The Right to Know

There is no more basic right for a shareholder than simply to know what is going on in your company.  In Texas, shareholders do not have the right to manage their corporations themselves; rather, shareholders elect directors who have all the power to run the company and make ordinary business decisions.  However, the shareholders are still the owners, and the directors answer to the shareholders. Shareholders must be adequately informed in order to exercise their right to vote and to protect their interests if the directors fail to do so. Therefore, the shareholders are entitled to information about the financial condition of the corporation, amounts paid to officers and directors, and how the company is being managed. Shareholders are also entitled to know what percentage of the company they own and who the other shareholders are.  These rights are important no matter how small the shareholder's ownership in the company.

As one Texas judge put it, “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 [of company records].” Perry v. Perry Bros., Inc., 753 S.W.2d 773, 777 (Tex. App.—Dallas 1988, no writ) (Howell, J., dissenting).

Public Information

The most basic information that a shareholder must know is who is running the corporation.  Every corporation in Texas is required to file an annual Public Information Report with the State Comptroller.  These reports are available over the internet through the Secretary of State's SOSDirect program. [Click here to access] There is a $1 charge per search. Downloads are free. Once you find your company, the Secretary of State's website will show the name, address, and registered agent of the corporation.  It will show whether the corporation is in good standing with the State.  It will also give information about whether there are affiliated companies and who the company's officers are.  The corporation's articles of incorporation or certificate of formation, together with any amendments, will be available for download in pdf format.  Also all Public Information reports filed with the Comptroller will be available for download.  These reports will identify the names and addresses for the corporation's officers and directors.  This information is available to anyone.

Key financial information is also available in the corporation's tax returns.  Every shareholder of a Texas corporation has the right to review the corporation's state franchise tax returns by presenting evidence of stock ownership to the State Comptroller.  You will need to contact the Comptroller's office directly. www.window.state.tx.us

Shareholders are also entitled to copies of the corporation's federal tax returns by contacting the IRS.  www.irs.gov

Financial Statements

Texas law requires every corporation to mail a copy of the corporation's last annual and most recent interim financial statements to any shareholder to sends a written request for the information.  These statements will not be detailed, but should give an accurate overview of the corporation's financial condition.

Shareholder Ledger

The corporation is required to keep written records showing how many shares are outstanding and who owns them. The record must also show the names and addresses of the shareholders.  A shareholder will find this information useful in contacting other shareholders or in determining if there is any suspicious stock issuance that might dilute the shareholder's ownership interest.

A shareholder is entitled to review this information at any reasonable time at the corporation's principal office by making a written request that states a proper purpose for the review.  The law favors the ready accessibility of this information, so a proper purpose can be as simple and straightforward as "I want to determine my percentage share ownership and the identities and holdings of my fellow shareholders."  The purpose should be tied to the your desire for information as a shareholder.  Wanting the names to contact other shareholders for the purpose of selling them something, for example, is not a proper purpose.  If you sell the list or otherwise misuse the information to the detriment of the corporation, then you will be barred from reviewing the list for two years.

Also, ten days before any annual or special shareholder's meeting, the corporation is required to make the list available to all shareholders at the company's headquarters during regular business hours.  No written request or advance notice is necessary to inspect the list during this period. The company is not required to give telephone numbers or email addresses.

Books and Records of the Corporation

Virtually any document in the corporation's books and records, particularly any financial information, must be made available to shareholders for inspection and copying at the corporation's headquarters.  In order to exercise this right of inspection, the shareholder needs to send the company a written request stating a proper purpose.  A proper purpose in this context is any purpose that is reasonably related to the shareholder's ownership interest.  Among the most common purposes that are always deemed to be proper include the following: assessing the financial condition of the corporation, ascertaining the value of the shares, and investigating self-dealing transactions involving the company's management.  The corporation is required to allow inspection of all documents that are reasonably related to the shareholder's purpose.  So, for example, looking at personnel files is probably not reasonably related to the proper purpose of ascertaining the value of your shares. Companies are allowed to withhold documents protected by the attorney-client privilege and sometimes documents that are not final (preliminary drafts of financial statements) that might be damaging if released prematurely.  Courts are also very suspicious of shareholders who work for competitors and who use their inspection rights to obtain proprietary information that could be used against the corporation.  Courts also allow a corporation to refuse the right of inspection if the shareholder has been abusing the right to harass the corporation. However, a shareholder is not limited to only one inspection.

Corporations are expected to cooperate with the shareholder's inspection but are not required to unduly burden the business or allow interference with operations.  Corporations may not charge the shareholder, require the shareholder to post a bond, or place undue restrictions on the timing or conditions of the inspection. Corporations may not offer a substitute for the documents requested by the shareholder--for instance, if the shareholder wants to see check registers and detailed financial information, the company can't give him summary financial statements instead.  The shareholder is allowed to make photocopies, but the corporation will probably be allowed to make a reasonable charge for use of its copy equipment.  Also, particularly if the shareholder is requesting to inspect confidential, proprietary, or other sensitive documents, the corporation will be permitted to require the shareholder to sign a reasonable nondisclosure agreement.

The shareholder is also a director of the corporation, then the rules are a little different.  The law presumes that every director is entitled to access all information in the corporation at all times, including proprietary information and attorney-client documents. A director is not required to make a written demand or have a proper purpose.

Annual Meetings

Corporations are supposed to hold annual shareholders' meetings for the purpose of electing directors and answering shareholders' questions.  If the corporation does not hold a shareholders' meeting within a period of 13 months, then any shareholder may make a written demand that the directors do so and may call a special meeting if the directors fail to do so.

Enforcing Your Rights

If the corporation violates your right to know, then your rights can be enforced in court.  If you own five percent or more of the outstanding stock or have owned your shares longer than six months, then the Texas statute provides special protections, including the right to recover your attorneys' fees.  However, all shareholders are entitled to enforce their rights in court.

If you are interested in the legal details regarding asserting and enforcing your right to know, please refer to the two legal analysis articles regarding this subject on this site:

Shareholder Rights to Inspect Corporate Records

Enforcement of Shareholder Inspection Rights—Procedural Guide