shareholder to describe the documents sought; rather the shareholder is entitled to review all its 
    books and records of account, minutes, and share transfer records that are relevant to the purpose stated in the demand. BOC 
    §21.218(b); TBCA art. 2.44(C). Typically, demands for inspection do give a list of documents requested.  This practice probably 
    stems from the fact that attorneys preparing these demands are familiar and comfortable with the requests for production of 
    documents in civil litigation.  Also the description of documents demanded assists in demonstrating the relationship between the 
    purpose and the documents if there is a question.  Description of documents also assists the corporation in gathering the 
    documents and placing them in a specific place for inspection, for the convenience of corporation and to prevent disrupting 
    business operations.  However, exercising the right of inspection is very different from serving a discovery request .  Describing 
    categories of documents puts the burden on the shareholder of predicting what kinds of documents the corporation keeps and 
    tends to allow the corporation to take a rather restrictive view of what documents it will make available for inspection.  A 
    shareholder would be completely justified stating only that he intended to inspect all books and records relevant to the purpose 
    described and attempting to inspect those records as they are kept in the files.  Probably the best practice is to state the purpose, 
    demand inspection of all relevant books and records, and provide a non-exclusive list as a starting point.

    D.    Timing of the inspection

    A shareholder is entitled to conduct the inspection at any reasonable time or times. BOC §21.218(b); TBCA art. 2.44(C).  There is 
    no requirement of any period of prior notice to the corporation.  Conceivably, a shareholder could show up at the corporation’s 
    place of business, hand over the written demand, and begin the inspection immediately.  However, the corporation might justifiably 
    claim that immediate inspection was not “reasonable.”  There is no requirement that the shareholder state in the demand when 
    the inspection is to occur, but doing so increases the odds that the corporation will voluntarily comply.

    E.    Place of Inspection

    The statute does not specify where the inspection must take place.  The inspection statute requires the corporation to keep certain 
    records and to make them available for inspection. BOC §§3.151, 21.218(b); TBCA art. 2.44(A), (C). Therefore, the logical 
    conclusion is that the inspection is to be made where the records are kept.  Typically, the demand will state that the shareholder 
    intends to be at a certain location, e.g. the corporate headquarters, during normal business hours on a certain day to begin the 
    inspection.

    A question arises as to corporations with records in many different places or out of state.  Nothing in the Texas case law or statute 
    suggests that there is any duty on a Texas corporation to do anything other than make the records available to the shareholder—in 
    other words, the shareholder must go to the records, not the other way around.  One commentator has suggested that a Texas 
    corporation may have an obligation to bring out-of-state records back into Texas to accommodate an inspection demand by Texas 
    shareholder. Hamilton, Miller & Ragazzo, 20A Texas Practice: Business Organizations §34.6, at 35 (2004) (“Presumably, a 
    corporation that maintains an out-of-state location for its records would be required to produce those records in Texas if a suit for 
    inspection of records is brought in Texas by a Texas shareholder.”) However, nothing in the statute suggests any requirement to 
    keep or produce records within the state.  Texas corporations are not required to maintain their headquarters in the state.  
    Therefore, it is difficult to conceive of any legal requirement for Texas corporations to maintain or produce their business records 
    for inspection within the state.

    F.    Who will do the inspection

    Shareholders are permitted to conduct the inspection in person or by agent, accountant, or attorney. BOC §21.218(b); TBCA art. 
    2.44(C).   There is no requirement to disclose who will do the inspection in the written demand; nor is there any requirement to 
    execute or provide the corporation with a written appointment or power of attorney.  However, if the shareholder does not intend to 
    be present, the best practice would be at least to identify the agent who will conduct the inspection in the written demand or prior to 
    the commencement of inspection.

    IV.    Scope of Documents Subject to Inspection

    A.    The Right to Inspect Generally Extends to All Records

    The right to inspect applies to all books, records of account, minutes and share transfer records. BOC §21.218(b); TBCA art. 2.44
    (C). The terms “books and records of account” are not defined, but there is no support in the case law or commentary for limiting 
    the right of inspection to financial records alone.  “Books and records of account” should include all documentary or electronic 
    information in the possession of the corporation.   See Hamilton, Miller & Ragazzo, 20A Texas Practice: Business Organizations 
    §34.6, at 36 (2004) (“the right of inspection should generally extend to all relevant records necessary to inform the a shareholder 
    about corporate matters in which has a legitimate interest.”). “The property of a corporation, in the last analysis is that of the 
    stockholder, and when one seeks an inspection of its books, records or property, he is in reality but seeking an inspection of his 
    own and that this should be accorded fully, freely and at all times when such inspection will not unreasonably inconvenience 
    others who have a like interest in and rights to the property and that the attempt unreasonably to hamper such inspection by 
    officers, managers or others is an unjust exercise of power and one which courts should not sanction.” Johnson Ranch Royalty 
    Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d).

