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By: Ted Peters
California Corporations Code Section 1601 provides certain rights to shareholders of corporations doing business in California. Specifically, as the statute currently reads, corporations are required to open their books and records upon written demand from any shareholder as long as the purpose of the demand is “reasonably related” to the shareholder’s interests. In 2016, the California Court of Appeal in Innes v. Diablo controls, Inc., 248 Cal.App.4th 139 (2016), held that Section 1601 did not require a corporation to produce records in any particular place; rather, the corporation was required only to produce records in the state where they were located, even if outside of California.
On February 13, 2018, California Representative Brian Maienschein (R) sponsored a bill that would amend Section 1601. In June, and without a single “no” vote against it, the California Legislature enacted the bill, AB 2237 (Maienschein). Governor Jerry Brown signed the bill into law on July 9, 2018.
A redlined version of the changes to Section 1601 clearly illustrates that the amendments, which go into effect next year, effectively reverse the holding from Innes. Specifically, when a shareholder demands an inspection, the records are to be made available for inspection “at the corporation’s principal office in [California], or if none, at the physical location for the corporation’s registered agent for service of process in [California].” The amendment also provides an alternative procedure which would permit the shareholder to elect to receive the corporation’s books, records, and minutes by mail or electronically, as long as the shareholder agrees to pay the reasonable costs for copying or converting the requested documents to electronic format.
Thus, it is now clear that corporations doing business in the State of California will be required to produce records in California, regardless of where the records are maintained. The significance of this change is obvious enough, but wait, there’s more… When amending the statute, the legislature made another minor change to the first sentence of the statute.
Previously, what was open to inspection were “The accounting books and records and minutes of proceedings…” As amended, what will be open to inspection will be “The accounting books, records, and minutes of proceedings…” The insertion of two commas seems innocent enough, but could lead to a heated debate as to the scope of shareholder inspections in general. The term “accounting” in the original statute could have been interpreted to modify just “books” or both “books and records.” With the amendment, however, it would seem that “accounting books” and “records” are two separate things and a corporation might be justified in refusing to produce “accounting records” to the extent they differed from “accounting books.”
Maybe the drafters of the amendment were simply sticklers for the proper use of punctuation and thought it best to tidy the statute up. Or maybe they intended to narrow the scope of what records corporations are required to produce. Or perhaps the change was intended to send no message at all. Why does it matter and who really cares? Well, punctuation does matter, even one little comma. At least grandmothers around the globe think so; there is a world of difference between “Let’s eat Grandma” and “Let’s eat, Grandma.”
If you have questions or would like more information, please contact Ted Peters at [email protected].