How to obtain information in company disputes

Information can be critical during a business dispute. If you suspect a business partner of taking excessive remuneration, diverting business away from the company or otherwise failing to act in the company's interests, it is important to establish what is happening as soon as possible.

We often find that unequal access to information can itself trigger a company dispute. If a company director or shareholder believes information is being withheld from them, they will naturally become suspicious. Where a potential wrongdoer can prevent others from accessing a company’s books, bank statements and other records, they may be able to entrench their position and strengthen their control over the company, making a resolution more difficult to achieve.

The amount of information a person is entitled to receive about a company depends to a significant extent on their role within that company. A director, who owes various potentially onerous duties to the company, is generally entitled to extensive information, whereas a shareholder, who typically has more limited rights, may be entitled to receive relatively little.

So, how does one gain access to information during the early stages of a company dispute, typically a shareholder claim for unfair prejudice or a dispute with directors?

Directors rights to obtain company information

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

A court will generally assume that a director’s request to access information is made for a proper purpose, and it is for the party resisting the request to establish otherwise. However, a court will not order inspection where it is clear that the request is made for a purpose other than enabling the director to fulfil their duties, including where the information is sought for 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 seen as being made in connection with a dispute.

What rights do shareholders have to company information ?

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 them when requested can lead to serious consequences for the company and officers in default.

Under the Companies Act 2006, a member of an unquoted company can demand, without charge, a copy of the company’s last annual accounts, directors’ report and relevant auditor’s report. The company must comply within seven days of receiving the demand, otherwise the company and every officer in default commit an offence.

A shareholder is also entitled to inspect certain company records, including the register of members and records of resolutions and general meetings. The ability to access directors’ service contracts can be particularly helpful where a shareholder believes that directors are awarding themselves excessive remuneration.

Members representing at least 5% of the total voting rights can, subject to the statutory requirements, require a private company to circulate a proposed written resolution to its members. Members can also require the directors to call a general meeting, generally where they represent at least 10% of the voting rights, although the threshold can be 5% in certain circumstances. This can be particularly useful where shareholders have questions which they wish the directors to address.

Enhancing access to information – Shareholders’ Agreement

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 shareholders or by allowing shareholders to request access to a wider range of documents.

If you are a shareholder looking for information about the company, is there a shareholders’ agreement and, if so, what does it say about access to information? Where you are entitled to information which is not being provided, there may be ways to enforce that right through the courts, against the company directly, other shareholders personally, or potentially both, depending on the terms of the agreement.

Can a shareholder demand a financial audit?

Small private companies are often exempt from the requirement to have their accounts audited. However, shareholders can require an otherwise audit-exempt company to obtain an audit where they represent at least 10% in nominal value of the company’s issued share capital, or 10% in number of the members where the company has no share capital, subject to the statutory requirements and timing.

While this does not directly give shareholders access to the company’s information, an audit can provide an additional check on the directors and may be a useful tactic in advancing a shareholder’s position.