    Courts in other jurisdictions have consistently favored a broad application of the scope of inspection rights.  In Otis-Hidden Co. v. 
    Sheirich, 219 S.W. 191 (Kan. 1920), a minority shareholder was permitted to inspect correspondence involving internal affairs of 
    the corporation which passed between its nonresident president, who was the majority shareholder, and its active manager. The 
    court held that the common law right of inspection included all documents, contracts, and papers relating to the business affairs of 
    the corporation. See also Meyer v. Ford Industries, Inc., 538 P.2d 353 (Or. 1975) (the term “book as and records of account” was 
    not limited to any ordinary, literal or limited sense, but was subject to a broad and liberal construction so as to extend to all 
    records, contracts, papers and correspondence); Bank of Heflin v. Miles 318 So.2d 697 (Ala. 1979) (same); Tucson Gas & Electric 
    Co. v. Schantz, 428 P.2d 686 (Ariz. 1967) (includes books, papers, contracts etc. Inspection includes all the books of account, 
    minute book, and all papers of every kind and nature); State ex rel. Anderson v. Frederickson, 233 P 291 (Wash 1925); Smith v. 
    Flynn, 155 So2d 497 (Ala 1963) (shareholder entitled to inspect president’s expense account); Friedman v. Altoon Pipe & Steel 
    Supply Co., 460 F.2d 1212 (3rd Cir 1972) (Right to inspect corporate tax return). However, in Master Mortgage Corp. v. Craven, 193 
    S.E.2d 567 (Ga. App. 1972), the court considered the scope of a shareholder’s right of inspection under both common law and the 
    Georgia statute, holding that the catch-all clause, “all other corporate books, records, and files pertaining in any way to business or 
    the financial status of the corporation at any time since the inception of the corporation” was too broad and not encompassed 
    within either the common law or statutory rights of inspection, in the absence of a showing or relevancy by the shareholder.

    B.    Subsidiaries’ Records

    A shareholder of a corporation has the right to inspect the books and records of all subsidiaries of that corporation. Cotton v. 
    Weatherford Bancshares, Inc., 187 S.W.3d 687, 697 (Tex. App.—Fort Worth 2006, pet. denied).

    C.    Proprietary, Confidential, Trade Secret Documents

    Most private corporations view all of their internal documents, particularly financial records, as proprietary and are reluctant to 
    share them with shareholders not actively involved in the business.  While these concerns can be and frequently are over-blown, 
    corporations do have some very legitimate concerns about information provided to shareholders. There are also frequently 
    concerns about the public release of non-public information or the breaching of duties of confidentiality to clients of the 
    corporation.  While these concerns are real and legitimate, it can generally be said that a shareholder who acts in good faith and 
    for a proper purpose may inspect even those documents that the corporation wishes to keep secret. See Moore v. Rock Creek Oil 
    Corp., 59 S.W.2d 815, 818 (Tex. Comm’n App. 1993, jmt adopted). (The issue of an improper purpose and reasonable restrictions 
    on the use of certain information is dealt with separately.)

    There is no blanket trade secrets or confidentiality privilege to shareholder inspection.  The Fort Worth court of appeals upheld a 
    discovery order requiring production of customer and supplier lists and pricing and discount information to a plaintiff who was 
    employed by the corporation’s chief competitor on the grounds that the plaintiff was a shareholder and would be entitled to inspect 
    those documents under the TBCA. Professional Microfilming, Inc. v. Houston, 661 S.W.2d 767, 769-770 (Tex. App.—Fort Worth 
    1983, orig. proceeding).  Courts in other jurisdictions have generally held that shareholders acting in good faith and for a proper 
    purpose are entitled even to confidential information.  See Fears v. Cattlemen’s Inv. Co., 483 P.2d 724, 730 (Okla. 1971). (The “fact 
    that the information sought by a stockholder under the statute involved is of a confidential nature is not enough, in itself, to deny the 
    statutory right of examination of records and making extracts or abstracts therefrom.”); Apple v. Careerco, Inc., 370 N.Y.S.2d 289, 
    291 (N.Y. Sup. 1974) (“The financial condition of a corporation cannot be considered confidential when a stockholder is concerned. 
    It is when the stockholder attempts to misuse the financial information to the detriment of the corporation that his actions will be 
    limited.”); Bank of Heflin v. Miles, 318 So.2d 697, 701 (Ala. 1975) (“the fact of mere confidentiality of the books and records sought” 
    will not defeat the right of inspection). In State ex rel. G.M. Gustafson Co. v. Crookston Trust Co., 22 N.W.2d 911, 916-17 (Minn. 
    1946), the Minnesota Supreme Court held that the shareholders of a bank had the common law right of inspection of the banks 
    records, notwithstanding the bank’s objection that the shareholder would have access to information regarding depositors’ 
    business that the bank had an obligation to keep confidential. Furthermore, the mere fact that a shareholder is a competitor, 
    without more, does not defeat the shareholder’s right of inspection. See BBC Acquisition Corp. v. Durr-Fillauer medical, Inc., 623 A.
    2d 85, 90 (Del. Ch. 1992); E.L. Bruce Co. v. State, Del.Supr., 144 A.2d 533, 534 (1958).  See also Kortum v. Webaso Sunroofs, Inc., 
    769 A.2d 113, 124 (Del. Ch. 2000) (“stockholder's status as a competitor may limit the scope of, or require imposing conditions 
    upon, inspection relief, but that status does not defeat the shareholder's legal entitlement to relief”); Uldrich v. Datasport, Inc. 349 N.
    W.2d 286, 288-89 (Minn. App. 1984) (court ordered inspection of what corporation contended was “confidential business 
    information” even though shareholders owned a competing business, although court also enjoined competitive use of 
    information); Nationwide Corp. v. Northwestern Nat’l Life Ins. Co., 87 N.W.2d 671, 679 (Minn. 1958) (“The fact that the stockholder 
    is interested as a stockholder or otherwise in rival corporations is not of itself enough to deny the right of inspection. … It ordinarily 
    is not enough to deny the right that the information sought is of a confidential nature.”).

