THE STOCKHOLDER’S RIGHT TO INSPECT CORPORATE RECORDS
By: Atty. Ellaine Anne L. Bernardino on January 21,2021.
The stockholder’s right to examine corporate records is based on his or her interests in the corporation and ownership of corporate property.
Under Section 73 of Republic Act 11232, or the Revised Corporation Code (RCC), which took effect on Feb. 23, 2019, corporate records can be inspected by any director, trustee, stockholder or member of the corporation, in person or by a representative, at reasonable hours on business days; and a demand in writing may be made to request for copies at the expense of the requesting party.
The old Corporation Code, or Batas Pambansa 68 (1980), required companies to keep a record of all business transactions and minutes of all their meetings. But the RCC expanded the coverage of these records to include:
– The articles of incorporation and bylaws of the corporation and all their amendments.
– The current ownership structure and voting rights of the corporation, including lists of stockholders or members’ group structures, intragroup relations, ownership data, and beneficial ownership.
– The names and addresses of all members of the board of directors or trustees and executive officers;
– A record of all business transactions.
– A record of the resolutions of the board of directors or trustees and of stockholders or members;
– Copies of the latest reportorial requirements submitted to the Securities and Exchange Commission.
– The minutes of all meetings of stockholders or members, or of the board of directors or trustees.
Who has the right to inspect the corporate records?
Only stockholders (which include directors) of the corporation or their representatives have the right to inspect corporate records. A requesting party who is not a stockholder or, if one, is a competitor or someone representing his or her interests shall have no right to inspect or demand the reproduction of these records.
In Puno vs. Puno Enterprises Inc. (G.R. 177066, Sept. 11, 2009), the Supreme Court said the right to inspect may be exercised only by a stockholder of record. In this case, Carlos L. Puno was an incorporator of Puno Enterprises Inc. After his death, Joselito Musni Puno, who claimed to be an heir of Carlos, initiated a complaint for specific performance against the respondent, praying, among others, to inspect its corporate books. The Supreme Court, in denying his petition, held that upon the death of a stockholder, his or her heirs do not automatically become stockholders and are not mandatorily entitled to the rights and privileges of one.
In Insigne vs. Abra Valley Colleges Inc. (G.R. 204089, July 29, 2015), the Supreme Court allowed shareholders to inspect the corporate books and records, even though there were no stock certificates proving their stock ownership, since they had presented sufficient proof that they subscribed to the firm’s shares, even though their subscription was not yet fully paid.
It should be noted that the inspecting shareholder shall remain bound by confidentiality rules under prevailing laws, such as those on trade secrets or processes under the Intellectual Property Code of the Philippines, the Data Privacy Act of 2012, the Securities Regulation Code, and the Rules of Court.
Burden of proof
The right to examine the books of the corporation must be exercised in good faith, for a specific and honest purpose, and not to satisfy curiosity or for speculative or vexatious purposes (Grey v. Insular Lumber, G.R. L-45144, April 3, 1939). However, in John Gokongwei Jr. vs. Securities and Exchange Commission (G.R. L-45911, April 11, 1979), the Supreme Court clarified that the burden of showing the impropriety of the purpose or motive of the inspecting shareholder is placed upon the corporation.
Hence, in Associated Smelting and Refining Corp. vs. Lim (G.R. 172948, Oct. 5, 2016), the Supreme Court ruled that the corporation cannot unilaterally deny the stockholder the right to inspect corporate records, based on the allegation that the motive of the requesting party is improper. The confidentiality of business transactions is not a magical incantation that will defeat the shareholder’s right to inspect corporate records. Thus, an action for injunction and a writ of preliminary injunction filed by a corporation is generally unavailable to prevent stockholders from exercising this right.
Remedies and defenses
The shareholder who is denied of his or her right to inspect the corporate books can avail himself or herself of the following remedies: specific performance, petition for mandamus, damages or a criminal action (Associated Smelting and Refining Corp. vs. Lim).
Section 73 of the RCC provides that a director, trustee or officer held liable in a suit for denying the shareholder his or her right to inspect may raise the defense that the person demanding to examine corporate records has improperly used any information secured from the prior examination of these records was not acting in good faith or the demand is not for a legitimate purpose, or that the stockholder is a competitor or otherwise represents the interest of a competitor. Furthermore, a stockholder who shall abuse his or her right of inspection shall be subject to administrative sanctions.
Thus, it is evident that law and jurisprudence highly regard the right of a shareholder to inspect corporate records in order to protect his or her interests in the corporation. However, he or she must always exercise this right in good faith and for a legitimate purpose.