Is a Corporation Required to Let Former Shareholders Have Access to Records for Inspection and Copying?
By: Charles B. Jimerson, Esq.
Jimerson Birr
Florida law guarantees access to corporate records only to present shareholders. Urfirer v. Cornfeld, 408 F.3d 710, 726 (11th Cir. 2005). Where a person demands to inspect records while one is a shareholder, but the person subsequently loses shareholder status, it is unclear whether that person is still entitled to inspect the records. For those in-house lawyers in companies that face ownership transitions or burdensome records requests, the answer to how far you must go in responding to transitional or former shareholder records requests largely depends on the facts of the case. As a general rule, the right to inspect the books and records of a company, as well as the ability to maintain an action based upon the failure to grant access to the books and records, dies when the shares are no longer owned by the shareholder.
To further understand how courts interpret these rights, it is instructive to look at how Florida courts treat the watershed moment of disposition of shares in discerning shareholder rights.
Where the Shareholder Still Owns the Shares: Cases Involving Executory Contracts to Sell Shares
An executory contract to sell the shares of the corporation does not undermine the shareholder’s demand to inspect records. Shelters, Inc. v. Mankin, 204 S.E.2d 810, 811 (1974); World Time Corp. of Am. v. Mizrachi, 702 So. 2d 284, 284 (Fla. 4th DCA 1997). This result flows from the definition of “executory contract” and the definition of “shareholder” in Florida’s corporate records statute. In World Time, the former shareholder appellee complied with the statutory requirements, and the appellant corporation refused to grant him access to the records, based upon its erroneous belief that he did not constitute a shareholder within the meaning of the statute. The former shareholder was a 50% shareholder in World Time Corporation of America. Id.
Though the appellate record is devoid of whether the liquidation was voluntary or involuntary, he entered into a written agreement to sell his shares to the other 50% shareholder. Id. The former shareholder placed his stock certificates, endorsed in blank, into an escrow account, with instructions to deliver the stock certificates when the other shareholder had completed payments approximately fifteen years later. Id. Two and one-half years after the parties had entered the agreement, the purchasing shareholder defaulted on his interest payments and subsequently refused to make any more payments. Id. The former shareholder then gave the purchasing shareholder and the corporation notice of his intent to inspect the corporate records. Id. Books and records access was denied, and the former shareholder sued.
The Court determined that the records requesting shareholder fit within the statutory definition of a “shareholder," since he retained beneficial ownership of the stock after it was placed in escrow. Id. at 284-85 (citing Phillips v. Zimring, 284 So. 2d 233, 235 (Fla. 2d DCA 1973)) (stock transfer law relating to effect of endorsement of security involves legal title only, but not the "broad field" of equitable rights and interests); Zell v. Cobb, 566 So. 2d 806, 808 (Fla. 3d DCA 1990) (instrument deposited in escrow does not take effect as fully executed contract until enumerated future condition or event occurs). Thus, the appellate court affirmed the trial court's order compelling inspection of the corporate records and reinforcing that until full and final transfer of shares has been effectuated through the discharge of future conditions, Florida law entitles the liquidating shareholder with statutory inspection rights.
Fla. Stat. § 607.1602(10) defines a “shareholder” as “a record shareholder, a beneficial shareholder, or an unrestricted voting trust beneficial owner.” A “record shareholder” includes a person “in whose name shares are registered in the records of the corporation.” Fla. Stat. § 607.01401(64). However, on the other hand, an executory contract is a “contract that remains wholly unperformed or for which there remains something still to be done on both sides.” Contract, Black’s Law Dictionary (11th ed. 2019). Therefore, it appears that Florida courts have made statutory carveouts for forms of executory contracts to sell shares of a corporation as instruments that preserve shareholder rights until completion of the contract.
In other words, until all material conditions of a buyout agreement have been completed, so long as the buyout agreement language preserves final transfer rights until the respective conditions have been completed, the shares (and all concomitant ownership rights) of the corporation will not be transferred in final. As in the World Time matter, if the shares of the corporation have not yet been transferred, the shareholder remains the person “in whose name shares are registered in the records of the corporation.” Thus, the shareholder remains a shareholder for purposes of demanding corporate records. This result makes sense because the transfer of the shares may be conditioned on the buyer’s performance or on other occurrences.