    Obviously, corporations have no obligation to allow inspection of sensitive or confidential records unless inspection of those 
    records is germane to the shareholder’s legitimate interests and proper purpose. See Garner v. Wolfinbarger, 430 F.2d 1093, 
    1104 n.21 (5th Cir. 1970). In News-Journal v. State ex rel. Gore 187 So. 271, 272 (Fla. 1939), the Florida Supreme Court held that a 
    shareholder “is entitled to any information affecting the financial status of the corporation but he is not entitled to be placed in 
    possession of its trade secrets and confidential communications unless they affect the financial status or the value of his stock in 
    some way.” It is important to remember that shareholders may lawfully compete with their corporation; therefore, conceivably, 
    highly sensitive competitive information might be made available to a competitor through the ruse of a shareholder inspection. In 
    enforcing inspection rights, courts are sensitive to possibility that a shareholder may have an improper purpose in seeking 
    confidential records. See Uvalde Rock Asphalt Co. v. Loughridge, 425 S.W.2d 818, 819-20 (Tex. 1968) (holding that inspection may
    be denied when the purpose is to obtain “competitive advantage” over the corporation); see also News-Journal Corp. v. State ex 
    rel. Gore, 187 So. 271, 272 (Fla. 1939) (shareholder who owned competing company “entitled to any information affecting the 
    financial status of the corporation but he is not entitled to be placed in possession of its trade secrets and confidential 
    communications unless they affect the financial status or the value of his stock in some way “); State ex re. Beaty v. Guarantee Mfg. 
    Co., 174 P. 459, 460 (Wash. 1918) (competitor was not entitle to inspect minutes of board of directors). The danger, however, must 
    be real.  Courts have universally rejected the argument that the common-law right of inspection must be limited merely because 
    the shareholder might make improper use of the information.  “Many legal rights may be the subjects of abuse, but cannot be 
    denied for that reason. … The possibility of the abuse of a legal right affords no ground for its denial.” Guthrie v. Harkness, 199 U.
    S. 148, 155-56 (1905)

    D.    Preliminary or interim records of account

    Although not yet addressed by Texas courts, some courts in other jurisdictions have restricted the right of inspection by holding 
    that corporations are not required to permit inspection of draft or tentative documents such as preliminary interim financial 
    statements. Bitters v. Milcut, Inc., 343 N.W.2d 418, (Wis. 1983) (holding that interim corporate financial statements were not within 
    the phrase “books and records of account”); State ex rel. Jone v. Ralston Purina Co., 358 S.W.2d 772 (Mo. 1962) (holding 
    confidential interoffice communications, such as preliminary profit and loss statements, monthly profit analysis reports, and 
    monthly tentative balance sheets, that were tentative studies prepared purely for the information of the management, were not 
    comprehended within the meaning of “books” with respect to which shareholders enjoy statutory inspection rights).

