Corporate shareholders in general are afforded certain rights, both by statute and under common law, to inspect books and records of companies in which they own an equity interest. A cooperator's right of access to building documents therefore derives primarily from his or her legal status as a shareholder in the apartment corporation.
The statutory right of inspection is rather limited in scope insofar as it relates to only three kinds of documents: financial statements; shareholder lists; and minutes of shareholder (as opposed to board) meetings. Moreover, shareholders seeking access to any of these documents are required under the statute to meet certain threshold requirements.
Shareholders owning at least five percent of a company's stock, or those who have been stockholders of record for all least six months, irrespective of the extent of their equity interest in the company, have an absolute right, upon written request, to obtain the preceding fiscal year's financials, as well as the most recent interim financials to the extent that these have been distributed to the shareholders. Most co-op bylaws require that year-end financials be distributed to all shareholders as a matter of course within four months of the fiscal year end.
Shareholders meeting the same threshold eligibility requirements, or their authorized agents, have the right, upon written demand with five days notice, to inspect and make copies of the shareholder proceedings. Such an inspection, however, may be denied in the absence of a sworn statement that the review is desired only for purposes relating to the business of the corporation and that neither the shareholder nor his authorized agent has participated in the sale of a shareholder's list over the past five years.
Thus, if a board wishes to adopt a hard line towards a request for access to these documents, it should first check to see that the demand was actually initiated by a shareholder of record (as opposed to a non-owning spouse, relative, sub-tenant, etc.) and that the shareholder meets the threshold eligibility requirements.
Under common law, shareholders are give a much broader right of review (i.e., access to the entire gamut of books and records), but this prerogative is subject to two major caveats: that the inspection demand be initiated in "good faith" and that its purpose be related to the shareholder's interest in protecting his investment in the corporation rather than advancement of his own private agenda.
In a leading court decision on inspection of corporate books and records, the court described "good faith" as follows: "an intangible and abstract quality with no technical meaning or statutory definition. It encompasses, among other things, an honest intent, the absence of a design to defraud or to seek an unconscionable advantage. An individual's personal good faith is a concept of his own mind and inner spirit, and therefore may not be conclusively determined by his protestations alone. The existence of good faith as a substantive fact therefore necessitates an examination and evaluation of external manifestations as well. This may be evidenced by facts and surrounding circumstances existing prior and subsequent to the application for the relief sought in a proceeding of this type."
Since a shareholder's good faith in seeking a review of corporate documents is presumed, the burden of proving bad faith motive is upon management. Proof of bad faith motive will almost always hinge upon the introduction of circumstantial evidence from which a court can infer that the shareholder's reason for demanding an inspection is for a purpose other than monitoring his investment.
The mere existence of hostility between the shareholder and corporate management or litigation will ordinarily not be sufficient in and of itself to establish bad faith. However, a long history of discord and controversy can be cited as circumstantial evidence that the inspection request is motivated by a desire to harass or some other improper purpose.
As previously indicated, a cooperator's statutory and common law right of inspection is predicated almost entirely on his status as a shareholder of the apartment corporation. Since condo unit owners are not corporate shareholders, it is clear that they do not have standing to avail themselves of the same legal rights to review association documents as are enjoyed by their cooperator counterparts. It may well be that condominium unit owners are limited to those rights of inspection which are expressly set forth in their association bylaws. Upon receipt of a request for inspection, the board should attempt to elicit from the shareholder or unit owner a written statement as to his or her reasons for the review. Having such a statement will assist the board in gauging its response to the request, and a shareholder or unit owner's curiosity can be satisfied through the release of a limited number of documents, which he or she seeks.