Shareholder and Partner Information Rights in New Jersey
As a shareholder of a corporation or a member of an LLC, what rights do you have to information? This question often arises in the context of a dispute among the owners. If you are the controlling shareholder or member, this is not typically an issue, but for holders of minority interests, their rights to information are generally more limited, and litigation over these rights often not a viable option.
New Jersey Law Says the Sizes of Your Holdings Matters
The rights of minority shareholders to corporate information are generally governed by State statute and case law; although, the issue may be addressed in the entity’s shareholder agreement.
In New Jersey, shareholders generally have a statutory right to information dependent on the size of their holdings. Any shareholder can request, in writing, a copy of the company’s balance sheet for the most recent fiscal year and the company’s income statement. Holders of at least 5% of the outstanding shares of any class of stock or any shareholder that has held his or her stock for at least six months may ask for the right to inspect books and records of account and minutes of proceedings of its shareholders, board and executive committees and its record of shareholders provided they have a “proper purpose.” As you might imagine, what constitutes a proper purpose has been the subject of much litigation. In the context of public entities, the issue often focuses on whether the demand is reasonably related to the shareholder’s interest as a shareholder. Where the request is onerous and made to harass the company, the courts have generally restricted broad access.
This issue is more nuanced in privately held or closely-held entities. Here, minority shareholders often couch their demands for information together with claims of oppression. For corporations, the same rules regarding access to information apply to closely-held corporations; however, for partnerships and LLCs, the rules are different.
Limited Partner Rights
Limited partners generally have the same rights to access partnership records as general partners. Limited partners have the right to demand true and full information “of all things affecting the limited partnership and to be given a formal account of partnership affairs whenever circumstances render it just and reasonable.”
LLC Member Rights
Members of LLCs have different rights depending on whether the LLC is member-managed or manager-managed. In a member-managed LLC, members can inspect any record maintained by the company regarding its activities, financial condition, and other circumstances to the extent the information is ”material to the member’s rights and duties under the operating agreement.”
In manager-managed LLCs, the informational rights stated above apply to the managers rather than the other members. Instead, the members’ rights to information are limited to situations where (i) the request for information is material to a member’s holding in the LLC, (ii) the demand is made with reasonable particularity as to the scope and purpose of the request, and (iii) the information is directly connected to the member’s “purpose.” As you can imagine, this gives the managers of an LLC plenty of ammunition to deny requests for information made by members.
Outline Partner Rights and Access to Information Early with the Help of a Corporate Lawyer
Holders of interests in closely-held entities are well advised to set forth their rights regarding access to information in the operating agreement or partnership agreement to avoid later disputes. Absent adequate protections, minority owners may find their access to information regarding their holdings severely limited. Contact Lex Nova today to work with a corporate lawyer on formulating a partnership agreement that outlines shareholder rights to information.