    E.    Attorney Client Privilege

    An attorney representing a corporate client does not owe any duty directly to the shareholders. Gamboa v. Shaw, 956 S.W.2d 662, 
    664-65 (Tex. App.—San Antonio 1997, no writ).  See also Felty v. Harweg, 523 N.E.2d 555, 555 (Ill. App. 1988) (“A shareholder in an 
    ordinary corporation does not thereby become a beneficiary of an attorney-client relationship between a lawyer and the corporation 
    in which he owns shares. The lawyer for the corporation does not, thereby, owe a fiduciary duty to the shareholder.”); Brennan v. 
    Ruffner, 640 So.2d 143, 146 (Fla. App. 1994) (“The duty of an attorney for the corporation is first and foremost to the corporation, 
    even though legal advice rendered to the corporation may affect the shareholders. Cases in other jurisdictions have similarly 
    held.”); Pelletier v. Zweifel, 921 F.2d 1465, 1491 n. 60 (11th Cir. 1991) (“a corporation's attorney owes no such fiduciary duty to the 
    corporation's shareholders”). Therefore, shareholders are outside the privilege between the corporation and its attorneys, and the 
    right of inspection does not extend to documents subject to the attorney-client privilege.  In Burton v. Cravey 759 S.W.2d 160, 162 
    (Tex. App.—Houston [1st Dist.] 1988, no writ). the Houston First Court of Appeals suggested in dicta that the attorney-client 
    privilege must be balanced against the right of inspection.  The Texas Supreme Court specifically disapproved this dicta in Huie v. 
    DeShazo 922 S.W.2d 920, 924 (Tex. 1996), in the course of holding that a trustee has an attorney-client privilege even against the 
    beneficiary of the trust:  “[T]o the extent that the court held that the owners' statutory right of inspection somehow trumped the 
    privilege for confidential attorney-client communications, we disapprove of its holding, for the reasons previously discussed. We 
    also disapprove of the court's dicta that the trial court could, in its discretion, decline to apply the attorney-client privilege even if all 
    the elements of Rule 503 were met.” See also Schein v. Northern Rio Arriba Elec. Co-op, Inc., 932 P.2d 490, 495 (N.M. 1997) 
    (“Corporate documents that are subject to the attorney-client privilege may be withheld from shareholders.”); Riser v. Genuine 
    Parts Co., 258 S.E.2d 184, 186 (Ga. App. 1979) (affirming denial of request for attorney's opinions). However, the Texas Supreme 
    Court also held that corporate records do not become shielded from inspection by the attorney-client privilege merely because they 
    are in the possession of the corporation’s attorney. 922 S.W.2d at 924.

    F.    Work product

    Although not addressed yet by Texas courts, the rule excluding attorney-client privileged documents from shareholder inspection 
    should also apply to the work product of the corporation’s attorney and consulting experts. See Barnett v. Barnett Enterprises, Inc., 
    182 So.2d 728 (La. App. 1966) (holding that shareholder inspection rights did not extend to valuation estimates prepared by the 
    corporations experts for use in the appraisal proceeding).

    G.    Fifth Amendment

    Corporations are not entitled to refuse shareholder inspection on Fifth Amendment grounds. See Stone v. Martin, 289 S.E.2d 898 
    (NC App. 1982).

    H.    Documents Not Discoverable in Litigation

    Lawyers representing corporations sometimes object to a requested inspection on bases drawn from the rules of civil procedure, 
    such as that the description of the documents in vague or ambiguous, or that the request is overly broad and unduly burdensome, 
    or is irrelevant to the subject matter of the on-going dispute with the shareholder.  These types of objections are completely 
    inappropriate in the context of a shareholder’s exercise of inspection rights.  The substantive rights to inspect corporate 
    documents and the procedures for demanding an inspection are completely independent from the discovery rules in civil 
    litigation.  San Antonio Models, Inc. v. Peeples, 686 S.W.2d 666, 670 (Tex. App.—San Antonio 1985, no writ).  In Burton v. Cravey, 
    759 S.W.2d 160, 162 (Tex. App.—Houston [1st Dist.] 1988, no writ), the court held that objections under the rules of discovery do 
    not apply to a request for inspection, so that a corporation may not complain that a demand is “overly broad, unduly burdensome, 
    and requires the production of irrelevant information.”  Likewise, restrictions and procedural requirements on a shareholder’s right 
    of inspection do not apply to or affect a shareholder’s discovery requests in on-going litigation, and a shareholder who is in 
    litigation with the corporation is free to use either or both methods of discovery.  Se San Antonio Models, Inc. v. Peeples, 686 S.W.
    2d at 670.  A shareholder engaged in litigation with the corporation may very well be entitled to inspect corporate records that 
    would otherwise not be discoverable in the lawsuit.  Conversely, a shareholder may be able to obtain some records in discovery 
    that he would not otherwise be entitled to inspect, that the fact that a document might be “discoverable” in litigation does not 
    establish a shareholder’s right to inspect it.  See Kaufman v. CA, Inc., 905 A.2d at 754.

    V.    Proper Purpose

    A.    Statement of a Proper Purpose

    The statutory requirement on the shareholder seeking inspection is merely to state a purpose.  There is no requirement that that 
    the shareholder state a “proper” purpose. “[TBCA art. 2.44] Section B contains no requirement that such a shareholder of record 
    must prove a ‘proper’ purpose, merely that he must ‘state’ his purpose.” Citizens Association for Sound Energy v. Boltz, 886 S.W.
    2d 283, 291 (Tex. App.—Amarillo 1994, writ denied), cert. denied 516 U.S. 1029 (1995). Neither is he required to state every 
    purpose that he has, that he represent that the purpose identified is the only purpose, or that he represent that he does not have 
    an improper purpose.  However, if the purpose stated is not proper, then the corporation will have a easy time resisting  any effort 
    to enforce the shareholder’s inspection rights. For corporations subject to the Business Organizations Code, the law now requires 
    that the written demand state a “proper purpose.”  BOC §21.222. Therefore, care should be taken to state purposes in the demand 
    that are recognized as proper.

