Under Texas law, a member of a limited liability company (LLC) or a qualifying shareholder of a corporation has the right to examine the company’s books and records, so long as there is a proper purpose. This right is codified in the Texas Business Organizations Code and exists so shareholders can obtain an understanding of the financial well-being of the company in which they are invested and assess whether there has been misuse of company assets or self-dealing.
Which Shareholders Are Eligible to Request Financial Records?
To be eligible to request the books and records of an entity, you must meet one of the statutory qualifications:
- For a corporation, the requestor must have held their shares for at least six months or own at least 5% of the corporation’s outstanding shares.
- For a limited liability company, the requestor need only be a member to request an examination of the books and records.
How to Get Financial Records as a Shareholder in Texas
To gain access to financial records as a shareholder, you must write a letter to the corporate secretary or managing member, and you must cite a proper purpose.
What constitutes a “proper purpose”? Texas courts have held that any request is proper so long as the information requested is relevant to the protection of the shareholder’s interest in the corporation. Please note that the corporation may have legal grounds to deny your request if you used information from a prior examination improperly or are not acting in good faith.
In crafting the demand, it is important to understand what Texas law entitles you to, so that your demand is properly tailored. If you request access to information that you are not entitled to, your request could be denied.
- For a corporation, a qualified shareholder can request to examine and copy the corporation’s “books, records of account, minutes, and share transfer records” (See Tex. Bus. Orgs. Code § 21.218(b).)
- A member of an LLC may request to examine and copy “information regarding the business, affairs, and financial condition” of the company. Generally, this includes books and accounting records, meeting minutes, and membership records. (See Tex. Bus. Orgs. Code § 101.502(a).)
The examination of these records can be conducted in person or through an agent, accountant, or attorney.
Which Remedies Are Available to Enforce Shareholder Rights to Inspect Books and Records in Texas?
If you make a proper demand for inspection of the books and records and the entity refuses, you can ask the courts to compel the production of documents by filing a lawsuit. Ultimately, if the records are ordered produced by a court, Texas law requires the company to pay your attorney’s fees and costs.
What Are My Duties as an Officer or Managing Member to my Shareholders?
As the officer of a corporation or managing member of an LLC, do not dismiss or deny shareholder requests to examine books and records lightly. Given the possibility of litigation, as well as the looming threat of having to pay attorney’s fees and costs, it is important to fully comply with your obligations under Texas state law.
Refer to Texas Business Organizations Code Section 21.218 (corporations) and Section 101.502 (LLCs) to review your members’ or shareholders’ rights and understand how to respond.
Whether you are a shareholder or an officer, our team of legal professionals can help you manage requests for records. Our team of attentive legal professionals will work with you to understand your objectives and recommend a strategy tailored to your needs.
Contact Hendershot Cowart today to request a consultation.
