Shareholders Agreement 101: Shareholder Financial Info Rights (Part 8/10)
By Joanne Hue, published: 2023-02-24
Shareholder’s agreement is a contract that is legally binding to the shareholders of a company. It comprises provisions that direct the operation of the company, the conditions, and terms for shareholders, their rights and obligation, and the procedure for shareholder’s meetings. While the agreement is drafted with the intention of avoiding or minimizing conflicts between the shareholders, it also consists of provisions that ensure certain shareholders do not have an unjustified advantage over other shareholders.
A shareholder’s agreement is a document that oversees the operation of the company alongside the relationship between the shareholders. Shareholders have the right to access the company’s financial information provided they have good reasons to pursue that information. Accessing that information influences the decision-making process in the company, consecutively impaction the rights and obligations of the shareholders.
How can shareholder’s acquire the financial information of the company?
A Shareholder has the right to access information concerning the company’s finances and accounting- provided they seek such information in good faith. Adherence to good faith under the shareholder’s agreement concerns commitment to reasonable commercial standards and faithfulness to the agreed common purpose. This means that the shareholder cannot use the information they receive against the firm or convey the information to the firm’s competitors. The acquisition of financial and accounting information of the company also comes along with the obligation to maintain confidentiality.
In order to ensure that shareholders maintain good faith after the acquisition of the company’s financial information, they are demanded to provide the reason for the request in writing. If the company deems the request reasonable, the shareholder is given all the corporate records that are correlated to the request made by the shareholder.
Shareholders are also asked to provide a proper request for financial information to secure the interest of other shareholders. This is because in the event the information is employed against the firm, the interests of other shareholders are compromised too. Therefore, shareholder’s who wish to acquire details of the company’s financial status or transactions need to make that request in good faith for the security of the company and other shareholders.
Providing a reason for the request does not always mean that shareholders are providing genuine reasons. It could also not mean that the shareholder who has requested such information has disclosed all the reasons for the request. Despite providing a reason, the shareholder could still use the information against the interest of the company and its shareholders. Therefore, the shareholder’s agreements generally outline details to identify the reasonability of requests made by the shareholder. It also ascertains methods to prioritize which shareholder is to be provided such information. For instance, groups or individuals that hold larger shares in the company have a greater interest in the company’s status and they are also the most impacted by the company’s operation.
Financial Info & Shareholder Rights/Obligations Impact on Decisions
Within the possession of shares in a company, shareholders have certain rights and obligations. Owning a share in a company means that you have the right to access information concerning the company’s financial situation. This is also known as the right to inspect the company’s books. Contingent to the fact that a shareholder has good intentions, they may access the accounting records of a firm. This right can also allow the shareholder to demand a court to assess the value or the worth of their share. However, these rights are generally reserved for shareholders with a very high-value share.
The privilege of accessing a company’s financial and accounting information also has a large impact on the voting decisions that a shareholder makes. Shareholders have the right to cast their votes on crucial matters like the election of the board of directors for the company’s next term. Voting is also an obligation for the shareholders. The information concerning a company’s financial details may influence the vote. Individuals who hold larger shares in a company also have a more in-depth insight into the company’s financial operations. Their vote also holds larger value because shareholders the value of a shareholder’s votes is proportional to their ownership of the company. the right to vote at company meetings. The success of the business is directly linked to the interests of the shareholder. The information regarding the status of financial expenditure in a firm can be pivotal in shaping the voter’s decision. If the financial situation of the firm is detrimental to the interests of a shareholder, they are likely to not prefer the administrative strategies of the acting executive board. The shareholder is then more likely to vote in favor of replacing them.
Likewise, the board of directors and the executive head of the company hold the obligation to provide reliable information to the shareholders. They hold the primary responsibility for the company’s development and its failure. If they fail to communicate the factual status of the company’s finances, shareholders are likely to detect it when they receive the accounting information. In a similar situation, the shareholders are likely to employ their voting right to appoint a different board to acquire more reliable information. Shareholders also have the right to obtain dividends for the profits gained by the company. However, this right is not limited to shareholders receiving a share in the company’s profits. They are also obligated to bear its losses. An informed decision from the firm would many times require the reinvestment of profits. Reinvestment is a practice in which a shareholder may choose to purchase additional shares by investing the dividends back into the company instead of acquiring distribution cash. In a situation where a company requires finances and has no alternative investors, a shareholder may cause hardship for the company by demanding their share of the dividends.
If a shareholder seeks information about the company’s financial and account-related issues, the company is obliged to provide it to them on the condition that the shareholder is seeking that information in good faith. A shareholder cannot use that information in any activity that may cause harm to the company or impact the rights of other shareholders. However, there is no definite method to ensure that the information sought will be used for the purpose provided. A well-drafted shareholder’s agreement outlines methods to regulate shareholders’ acquisition and usage of the company’s financial information.
Evidently, acquiring details concerning the company’s financial operation impacts the decision-making within the company. Shareholders have voting rights that they can use to vote for or against important issues within the company. Hence, the information they receive impacts their voting decision.
You may also like:
- Shareholders Agreement 101: Rights and Responsibilities(Part 1 of 10)
- Shareholders Agreement 101: Terms and Conditions of Transferring Shares(Part 2 of 10)
- Shareholders Agreement 101: Resolving Disputes Among Shareholders (Part 3 of 10)
- Shareholders Agreement 101: Defining The Voting Rights of Shareholders (Part 4 of 10)
- Shareholders Agreement 101: The Roles and Responsibilities of the Board of Directors (Part 5 of 10)
- Shareholders Agreement 101: The terms and conditions of issuing new shares in a company(Part 6 of 10)
- Shareholders Agreement 101: The procedures of holding shareholder meetings and voting on company matters(Part 7 of 10)