    B.    What Constitutes a Proper Purpose


    The principal limitation on a shareholder’s inspection rights is that the shareholder must act with a “proper purpose.”  Generally, a 
    proper purpose is one that is reasonably related to the protection of stockholder’s interest as a shareholder (including protection 
    of the corporation’s interests that affect the shareholder indirectly); conversely an improper purpose is one that seeks to injure to 
    the corporation or the shareholders. See Guaranty Old Line Life Co. v. McCallum, 97 S.W.2d 966, 967 (Tex. Civ. App.—Dallas 1936,
    no writ).  Hamilton, Miller & Ragazzo, 20A Texas Practice: Business Organizations §34.6, at p. 34 (2004) state, “Note that a proper 
    purpose is one that bears upon the protection of the shareholder’s interest and that of other shareholders in the corporation.” See 
    also Tatko v. Tako Bros. Slate Co., Inc., 569 N.Y.S.2d 783, 918 (N.Y.A.D. 1991). (“[P]roper purposes are those reasonably related to 
    the shareholder's interest in the corporation. They include, among others, efforts to ascertain the financial condition of the 
    corporation, to learn the propriety of dividend distribution, to calculate the value of stock, to investigate management's conduct, and 
    to obtain information in aid of legitimate litigation.”)



    1.    Ascertain Value of Shares

    Probably the most common reason for a shareholder’s wanting to inspect corporate records is to determine the financial 
    performance of the company and other information that bears ultimately on the value of the shareholder’s ownership interest.  The 
    stated purpose of “ascertaining the value of his shares” is a “clearly proper and legitimate” purpose for inspection.  Chavco 
    Investment Company, Inc. v. Pybus, 613 S.W.2d 806, 808 (Tex. Civ. App.—Houston [14th Dist.] 1981, writ ref’d n.r.e.).

    2.    Investigate Mismanagement and Waste

    In Chavco Investment Company, Inc. v. Pybus, 613 S.W.2d 806, 808 (Tex. Civ. App.—Houston [14th Dist.] 1981, writ ref’d n.r.e.),  the 
    court held that the stated purposes of “determin[ing] whether the rental on a building, the principal asset of the corporation, was a 
    reasonable rental or whether the rental was so unreasonably low as to result in corporate waste,” “examining expenditures, 
    determining whether there was excessive compensation being paid to officers and directors, whether corporate funds were used 
    for personal purposes, and whether there was corporate mismanagement” “were clearly proper and legitimate reasons for 
    wanting to inspect the books of the corporation.”

    3.    Communication With Other Shareholders

    Inspection of shareholder lists for the purpose of obtaining the names and addresses of other stockholders to inform them of 
    grievances or concerns is per se a proper purpose.  “We can see no good reason why a stockholder in a corporation who is 
    dissatisfied with the internal management of the corporate affairs should not have the right to call to the attention of his fellow 
    stockholders conditions in the corporate management with which he is dissatisfied and in good faith regards as prejudicial to the 
    best interest of the corporation and its stockholders. In our opinion, stockholders have such right.”  Grayburg Oil Co. v. Jarratt, 16 S.
    W.2d 319, 320 (Tex. Civ. App.—El Paso 1929, no writ); see also Conservative Caucus Research Analysis & Education Foundation, 
    Inc. v. Chevron Corp., 525 A.2d 569 (Del. 1987) (desire to communicate with other shareholders, particularly regarding matters of 
    concern in advance of a shareholder’s meeting, is proper as a matter of law). “Courts probably tend to be more lenient in granting 
    access to shareholders lists than to other books and records.” Hamilton, Miller & Ragazzo, 20A Texas Practice: Business 
    Organizations §34.10, p. 41  (2004).

    However, the Delaware Supreme Court has held that the stated purpose of communicating with other shareholders was not 
    sufficient if the nature of intended communication not disclosed.  Northwest Industries Inc. v. BF Goodrich Co., 260 A.2d 428, 429 
    (Del. 1969). Also in Retail Property Investors, Inc. v. Skeens, 471 S.E.2d 181, 183 (Va. 1996), request for shareholders list not 
    allowed for purpose of contacting other shareholders regarding possible lawsuit against corporation. In Shabshelowitz v. Fall 
    River Gas Co., 588 N.E.2d 630, 632-33 (Mass. 1992), the Massachusetts Supreme Court held that a shareholder’s request to 
    inspect and copy the stock ledger for the purpose of contacting other shareholders and soliciting the purchase of their shares was 
    not proper. The same result was reached by the Supreme Court of Maine in Chas. A. Day & Co. v. Booth, 123 A. 557, 558-59 (Me. 
    1942). However, in Madison Liquidity Investors 103 LLC v. Carey, 739 N.Y.S.2d 18 (N.Y. App. 2002), a New York appellate court 
    permitted inspection of stockholder list where avowed purpose was to solicit purchases and where there was no evidence of 
    wrongful intent or that anything other than market would dictate price.

