What’s Going On in There? Access to Company Books and Records
Business owners like to keep the business’s financial information secret. This policy can be wise toward outsiders, customers, and even employees. But secrecy becomes a source of frustration and conflict when practiced toward co-owners of the business, and secrecy pursued too far may cross the line into illegality. It’s important as a controlling owner or as a non-controlling owner to understand the rights and responsibilities of owners that may allow (or not allow) them to inspect sensitive business books and records. In Minnesota, statutes set forth the applicable rules, sometimes in great detail. The rules vary somewhat depending on what type of business organization is involved – corporations, limited liability companies, partnerships, and cooperatives.
Corporations
Minnesota corporations are obligated by statute to keep records containing certain information and make them available at a location inside of Minnesota within ten days after written demand by a shareholder. Minn. Stat. § 302A.461 subd. 1-2. The necessary information includes, in general, shareholder- and meeting-related information, documents governing the corporation’s management, and some financial information. Id. A shareholder has a separate, absolute right to obtain from the corporation a copy of any shareholder agreement. Minn. Stat. § 302A.457 subd. 2(c).
If a shareholder seeks “other” corporate records, the shareholder must “demonstrate[] a proper purpose for the examination,” where a “proper purpose” means a purpose “reasonably related to the person’s interest as a shareholder, beneficial owner, or holder of a voting trust certificate of the corporation.” § 302A.461 subd. 4(b), (c), (d). The right to “other” corporate records varies slightly based on whether the corporation is publicly held or not. Id. A shareholder is specifically prohibited from using for any purpose “other than a proper purpose” information obtained from the corporation by exercise of statutory rights. Id.subd. 4b.
If a corporation can show that premature disclosure of confidential information would be likely to cause competitive injury to the corporation, then it can ask a court to issue a protective order permitting the corporation to withhold portions of its records for a reasonable time, in total not more than 36 months. Id. subd. 4a. A corporation can also ask a court for a protective order to limit a shareholder’s use of information obtained from the corporation. Id. subd. 4b.
Minnesota courts have twice expounded, in published opinions, upon shareholder statutory rights to inspect books and records of a corporation. The Minnesota Supreme Court explained that the right to inspect the books and records is not to “gratify idle curiosity,” but must be justified by an explanation setting out “the interest at stake rendering an inspection necessary.” Fownes v. Hubbard Broad., Inc., 225 N.W.2d 534, 536 (Minn. 1975). If a shareholder states a “good faith purpose” by saying that the information sought is “for a proper purpose,” then the burden falls on the corporation to show, by more than “surmise and speculation,” that the shareholder’s purpose is otherwise. If the corporation does not, then the corporation is not entitled to receive a trial on the issue, and the court will order the corporation to provide access to the books and records. Id. at 473-74. A desire to “place an accurate value” on shares of stock, and to “evaluate the conduct and affairs of the corporation’s officers and majority shareholders” qualify as proper purposes. Id.
More recently, the Minnesota Court of Appeals held that a shareholder’s right to access corporate books and records can be enforced in a lawsuit under § 302A.467. Blohm v. Kelly, 765 N.W.2d 147, 157-58 (Minn. Ct. App. 2009). Section 302A.467 notably specifies that a court may award attorney fees to a shareholder who brings an action – so a corporation refusing access to books and records faces the possibility of being ordered to give access and to pay the shareholder’s fees for bringing the lawsuit, if the court decides that the shareholder should get to see the information.
Limited Liability Companies
In a limited liability company (LLC), an owner’s right to inspect books and records in part depends on what kind of LLC the company is.
- For a member-managed LLC, a member may inspect and copy “any record maintained by the company regarding the company’s activities, financial condition, and other circumstances,” but only “to the extent the information is material to the member’s rights and duties under the operating agreement” or Minnesota law. Stat. §322C.0410 subd. 1(1). A member is entitled to receive, even without requesting it, information about the company’s activities, finances, and circumstances if the information is “material to the proper exercise of the member’s rights and duties.” Id. subd. 2(2)(i). The member is entitled to demand and obtain other information concerning the company’s “activities, financial condition, and other circumstances” unless the demand is “unreasonable or otherwise improper under the circumstances.” Id. subd. 2(2)(ii).
