Rights of Shareholders to Company Information
If you are a shareholder of a small to medium-sized company but not a director, then you may have a significant amount of money invested in the company but not be involved in its day-to-day management and operation.
You have an interest in knowing what the company is doing, as your investment may be at risk if the company fails. You may also be reliant on the company for your income, either through share dividends or as an employee of the company.
This raises the issue of what information about a company a shareholder is entitled to receive. The Companies Act 1993 governs this.
Right to information under section 216
A shareholder has an absolute right to some fundamental information under section 216 of the Companies Act. This includes:
• Minutes of all meetings and shareholder resolutions
• All written information distributed to shareholders over the preceding 10 years, including annual reports and financial statements
• Directors’ certificates, and
• The company’s interests register (the official list of any potential conflicts of interest the directors may have).
The limited information available under section 216 is unlikely to enable a shareholder to obtain information about significant financial decisions made by the company in time to influence them.
Right to information under section 178
A shareholder has a right to ask for any information held by a company under section 178 of the Companies Act. However, the company may refuse to provide the information or charge the shareholder for providing it. The company may decline to provide information for any reason.
The Companies Act, however, specifically states that a company may refuse to provide information if its release would prejudice the company’s commercial position or that of any other party it is dealing with. It also states that a company may refuse a request that is frivolous or vexatious.
A shareholder may apply to the court to have a company’s decision to refuse to release information reviewed. However, a court application is likely to substantially delay the release of the information and increase the cost of obtaining it, even if the court ultimately orders the release of the information.
Shareholder entitled to see the company’s legal advice?
One category of information that has special rules applying to it is legal advice received by a company. Traditionally, the courts have applied what has become known as the Shareholder Rule. This has meant that a shareholder was entitled to be provided with any legal advice obtained by a company except advice relating to a dispute with the shareholder. It would be very difficult for a company to deal with a dispute with a shareholder if it could not keep its legal advice regarding the dispute confidential.
Recent Privy Council decision
The UK’s Privy Council has recently issued a decision that is likely to become a landmark decision in company law. The court’s decision effectively overturns the long-standing Shareholder Rule. The court held that shareholders are not entitled to any privileged legal advice obtained by a company.
The Privy Council is no longer New Zealand’s highest court; it was replaced by the Supreme Court in New Zealand in 2004. The Privy Council’s decisions are, however, still strongly influential on the development of New Zealand law. Many commentators believe that the New Zealand courts will adopt this approach to the Shareholder Rule. Companies may well, therefore, begin to decline shareholder requests for any legal advice obtained by a company under section 178 of the Companies Act.
It is likely that the New Zealand courts will uphold the refusal by a company to release such information in the future.
Shareholders still have strong rights
Shareholders still have strong rights to obtain information about a company under sections 178 and 216 of the Companies Act, even if they are no longer able to access the company’s legal advice. These rights can be particularly useful if a dispute arises between shareholders in relation to the company’s management or strategic direction.
You should contact us if you have any concerns about the management of a company in which you own shares. There are a number of legal mechanisms contained in the legislation that shareholders can use to protect their position, including the rights to information discussed here. Prompt action, however, is often required to achieve the best possible outcome.
DISCLAIMER: All the information published is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in this newsletter may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650 or 04 496 5513.