    C.    True purpose

    The problem arises when the corporation believes that the purpose stated is not the true purpose or that there is another purpose 
    that is improper.  “And it is very easy for controlling shareholders to view any request to inspect with suspicion that easily could 
    lead to the rejection of a request on the ground that a claimed ‘proper purpose’ was in fact ‘improper.’” Hamilton, Miller & Ragazzo, 
    20A Texas Practice: Business Organizations §34.6, p. 35 (2004).  The issue of what is the true purpose and whether that purpose 
    is improper must be resolved through the courts once the corporation refuses to allow inspection.  That issue will be dealt with in 
    a separate article on the enforcement of inspection rights.  What is important here is to determine what constitutes the statement 
    of a proper purpose.

    VI.    Compliance

    A.    Furnishing a Substitute Is Insufficient

    A corporation may not satisfy its obligation to permit shareholder inspection by offering a substitute, such as an annual statement. f
    “The fact that the defendant had its books audited annually and furnished its officers copies thereof is no defense in this 
    proceeding. … The right [of shareholder inspection] cannot be defeated by an audit of the company's business and furnishing the 
    stockholder with the auditor's report.”  Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’
    d).  See also Citizens Association for Sound Energy v. Boltz, 886 S.W.2d 283, 290 (Tex. App.—Amarillo 1994, writ denied) (The 
    furnishing of a financial statement of the corporation in lieu of the original financial records is not sufficient to satisfy a right to 
    inspect the corporate books), cert. denied 516 U.S. 1029 (1995); Moore v. Rock Creek Oil Corp., 59 S.W.2d 815, 819 (Tex. Comm’n 
    App. 1993, jmt adopted) (“Defendants in error are not entitled to defeat plaintiffs in error's statutory right of inspection by offering 
    them the substitute of financial statements issued by the company or an auditor's report made at its instance. … The right thus 
    granted by the statute cannot be bartered away by the officers of the corporation.”)

    B.    Conditions

    A corporation may require some reasonable conditions on the inspection so as to protect the rights of other shareholders and 
    avoid harm to the corporation.  However, the courts tend to be skeptical about such conditions and will not permit the corporation to 
    substantially abridge the shareholder’s right.  In Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 151 (Tex. App.—Amarillo 
    1930, writ ref’d), the corporation agreed to allow inspection and audit of the books and records but imposed a number of onerous 
    conditions.  The shareholders agreed to some but not all of the conditions, and the corporation refused to allow the inspection.  
    The trial court ordered the corporation to permit the inspection and audit and imposed following conditions on the shareholders in 
    the order:  That the shareholders bear all expenses and not unnecessarily interfere with the conduct of the business; that no 
    valuable deeds or other instruments, contracts, or any of the books or papers from the defendants' office; that the plaintiffs post a 
    $10,000 bond for the safe redelivery to the corporation of all documents; that plaintiffs use a Texas CPA; and that the examination 
    and audit be conducted continuously and diligently.  The plaintiffs did not challenge the conditions imposed by the district court, 
    and the court of appeals affirmed the judgment. The court of appeals seemed to accept the notion that some reasonable 
    conditions might be imposed by the corporation or ordered by the court; however, the court of appeals stated in dicta: “We think the 
    court's judgment and the conditions imposed upon plaintiffs are even more liberal than defendants could insist upon under the 
    law.”  Id. at 152.

    1.    Bond

    The corporation may not require shareholders to post a bond to guaranty the safety or redelivery of documents, “unless it had been 
    shown that the plaintiffs had threatened or would likely take possession of valuable records, deeds, etc.”  Johnson Ranch Royalty 
    Co. v. Hickey, 31 S.W.2d 150, 152 (Tex. App.—Amarillo 1930, writ ref’d).

    2.    Designation of Agent or Agent’s Qualifications

    A shareholder is entitled to conduct an inspection personally or through an agent, and the corporation has no right to dictate who 
    the agent may be or to limit the plaintiff’s choice of agent by, for example, requiring the agent to have particular qualifications.  In 
    Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 152 (Tex. App.—Amarillo 1930, writ ref’d), the court of appeals held that the 
    corporation was not entitled to specify that the shareholders’ agent conducting the inspection be a Texas CPA.

