Limits to corporate records access

By this time of the year, most private corporations would have already held their annual stockholders’ meeting.

This mandatory yearly ritual is meant to give stockholders the opportunity to meet with management and be informed of how the company fared in the past year and its plans for the future.

To further ensure corporate accountability, the law gives stockholders the right to inspect corporate records in whatever form they are stored and make copies of them at their expense.

This right may be exercised subject to conditions, i.e. written demand is made for that purpose and the inspection is done at reasonable hours on business days.

There is no minimum number of shares a stockholder is required to own before this right can be availed of. One share of stock is all it takes for a stockholder to be able to gain legitimate access to the corporate records of, say, a multibillion peso company.

This right, however, may be denied if the company has reasonable grounds to believe the stockholder is acting in bad faith, or has in the past used his or her access to corporate records for selfish reasons, or shared the information to unauthorized parties to the detriment of the company.

Apparently learning from experience on how this right had been abused or misused by unscrupulous stockholders, the Revised Corporation Code dictates “the inspecting or reproducing party shall remain bound by confidentiality rules under prevailing laws.”

These laws include the Intellectual Property Code with regard to trade secrets or processes, Data Privacy Act of 2012, Securities Regulation Code and Rules of Court.

The underlying objective of these laws is to keep confidential and secure private or personal information that may have been made known to or accessed, legally or otherwise, by third parties, including the government. Although with regard to the latter, the restriction is relaxed under certain circumstances related to national security and public welfare.

If the stockholder violates these confidentiality rules by sharing the information with unauthorized persons, or making them public to put the corporation in a bad light, he or she could find himself or herself in serious legal trouble.

Aside from facing civil or criminal sanctions, the stockholder can be barred by the corporation from exercising the right to access its records in the future. Corporate snoops should not be given the opportunity to reprise their acts.

To add more teeth to the confidentiality provision of the Code, it would be good practice for a company that gets a request for inspection to require the requesting stockholder to sign a nondisclosure agreement (NDA) before he or she is given access to corporate records.

The NDA should state, among others, the stockholder’s cognizance of the confidentiality laws earlier mentioned and agreement to faithfully abide by those laws under pain of monetary damages.

If the stockholder is motivated by good intentions in requesting access to corporate records, i.e., a sincere desire to see how his or her investment is being used by the company, there should be no problem signing the NDA.

A hesitancy or refusal to sign the NDA should be treated as a “red flag” or an indication that something more than meets the eye in the request for inspection.

The stockholder may be looking for trade secrets or internal processes the company’s competitors would be interested in and willing to pay for handsomely. Or, the inspection is a “fishing expedition” aimed at looking for skeletons in the closet that can be used to blackmail the company.

Under these circumstances, it would be the better part of discretion for the company to refuse the stockholder’s request. If it does, it is advisable to put the refusal in writing and state the reasons behind the turndown.

This way, in case the refusal is questioned in court, the company can invoke good faith in rejecting the request and refute the stockholder’s possible claim that the company’s action was capricious or motivated by ill will.