Opening your books to shareholders?

Wednesday, 18 May 2016


    What should you do when a shareholder asks to review the company books? James Morvell considers the risks for company directors and the level of access they are legally required to give.

    Boards may face difficult choices when a shareholder requests access to company documents, starting with questions as to what actually constitutes “company books” and how many documents (if any) need to be handed over.

    In some cases, a company’s constitution or its shareholders’ agreement (if one exists) may grant rights to shareholders to inspect the company’s books. Shareholders also have a right under section 247A of the Corporations Act 2001 (Cth) (Act) to make court applications acting in good faith and for a proper purpose to inspect company books.

    Company directors need to consider whether disclosure will harm the company and whether to resist when faced with such requests. They also need to discuss the issue with the appropriate executives and legal counsel.

    However, if it is inappropriate to voluntarily grant access to the documents requested by a shareholder, it is important to know how a court is ultimately likely to consider an application (if made by the shareholder).

    The Engel case

    In the recent case of Engel v National Biodiesel Limited [2015] FCA 1114 (Engel), the Federal Court explored the “books of the company” definition, and the orders available regarding a shareholder’s section 247A application.

    Mr Engel, a shareholder of National Biodiesel Limited (NBL), applied to the court to access certain documents after NBL refused his direct request for documents. Mr Engel wanted to examine what he considered to be a series of alleged related party transactions between NBL, its subsidiary National Biodiesel Distributors Australia Pty Ltd, its major shareholder National Biodiesel Group Pty Ltd 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.

    Establishing “books of the company”

    “Books of the company” is not defined (generally or in the context of section 247A). However, the Act does include a wide definition of “books”, which includes (without limitation):

    • A register
    • Any other record of information
    • Financial reports/ records
    • A document

    In Engel, the Federal Court found the phrase “of the company” to mean property of the company. Notably, it also found that where a parent company receives material from its subsidiary for inclusion in board packs, ownership of the materials passes to the parent and becomes part of its records.

    How many documents?

    Shareholders will rarely be granted unfettered access to all of the books of the company.

    In Engel, the Court was satisfied the application was in good faith and for a proper purpose, as Engel sought to investigate possible contraventions of the Corporations Act 2001.

    Nevertheless, the court emphasised that applications under section 247A should only be for documents relevant to the purpose of the application. The court also confirmed its discretion to determine such matters, and held that certain documents sought by Mr Engel were not relevant to the inspection.

    What of protection?

    The court also explored using legal professional privilege to resist the production of certain documents. It acknowledged the importance of confidentiality in maintaining privilege and ordered Mr Engel not to disclose or copy the documents he obtained other than for analysing the related party transactions.

    Who pays the costs?

    Cost awards are determined by the court. In this case, NBL was ordered to pay the costs of Mr Engel’s application on the basis he had requested access to the documents directly from NBL (which was denied), and was largely successful in his section 247A application.

    Engel is a timely reminder that “company books” is a broadly defined term. Companies may benefit from reviewing their contractual obligations to provide access to company books and records, which may allow them to resolve such requests quickly and without going to court – however, there will be situations where court intervention is unavoidable or even necessary to deal with a shareholder who may have malicious or improper intentions.

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