    3.    Limitations on time or deadlines for completion

    In Johnson Ranch Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d), the court of appeals held that 
    the trial court’s requirement that the examination, once commenced by plaintiffs, be conducted continuously and diligently until 
    finished” is “more favorable to them than the law justifies.” The court held that the law requires that a “corporation's books and 
    records shall at all reasonable times be open to the inspection of the stockholder, and does not limit them to any particular hours 
    or any period or periods of time which may be reasonable.”  Id.

    4.    Confidentiality Agreement

    A common condition, generally approved by the courts, is a reasonable confidentiality agreement preventing the shareholder from 
    using the information obtained to compete against the corporation or otherwise injure the corporation, particularly if the 
    shareholder works for a competitor or there is some other reasonable basis for concern.  A shareholder otherwise entitled to 
    inspection “may be limited in its use of any information where the information is confidential and release would harm the 
    company.”  Pershing Square, LP v. Ceridian Corp., 923 A.2d 810, 816 (Del. Ch. 2007).  “[I]t is customary for any final order [in a § 
    220 action] to be conditioned upon a [reasonable] confidentiality [agreement].” Id. at 820; see also CM&M Gourp, Inc. v. Carroll, 453 
    A.2d 788 (Del. 1982) (holding that shareholder’s “secondary purpose” to get financial information that might be helpful to a third 
    party did not preclude inspection, but conditioned inspection on an agreement of non-disclosure). In Ihrig v. Frontier Equity 
    Exchange Assn, 128 P.3d 993, 999 (Kan App 2006), the court held that the corporation may limit disclosure to those records 
    reasonably related to the proper purpose, and may prescribe limitations or conditions on disclosure as deemed just and proper, 
    including prohibiting on any publication of information contained in records.

    C.    Delay

    “The law does not sanction an indefinite delay in granting the right to inspect. The right of inspection is a present right when the 
    demand is made at a reasonable time and an indefinite delay in according this right is equivalent to a denial of it.” Johnson Ranch 
    Royalty Co. v. Hickey, 31 S.W.2d 150, 153 (Tex. App.—Amarillo 1930, writ ref’d).

    D.    Right to Photocopy

    In addition to inspecting the books and records, the shareholder has the right to make photocopies.  Cotton v. Weatherford 
    Bancshares, Inc., 187 S.W.3d 687, 698 (Tex. App.—Fort Worth 2006, pet. denied).

    VII.    Other statutory rights to corporate records

    A.    Shareholder Lists

    In addition to the general right of inspection, there is also a statutory right to inspect a shareholders list before the any meeting of 
    the shareholders. TBCA 2.27(A); BOC §§21354, 21.372. Not less than ten days before the meeting, the corporation is required to 
    make available for inspection at its principal place of business (or post on the internet) a complete, alphabetical list of the 
    shareholders entitled to vote at the meeting, with the address of and the number of shares held by each.  The corporation does not 
    have to provide telephone numbers or email addresses.  The list must be continuously available during normal business hours 
    for a period of at least ten days.  Shareholders are entitled to inspect and copy the list without a written demand, proper purpose or 
    prior notice.

    B.    Voting Trust Agreements

    Copies of voting trusts and voting agreements must be deposited with the corporation and be kept available for inspection by 
    shareholders, but the shareholder must follow the same procedures as with other books and records.  TBCA arts. 2.30A, 2.30B; 
    BOC §§6.251, 6.252.

    C.    Annual Reports

    In addition, a corporation must mail its most recent annual and interim financial statements to any shareholder who requests 
    them in writing. TBCA art. 2.44F; BOC § 21.219.

    D.    State and Federal Tax Returns

    A shareholder of record who owns at least 1% of the corporation’s outstanding stock has the right to inspect the corporation’s 
    federal income tax returns.   26 U.S.C. §6103(e)(1)(D)(iii).  Any shareholder has the right to inspect Texas franchise annual 
    reports.  Texas Tax Code §171.209.

    E.    Notice of indemnification

    If the corporation has agreed to indemnify or advance expenses to any director, the corporation must report that fact to the 
    shareholders in writing with or before the notice of the next shareholders’ meeting, and in any case within twelve months of the 
    indemnification or advance.  TBCA art. 2.02-1(S); BOC § 8.152.

    VIII.    Director’s Right of Inspection

    In disputes and litigation among shareholders of closely-held corporations, the shareholder be excluded from access to corporate 
    records and information is often also a director.  When this situation arises, the withholding of information takes on an entirely 
    different dimension.  The management of Texas corporations is entrusted to the directors.  Implicit in that idea is that the directors 
    must have access to all information within the corporation.  Whatever rights there may be for management to withhold information 
    from a shareholder, those rights vanish when the shareholder is also a director.

