Inspection of corporate records of publicly listed companies

One of the fundamental rights of a stockholder is the right of inspection of corporate records. This right is based on his ownership of shares in the corporation and the necessity of self-protection. While the shareholders and the corporation are considered by law to be distinct entities, the shareholders have the underlying and ultimate ownership of the corporate assets and property. The right to inspect rests on this underlying ownership as well as the fact that the persons in charge of the corporation are the agents of the shareholders. The good faith of these persons in discharging their duties is a matter of interest to the shareholders. Thus, shareholders have the right to be informed of the corporate officers’ actuations.

In the Philippines, the right of inspection is statutory. Section 74 of the Corporation Code of the Philippines provides, in pertinent part, that:

"Section 74. Books to be kept; stock transfer agent.-xxx

The records of business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense." (underscoring supplied)

The problem in real-life setting is how to address requests for inspection. Should stockholders be given access to any and all kinds of records? The question is raised because Section 74 does not distinguish between kinds of records subject of the right to inspection. It merely states that "records of business transactions" of the corporation shall be open to inspection. The right of inspection appears to be broad and all-encompassing. At the same time, such right is not, and should not be construed as, absolute. In W.G. Philpotts v. Phil. Manufacturing Corp., 40 Phil. 471 (1919), for example, the Supreme Court held that the right cannot extend to purely private communications or correspondence of corporate directors or officers, nor to a formula or process not generally known which has proved of utility to the corporation in the manufacture of its products. In another case, the Supreme Court suggested that a stockholder who is engaged in a competing business may not be given unlimited access to competitive information (Gokongwei vs. Securities and Exchange Commission, G.R. L-45011, April 11, 1979).

The law and jurisprudence on the right of inspection is not as simple as it appears to be. There is a myriad of arguments on either side of the coin, so to speak. This is especially true of listed companies where the public at large is involved. Categorizing or classifying corporate records of listed companies will help in the resolution of issues pertaining to the right of inspection. For purposes of inspection, the corporate records of listed companies may be classified as follows:

(1) "Inspectable/Public" information which comprises of information that is published and/or contained in a corporation’s reportorial filings with the Securities and Exchange Commission (SEC), stock exchanges and other regulatory bodies. This includes, but is not limited to, a corporation’s articles of incorporation, by-laws, general information sheet, audited financial statements, annual reports, registration statements, disclosure statements and periodic reports required by the appropriate regulatory bodies.

(2) "Inspectable/Non-public" information which consists of information that may be made available to the stockholders of a corporation but which is not, as a matter of practice, made available to the public. This category includes, but is not limited to, minutes of meetings, journals, ledgers, vouchers and receipts and contracts.

(3) "Non-inspectable/Non-public" information comprises of information that is confidential in nature and to which the corporation has exclusive right and benefit. This type of information includes confidential formulae, trade secrets, manufacturing processes, pricing techniques and competitive information.

The classification is important because it dictates what can and what cannot be inspected by stockholders. A stockholder is entitled, as a matter of law, to inspect "Inspectable/Public" and "Inspectable/Non-public" information. On the other hand, "Non-inspectable/Non-public" information, which a corporation may appropriately regard as confidential information, is not available to a stockholder seeking to exercise the right of inspection under Section 74 of the Corporation Code.

Insofar as "Non-inspectable/Non-public" information is concerned, the corporation’s board of directors or officers may, in the exercise of their fiduciary duties using their reasonable business judgment, either opt to keep in confidence such information, or disclose the same to a select group of stockholders under certain terms and conditions designed to ensure the confidentiality of the same.

In deciding whether to allow a stockholder access to "Non-inspectable/Non-public" information, the corporation must be guided, first and foremost, by standards set by law and/or jurisprudence for the inspection of other corporate books and accounts, thus:

1. The request for inspection must be made in good faith or for a legitimate purpose (Sec. 74, Corporation Code);

2. The request for inspection must be germane to the interest of the stockholder, and not merely to gratify curiosity or any other speculative or vexatious purpose (Gonzales vs. Philippine National Bank, 122 SCRA 490 [1983]; see also, Gokongwei vs. Securities and Exchange Commission, G.R. L-45011, April 11, 1979; 5A Fletcher Cyc. Corp., Sec. 2222 at pp. 368-369 citing Fleischer Development Corp. vs. Home Owners Warranty Corp., 856 F2d 1529, see also pp. 386-388, 1995 Rev. Vol.);

3. The disclosure must not be inimical or otherwise adverse to the interests of the corporation (Koglund vs. Ormand Industries Inc., 372 A. 2d 204 [Del Ch 1976]; Gokongwei vs. Securities and Exchange Commission, G.R. L-45011, April 11, 1979);

4. It must be done at reasonable hours on business days (Sec. 74, Corporation Code); and

5. The person demanding the right to examine and copy excerpts from corporate records and minutes has not improperly used any information secured through any previous examination of the records of such corporation (id).

In addition to the foregoing, a corporation may impose other conditions as consideration for the grant to a stockholder of access to "Non-inspectable/Non-public" information. The imposition of such conditions may be warranted especially when a stockholder is attempting to exercise his right to inspect corporate books and records outside the parameters set by Section 74 of the Corporation Code.

It is to be noted, however, that there are Non-inspectable/Non-public information which corporate officers and directors cannot disclose to the shareholders. Examples are deposits and records of banking transactions. Although they are part of the business transactions of a bank, stockholders of the bank cannot have access to them because they are declared confidential by special laws and can be disclosed only under specified instances.

It is extremely important to properly respond to requests for inspection. The Corporation Code penalizes a director or officer who unlawfully deprives a stockholder of the right of inspection. Such officer or director is liable for damages to the stockholders and, if the refusal is made pursuant to a resolution or order of the board of directors, the liability is imposed upon the directors who voted for such refusal. Worse, the officers or directors concerned may be held criminally liable for violation of the Corporation Code (Section 74, Corporation Code). At the same time, directors and officers who improperly disclose corporate records and information may be held liable for gross negligence or bad faith in running the affairs of the corporation (Section 31, Corporation Code). These officers and directors may also be held criminally liable for disclosing to their shareholders information which are declared confidential by special laws like the Secrecy of Bank Deposits Act and the Foreign Currency Deposit Act.

(The author is the co-managing partner and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at 830-8000.)