Examining Books and Records When Do Owners Have a Legal Right to Do So

Scenario: A shareholder or unit owner suddenly demands an inspection of the board's "books and records." Since the board is not guilty of financial impropriety or the squandering of funds, it has nothing to hide. Nevertheless, the board does not wish to deliver ammunition, which can be used to sow discord within the residential community.Question: Can the board lawfully refuse the request for an inspection of its books and records? Answer: It depends. Under common law, the term "books and records" generally applies to all documents pertaining to the board's business affairs, including the cooperative's Certificate of Incorporation or condominium's Declaration; list of shareholders or unit owners; various contracts transfer records; "tenant files"; minutes of the board and shareholder proceedings; financial statements; brokerage statements; records pertaining to receivables and payables; Books of Account (i.e., receipt and disbursement ledgers, purchase orders, and invoices); and insurance records.Cooperator's Rights

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.

Condominium Unit Owners' Rights

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.

Peter I. Livingston is a partner and Bruce A. Cholst, a senior attorney with the Manhattan-based firm of Rosen & Livingston, which specializes in representing cooperative and condominium boards.

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7 Comments

  • How does your office help Califolrnia condo to enforce inspection of books and records locating in Califfffffornia? Sincerely, Lewis
  • Can the association charge a Unit Owner to examine the Books and Records of an Association
  • If a shareholder wants a list of all the shareholders, does the Corp have the right to refuse if they feel it is to pull voting toward their own agenda?
  • Can a cooperator ask to examine the invoices that relate to a particular expense. For example plumbing expenses that he paid for that he thinks that the Coop should have paid?
  • If an HOA (Homeowners Association) in Texas has received a request, supported by Deed Restrictions and Bylaws that allow for a Homeowner to access "Books and Records", what limitations to Books and Records can be successfully asserted by the Board of Directors/HOA?
  • Activist Shareholder on Thursday, August 23, 2018 8:30 AM
    I'm planning to demand a review of the books in the not too distant future. There are many financial irregularities, false statements, unpaid liabilities, building disrepair, and purposeful distractions occurring, requiring a review of the books. The one controlling the money doesn't see this coming, so I'm using the element of surprise to my advantage. I can't wait to start the process. I have a draft request in place. I'm expecting that the board will not be cooperating, so I have an idea of which lawyer to hire. After I collect evidence of embezzlement the matter will be referred to the county district attorney for prosecution. I will provide you an update at the conclusion of the process.
  • I ended up having to do this. I'm a shareholder and with a valid purpose requested (false fy financial statements issued) to specific list of financial records through a notice composed by my attorney. I was denied for no reason, then 2 months later the co-op president puts his apartment up for sale, then I file a lawsuit near the end of the 4 months statutes of limitations of the notice, and also put in for an injunction to keep that bum from selling. I'm gonna get to the bottom of this. We gonna see.