    A.    Right of Inspection is Absolute

    The right of a director of a corporation to inspect the corporate books and records is absolute. Chavco Investment Company, Inc. v. 
    Pybus, 613 S.W.2d 806, 810 (Tex. Civ. App.—Houston [14th Dist.] 1981, writ ref’d n.r.e.).   Because directors of a corporation are 
    charged with managing the business and affairs of the corporation, BOC §21.401; TBCA art. 2.31 “It would seem to be axiomatic 
    that the individual director cannot make his full contribution to the management of the corporate business unless given access to 
    the corporation's books and records. The information therein contained is ordinarily requisite to the exercise of the judgment 
    required of directors in the performance of their fiduciary duty so much so that the directors' right of inspection has been termed 
    absolute, during their continuance in office at all reasonable times.” Chavco Inv. Co., Inc. v. Pybus, 613 S.W.2d at 810 (quoting :  
    Fletcher, Cyclopedia of the Law of Private Corporations s 2235)  At the time Chavco Inv. Co., Inc. v. Pybus was decided the Texas 
    Business Corporation Act did not specifically confer upon directors the right to inspect the corporate books, however, the court of 
    appeals held that this right existed by common law.  Id.  The current TBCA and BOC specifically provide directors the right of 
    inspection and a remedy for violation of that right. TBCA art. 2.44(B).  BOC §3.152(a).  The director does not have to have a “proper” 
    purpose to inspect, so long as his purpose is “reasonably related to his service as a director”: however, the director is not required 
    to state his purpose or even to make a written demand.

    B.    Attorney Client Privilege

    Frequently, when there is a dispute among shareholders, the attorney paid by the corporation will consult with one side or the 
    other, typically with the side aligned with the controlling shareholder.  In this instance, in all likelihood, the communications with the 
    corporation’s attorney are not privileged as to another director.  Texas courts have not confronted this issue, although the 
    statement in Chavco Inv. Co., Inc. v. Pybus, 613 S.W.2d at 810, that the director’s right to information is “absolute” would certainly 
    seem to imply that result.  Delaware courts have confronted this issue in a number of contexts and have uniformly held that the 
    attorney-client privilege between the corporation and the corporate counsel does not shield communications from a director.  
    When a corporation employs legal counsel, each of the members of the board of directors has a status co-equal with the 
    corporation as “client.”  “The issue is not whether the documents are privileged or whether plaintiffs have shown sufficient cause to 
    override the privilege. Rather, the issue is whether the directors, collectively, were the client at the time the legal advice was given. 
    Defendants offer no basis on which to find otherwise, and I am aware of none. The directors are all responsible for the proper 
    management of the corporation, and it seems consistent with their joint obligations that they be treated as the ‘joint client’ when 
    legal advice is rendered to the corporation through one of its officers or directors.”  Kirby v. Kirby, 1987 WL 14862 (Del. Ch. 1987).  
    As a matter of law, communications made during the tenure of any director could not have been intended to be kept confidential 
    from that director.  “Absent a governance agreement to the contrary, each director is entitled to receive the same information 
    furnished to his or her fellow board members.”  Intrieri v. Avatex, 1998 WL 326608 (Del. Ch. 1998).  Each director is as much the 
    “client” as any other member of the board.

    Furthermore, even after a director’s tenure expires or the director is removed, that director continues to be entitled to discovery all 
    communications with the corporation’s counsel that occurred during his tenure—for the obvious reason that such 
    communications were not privileged when made, and there is no legal principle that would create a privilege ex post facto. In Kirby 
    v. Kirby, 1987 WL 14862 (Del. Ch. 1987), the Delaware Chancellor held that, as to attorney-client communications that occurred 
    during the tenure of former directors, it is not possible for any privilege to have been created for those communications, and 
    therefore, there is no basis for the invocation of the attorney-client privilege at a later date.

    Independently, Delaware courts have held that the corporation is prohibited from asserting the attorney-client privilege as to 
    information to which a director is entitled.  A corporation may not “assert the privilege to deny a director access to legal advice 
    furnished to the board during the director’s tenure.”  Moore Business Forms, Inc. v. Cordant Holdings Corp., 1996 WL 307444 (Del. 
    Ch. 1996).

    In a situation where there is a dispute with one of the directors, where the board or management has a good faith reason for 
    consulting with counsel without the participation of that director, the law does provide mechanisms for preserving the privilege.  As 
    the Chancellor held in Moore Business Forms, inc. v. Cordant holdings Corp., 1996 WL 307444 (Del. Ch. 1996):  “Holdings had 
    alternative means to enable its directors (other than Mr. Rogers) to receive confidential attorney advice not discoverable by Moore.  
    Holdings could have bargained for such protections in the Stockholders Agreement. Alternatively, and independent of the 
    Stockholders Agreement, the Holdings board could have acted, pursuant to 8 Del.C. § 141(c) and openly with the knowledge of 
    Moore and Rogers, to appoint a special committee empowered to address in confidence those same matters. Under either 
    scenario the special committee would have been free to retain separate legal counsel, and its communications with that counsel 
    would have been properly protected from disclosure to Moore and its director designee. Neither approach was followed here.