- For an LLC that is managed by a board or by managers, the full rights to obtain information described above are held bythe managers or governors of the company, and not to the individual members. Stat. §322C.0410 subd. 2(1). A member may inspect and copy “full information regarding the activities, financial condition, and other circumstances of the company as is just and reasonable” only if the member (i) “seeks the information for a purpose material to the member’s interest as a member,” (ii) “makes a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information,” and (iii) “the information sought is directly connected to the member’s purpose.” Id. subd. 2(2). If the company receives a request from a member to inspect company information, it must within ten days inform the member what information the company agrees to provide and what information, if any, the company refuses to provide, as well the place and time that the information will be provided. Id. subd. 2(3). If there is information “material” to a decision the member is entitled to make about the company, then the company must provide all such information to the member without the member requesting it. Id. subd. 2(4).
For any LLC, the company may impose “reasonable restrictions and conditions on access to and use of information” it furnishes, including “designating information confidential and imposing nondisclosure and safeguarding obligations on the recipient.” Minn. Stat. § 322C.0410 subd. 7. The company’s operating agreement may not “unreasonably restrict the duties and rights” of the members under the statute to receive information about the company. Minn. Stat. § 322C.0110 subd. 3.
In at least one case, a Minnesota court has approved an LLC’s decision to withhold information from a member, based on the fear that the member would use the information to unlawfully compete with the company. Ross v. Candles, No. A20-1543, 2021 Minn. App. Unpub. LEXIS 730, at *23-24 (Aug. 30, 2021).
Partnerships
Of the various options for organizing a Minnesota business, the partnership form gives the owners the greatest access to the business’s information – nearly unlimited. A Minnesota partnership, including a limited liability partnership, is obligated to keep its books and records “at its chief executive office.” Minn. Stat. § 323A.0403(a). The partnership is required to provide “partners and their agents and attorneys access to its books and records.” § 323A.0403(b). No showing of a proper purpose is required. Even former partners are given an absolute right to inspect books and records “pertaining to the period during which they were partners.” Id. In fact, a partnership is obliged to supply information to partners without request by the partners if the information is “reasonably required for the proper exercise of the partner’s rights and duties” under the partnership agreement or Minnesota law. § 323A.0403(c)(1). A partnership agreement, though voluntarily signed by all the partners, may not “unreasonably restrict the right of access to books and records under section 323A.0403(b).” § 323A.0103(b)(2).
The statutory right of a partner to inspect the partnership’s books and records is subject to a few limitations which are primarily logistical in nature. Inspection must be done “during ordinary business hours,” and the partnership may impose a “reasonable charge, covering the costs of labor and material, for copies of documents furnished.” Minn. Stat. § 323A.0403(b). If a demand for information is “unreasonable” or “otherwise improper under the circumstances,” it may be refused. Minn. Stat. § 323A.0403(c).
Statutory rights to inspect books and records are arguably superfluous for a partnership. In a partnership all partners have a legal duty “to render to any partner on demand true and full information as to all things affecting the partnership,” and that duty may not be altered by contract. Triple Five of Minn., Inc. v. Simon, 280 F. Supp. 2d 895, 901-02 (D. Minn. 2003) (quotation omitted). Even if the Minnesota statutes didn’t mention a partner’s right to examine books and records, each partner would still owe the others a “broad common law duty to disclose all material facts, whether requested to do so or not.” Id. (quotation omitted).
Cooperatives
Minnesota law specifically addresses the right of members of a co-op or cooperative organized under Minn. Stat. chapter 308B to obtain books and records. The member must have been a member for at least one year or own at least 5% of the cooperative. Minn. Stat. § 308B.501 subd. 4(b). If the member meets that requirement and makes a written demand in good faith and “for a proper cooperative business purpose,” describing “with reasonable particularity the purpose and the records,” and the records are “directly connected with the described purpose,” then the cooperative must make the records available “during regular business hours at a reasonable location.” Id. subd. 4(a), (b). The member must give at least five days’ notice. Id. The member can by this method gain access to the cooperative’s meeting minutes, actions without a meeting, accounting records, governing documents, membership information, and financial statements. Id. subd. 4(a) and § 308B.245. If a member brings a lawsuit seeking inspection of cooperative records, the court may order the losing party to pay the costs and attorney fees of the prevailing side. § 308B.501 subd. 4(h).
Conclusion
If you share ownership of a business with others, the owner(s) who control(s) access to the business’s records and documents has/have an advantage over the others. But Minnesota law has a fair amount to say about the non-controlling owners’ right to delve into the business’s information, whether it is a corporation, LLC, partnership, or otherwise.
If you have questions about access to company documents, Parker Daniels Kibort can help. Give us a call at 612.355.4100.
