How to obtain information in company disputes

Last Updated: July 20th, 2022

Knowledge is power, so they say. Rarely is information more important than during a business dispute. If you suspect a business partner of drawing excess remuneration, diverting business away or otherwise failing to promote the success of your company, it is vital you find out what is happening as soon as possible.

We often find that unequal access to information is itself the catalyst that sparks a company dispute. If a company director or shareholder feels information is being hidden from them they will naturally be suspicious. Where a would-be wrongdoer has the ability to cut others off from a company’s books, bank statements and the like, they can often entrench their position and enhance their grip over the company, making any resolution more difficult to achieve.

The amount of information that a person is entitled to receive about a company depends very much on their role within that company. A director (who owes various potentially onerous duties to the company) is entitled to a lot of information, whereas a shareholder (who usually only receives certain benefits from a company) might be entitled to receive relatively little.

So, how does one gain access to information during the early stages of a company dispute?

Accessing information as a director

A director is entitled to be informed about a company’s affairs and to inspect all the company’s books and records, provided that such a right is not exercised for an improper purpose. An “improper purpose” is for any purpose other than to allow the director to exercise their duties as a director.

A court will assume that a director’s request to access information will be for a proper purpose, and it is for the party resisting the request to prove otherwise. However, a court will not order inspection where it is clear the request is made for some reason other than to allow the director to satisfy their duties, including where it is clear the information is sought for the purpose of the director’s own private litigation against the company, or to pursue an unfair prejudice petition.

It is therefore important for directors to seek access to information at an early stage, before the request can be categorised as being in service of a dispute.

Example situation

Let’s take a worked example. It is very common in small companies for one director to take ownership of the day-to-day running of a business, while the other takes responsibility for the finances, fundraising, and investor relations. However, the duties of a director include duties to exercise independent judgement and to promote the success of the company for the benefit of its members. Therefore, if the “day-to-day” director suspects his or her co-director of some improper financial reporting, they will be perfectly entitled (and are arguably obligated) to ask for information regarding the company finances, even if they have not sought such information in the past.

It might be that this information produces evidence that is useful in litigation brought by the requesting director (either on behalf of the company or in their capacity as a shareholder), but the purpose behind the request will be to allow the requesting director to satisfy the duties they owe to the company.

What rights to information do shareholders have?

As noted above, a shareholder’s right to access information is typically limited. However, there are certain documents to which a shareholder is entitled, and a failure to provide these documents when requested can lead to serious consequences for the company and officers in breach.

Under the Companies Act 2006, shareholders have the right to receive a copy of the company’s last annual accounts and directors’ reports within seven days of making a request. If the request is not complied with, a criminal offence is committed by the company and every director who is in default.

A shareholder is also entitled to inspect minutes of general meetings (but not board meetings), the company’s register of members and the directors’ service contracts. The ability to inspect directors’ service contracts can be particularly helpful where a shareholder believes that the directors are awarding themselves excess remuneration.

A shareholder who holds at least 5% of the issued share capital in a company can require the circulation of a written resolution or statement to all the shareholders in a company. They can also call a general meeting of the Company. This can be particularly useful where the shareholder has particular questions which they wish directors to answer.

Enhancing access to information – Shareholders’ Agreement

So far we have only explored the rules which are common to all privately held companies in England and Wales. However, it is very common for shareholders’ agreements to provide shareholders with additional rights to information, either by placing an obligation on directors to provide reports to the shareholders or by allowing the shareholders to request access to a wider variety of documents.

If you are a shareholder looking for information about the company, is there a shareholders’ agreement?  If so, what does it say about access to information?  Where you are entitled to information which is not being provided, there are ways to enforce this right through the courts, against either the company directly or against the other shareholders personally, or perhaps both, depending on how the agreement is written.

Can a shareholder demand a financial audit?

Small private companies are not required to appoint auditors and most do not.  However, a shareholder who owns 10% of the shares (or shareholders who together own 10%) can require the company to appoint an auditor (at the company’s expense). While this does not directly give information to shareholders, it can act as a check on directors and be useful as a tactic to advance their position.

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

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