Examination of corporate records, grounds for refusal and penalties

The right of a stockholder to inspect corporate records is an essential aspect of corporate governance. This right allows shareholders to access information regarding the company’s financial and operational activities, enabling them to make informed decisions regarding their investments.

It also serves several other important purposes. First, it allows shareholders to monitor the performance of the company and evaluate the effectiveness of its management. Second, it is essential in ensuring that the company is complying with all relevant laws and regulations. Thirdly, it promotes transparency and accountability in corporate governance.

Decades ago, the Supreme Court declared that a stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of the assets and property of the corporation. Since this right is an incident of ownership of corporate property, its exercise must be related to one’s interest as a stockholder and not prejudicial to or against the interest of the corporation (Gokongwei Jr. v. Securities and Exchange Commission, G.R. No. L-45911 April 11, 1979)

Right to inspect corporate books and records

The Revised Corporation Code (RCC) provides that corporate records, regardless of the form in which they are stored, shall be open to inspection by any director, trustee, stockholder or member of the corporation in person or by a representative at reasonable hours on business days. A demand for copies and excerpts of the records may be made by any director, trustee or stockholder (Republic Act No. 11232, Revised Corporation Code)

Notably, during the period when the corporation is undergoing liquidation and dissolution, this right to inspection is still available because the rights and remedies against, or liabilities of, the officers is not removed or impaired by reason of the dissolution of the corporation. (Chua & Diaz v. People of the Philippines, G.R. No. 216146, august 24, 2016)

What are these corporate books  and records

While there was no specific list under the old Corporation Code, the RCC now provides the following non-exhaustive list of what these corporate books and records are which must be maintained and kept at its principal office. These are the:

a. Articles of incorporation and by-laws of the corporation & all their amendments
b. Current ownership structure and voting rights of the corporation, including lists of stockholders, group structures, intra-group relations, ownership data, and beneficial ownership
c. A stock and transfer book containing a record of all stocks, the names of the stockholders, details of payment for shares of stocks, alienation, sale or transfer made, as well as other entries as the by-laws may prescribe
d. Names and addresses of all the members of the board of directors and the executive officers
e. Records of all business transactions
f. Records of resolutions of the board of directors and of the stockholders
g. Latest reportorial requirements submitted to the SEC
h. Detailed minutes of meetings of stockholders and that of the board of directors
i. Financial Statements.

(Section 73 & 74 of Republic Act No. 11232, Revised Corporation Code)

Refusal of the right to inspect

Should a corporation decline or refuse a request for inspection or to provide a copy of its records it may do so based on the following grounds:

a. That the requesting stockholder has improperly used information before
b. There is a lack of good faith in the request for inspection
c. There is a lack of legitimate purpose
d. The requesting party is not a stockholder of record, or is a competitor, director, officer, controlling stockholder or otherwise represents the interests of a competitor
e. There are trade secrets or other Intellectual Property Rights that are entitled to protection
f. Limitations provided by the Data Privacy Act of 2012

(G.R. no. 172948 , October 5, 2016 Philippine Associated Smelting and Refining Corporation vs. Lim, et al.; Sec. 73, RCC)

The Supreme Court has declared that good faith and a legitimate purpose are presumed which is why it is the duty of the corporation to allege and prove with sufficient evidence the facts that the request is being made in bad faith or that the request is being made for an illegitimate purpose.

Confidentiality of business transactions, trade secrets and other intellectual property rights as grounds to refuse inspection is not a magical incantation that will defeat the request for inspection of records as the corporation must establish that the disclosure will violate the corporation’s own legal right.

Neither will the discomfort or inconvenience that will be caused to the management of a corporation be good ground to refuse an inspection as it must be established that the scope or manner of the request and the conditions under which it was made are so frivolous that the huge cost to the business will, in equity, be unfair to the other stockholders.

Lastly, in cases where disclosure or processing of personal or sensitive personal information may be involved in a request for inspection the data subject concerned has the right to be informed of the request for disclosure. Moreover, the corporation has the obligation to examine or inquire about the particular demand and may disclose only those personal information that are necessary, not excessive, relevant and adequate to fulfill the legitimate purpose of the demand, as required by Section 74 of the Corporation Code. (NPC Advisory Opinion No. 2019-011; Data Privacy Act of 2012)

Penalties/sanctions

The RCC provides for penalties and sanctions for unjustified and unlawful refusal to allow a request for inspection. The SEC has also issued its SEC Memorandum Circular No. 25, series of 2020 which provides for the guidelines in the filing, investigation and resolution of complaints for violation of the right to inspect and/or reproduce corporate records.

The SEC itself, in an administrative proceeding, may impose the following sanctions:

i. A Fine for failure or refusal to comply with its order or Subpoena in the maximum of Php1,000 per day until the order, decision or subpoena is complied with (Sec. 157, RCC)

ii. The SEC may also issue a Cease and Desist Order or suspension of the corporation and, in extreme cases, order the revocation of incorporation and dissolution of the corporation and forfeiture of its assets (Sec. 158, RCC, SEC MC No. 25, series of 2020)

The RCC also provides that any officer or agent of the corporation who shall refuse to allow the inspection and/or reproduction of records in accordance with the provisions of the RCC shall be liable to such director, trustee, stockholder or member for damages. The court may also impose a fine ranging from P10,000 to P200,000 for violations. In the event that the violation is found to be injurious or detrimental to the public, there is a higher penalty which is P20,000 to P400,000. (Section 161, RCC)

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)