Completed Transactions: Cases Involving Completed Sales of Shares
Where a contract for the sale of shares is performed and no longer executory, the shareholder likely loses its right to inspect corporate records. Although no Florida case explicitly addresses this question, the case of Fritz v. Belcher Oil Co., 363 So. 2d 155, 158 (Fla. 3d DCA 1978) is instructive. There, a shareholder demanded records under Section 607.157 of the Florida Statutes, which has since been repealed and replaced with Sections 607.1601 through 607.1604. The corporation refused his inspection, and the shareholder subsequently sold his shares. The shareholder later sued the corporation for the statutory penalty that former Section 607.157 provided.
The Fritz court relied heavily on the case of McCormick v. Statler Hotels Delaware Corp., 203 N.E.2d 697, 702 (Ill. App. Ct. 1964). In McCormick, the court found that:
[I]t seems clear . . . that one need not be a shareholder of a corporation at the time the case comes to trial, or even at the time the suit is filed. A properly qualified shareholder has a cause of action if he is refused permission to see the books and records for a proper purpose. What he does with the stock thereafter does not matter so far as the penalty is concerned. The ten percent fine is in the statute to punish corporate officers or a corporation which violates its legal duty to a shareholder to permit such shareholder to use the corporate books and records, including stockholder lists, for a proper purpose. That duty is breached when the refusal is made. A shareholder does not waive his right to sue for this breach of duty by subsequently selling his stock any more than one waives the right to sue for damages done to an automobile when he sells his car. The case is not a moot one.
Id. at 701.
Thus the Fritz court ruled that, under Florida law, a shareholder’s sale of his shares, which sale is made after a proper written demand for inspection, etc., and after a refusal for such inspection, etc., by a corporation, does not preclude his right to maintain an action for a penalty as provided by statute, and that such cause of action for a penalty accrues and remains from the time that a proper written demand was made and subsequently refused, i.e., the cause of action relates back to the time that a proper demand was made. Fritz v. Belcher Oil Co., 363 So. 2d 155, 158 (Fla. 3d DCA 1978).
One thing worth noting in reconciling Florida law on the issue is that standing to enforce shareholder rights still requires a showing of proper purpose. As the instructive McCormick court said in rejecting the former shareholder’s argument that he was still entitled to inspect the corporate records:
“It was perfectly possible for the Court below to grant McCormick a penalty for the breach of duty owed to him and yet find he could not have the records at this point. . . . [It] is a different question from whether or not McCormick still has a right to see the lists. While he may have had a proper purpose at the time he originally sought the lists, we cannot see what purpose he could have in doing so now.”
Therefore, unless a shareholder can identify a proper purpose for inspecting the corporate records after a completed sale of his or her shares, it is likely that the completed sale cuts off the shareholder’s right to inspect the corporate records.
Cases Where Shareholder Status is Otherwise at Issue
There are many other types of cases where shareholder status is at issue in litigation. In these types of cases, the court’s determination as to shareholder status will determine statutory entitlement to inspect records. For example, in Urfirer v. Cornfeld, 408 F.3d 710, 726 (11th Cir. 2005), the plaintiff demanded to inspect the corporate records before transferring his shares to his ex-wife pursuant to a settlement agreement in a divorce. He argued that he was still entitled to inspect the corporate records after transferring the shares. The Eleventh Circuit found otherwise. The plaintiff had failed to promptly fulfill his obligation to transfer the shares. Although the plaintiff was a shareholder of record when he made the demand to inspect the corporate records on January 22, 2003, the divorce court had held that the plaintiff had no ownership rights in the stock as of June 1, 2001. Therefore, the plaintiff was collaterally estopped from claiming entitlement to inspect the corporate records.
While outside of the purview of this particular article, it should be noted that the above-referenced scenarios do not address circumstances where the propriety of the ouster and/or redemption of shares is at issue. Logic dictates, and case law supports, that if a company wrongfully terminates a shareholder and acquires shares through an unsustainable repurchase process, the shareholder will not lose contractual, statutory, legal, or equitable rights afforded by virtue of share ownership.
Conclusion
In conclusion, when a shareholder demands to inspect corporate records, but subsequently loses its/their shareholder status, there are several possible results, depending on the facts of the particular case. The Florida Statutes do not specifically address this situation, which is when intelligent and intentional advocacy can really pay off. Jimerson Birr attorneys have represented businesses of many sorts and their purchasing or selling shareholders in issues pertaining to share transactions, corporate transitions, and records requests.