Thinking | 4 April 2016
Hand over those documents!
Does this sound familiar?
Help, a shareholder wants to inspect our company’s documents! They are saying they are legally entitled to review the ‘books of the company’? What documents actually comprise the ‘books of the company’? And, do we have to hand all of them over?
Can a shareholder have access to a company’s documents?
As a company officer, you may receive a request from a shareholder to inspect company documents/books as part of an investigation by that shareholder into certain actions of the company (or the board) which, in the shareholder’s view, may have affected the value of their investment in the company. The request may also be motivated by a sense that information is not being voluntarily provided to shareholders. Alternatively, it may be based on a desire to find a third party buyer for some or all of the shares in the company. Whatever the basis, all such requests should be carefully considered before any documents are handed over.
A company’s constitution (or even the shareholders’ agreement if one exists) may grant rights to shareholders to inspect the company’s books. Ideally, the drafters of the constitution or shareholders’ agreement will have been specific in defining the scope of the ‘company books’ definition. In our experience, this is quite often not the case.
In any event, these contractual rights will be in addition to the fundamental statutory access rights of shareholders under section 247A of the Corporations Act 2001 (Cth) (Act). A shareholder can bring an application to the court for inspection of the books of the company under section 247A. However, there is an important qualification to the access right under the Act: the application must be brought in good faith and for a proper purpose.
What do you need to do if faced with a request for access?
When faced with such a request (which could be a precursor to a statutory application being made), company directors (or other officers) should consider the following questions. In some cases, it may be appropriate to grant access prior to the court application being made to save time, costs and avoid an unnecessary dispute.
- What does ‘books of the company’ mean?
- Is it conferred by contract (company constitution or shareholders’ agreement) and, if so, does the contact clearly define the scope of the access rights or impose any conditions or qualifications on the right of access?
- What is the purpose of an inspection/request for access?
- This is a relevant and appropriate question to ask (particularly if access is being requested as a precursor to making an application under section 247A).
- Must access be granted to all company documents?
- What about confidentiality or legal professional privilege?
The recent case of Engel v National Biodiesel Ltd1 involved the Federal Court exploring the definition of ‘books of the company’ and the orders available in the context of a shareholder’s section 247A application.
Engel – the facts
Mr Engel, a shareholder of National Biodiesel Limited (NBL), applied to the Court for access to certain documents of NBL after NBL had refused his direct request. The purpose of Mr Engel’s application was to examine what he considered to be a series of related party transactions between NBL, its subsidiary (National Biodiesel Distributors (Australia) Pty Ltd (NBDA)), its major shareholder (National Biodiesel Group Pty Ltd (NBG)) and various other related parties. Mr Engel feared these transactions had resulted in assets being moved out of NBL, thereby diluting the value of his investment.
Mr Engel provided a schedule of 15 categories of documents he wished to inspect for the relevant period, including documents relating to loans from NBL to NBG, the transfer of trademarks from NGB to NBL and the transfer of NBL’s assets to related third parties.
Engel – the Court’s findings
What does ‘books of the company’ mean?
The phrase ‘books of the company’, as a whole, is not defined (ie neither generally nor in the context of section 247A). The Act widely defines ‘books’ to include:
- a register;
- any other record of information;
- financial reports/records; and
- a document.
In Engel, Justice Markovic found that the phrase ‘of the company’ meant property of the company. While this is a question of fact, a party will need to show something beyond possession to establish that a document belongs to it. Her Honour also noted that where a parent company receives material from its subsidiary for inclusion in board packs, ownership in the materials would pass to the parent and become part of its records.
What is the purpose of an inspection? Do we have to hand over all documents?
The purpose of an inspection indicates the reasons why the shareholder wants access to the ‘books of the company’. It also aids in defining the scope of an application under section 247A by determining the categories of company books that will be made accessible to the shareholder – shareholders will rarely be granted unfettered access to all of the books of the company.
In Engel, 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 (ie for a contravention of the related party provisions in Chapter 2E).
In making its determination, the Court emphasised that an application under section 247A is not for a wholesale inspection of all books, but rather for those documents that bear on and have particular relevance to the purpose for which the inspection is sought. The Court also confirmed that it has discretion to determine such matters and held that certain documents sought by Mr Engel were not relevant to the inspection.
What about confidentiality and legal professional privilege?
The issue of whether provision of some of the documents could be resisted owing to legal professional privilege was also explored. Due to the lack of common interest between NBL and Mr Engel, which could preserve the privilege in those documents if they were disclosed, the Court agreed that legal professional privilege may apply to certain documents. The Court ordered that a list of such alleged privileged documents with a brief description should be provided to Mr Engel.
The Court also considered confidentiality of the disclosed documents. Protection is already provided for in the Act at section 247C, which prevents third parties authorised to inspect the books on behalf of the applicant from disclosing any information obtained during the inspection to persons other than the applicant or ASIC. That section, however, does not impose any limitation on the disclosure or use an applicant, as opposed to a third party, can make of that information.
Justice Markovic agreed, on balance, ‘until further order’ to make confidentiality orders to prevent Mr Engel from communicating or disclosing information obtained as a result of the inspection or copying of the books, except for the purpose of investigating and determining whether proceedings should be commenced in his name or derivative proceedings in NBL’s name.
Who should pay the costs of a section 247A application?
Cost awards are determined by the Court. In Engel, however, NBL was ordered to pay the costs of Mr Engel’s application on the basis that he had requested access to the documents directly from NBL (which access was denied) and was somewhat successful in his section 247A application.
If faced with a request from a shareholder to inspect the books of the company, a company should give careful consideration to the documents requested, the purpose of the request, whether the requested documents are actually the property of the company and whether any privilege or confidentiality issues could be raised. From the Engel decision, it would seem that the concept of the ‘books of the company’ still has a very broad meaning. Importantly, the appropriate scope of the actual books that can be accessed is defined more by the purpose for which access is requested (ie only those documents that are relevant to the purpose should be provided).
If agreement can be reached with the shareholder as to an appropriate category of documents to be disclosed, and also the conditions on which disclosure is granted (eg on the basis a confidentiality agreement is first entered into with the company), this may prevent the souring of relations and also the cost, adverse publicity and disruption of court proceedings.
A company should be aware that where it rejects a shareholder’s request and the shareholder brings a section 247A application, the company may end up bearing the costs of the application if the shareholder is successful (or even partly successful).
1 FCA 1114
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