Miles, a bank shareholder, requested an unlimited inspection of the bank’s books
ID: 333820 • Letter: M
Question
Miles, a bank shareholder, requested an unlimited inspection of the bank’s books and records. He said that he wanted to ascertain whether any action had been taken contrary to the best interests of the stockholders- such as misuses of corporate funds; abuse of corporate office; diversion of corporate assets to the personal benefit of any officer, director, employee, or stockholder; misapplication of corporate assets; or favoritism of certain customers of the bank because of personal connections with officers or directors of the bank. He also wanted to determine whether the directors had lived up to their fiduciary obligation to the stockholders. Must the bank honor his request? Explain.
Explanation / Answer
Several federal regulations and statutes were formulated in relation to a shareholder's rights to inspection of a compaies books and records to ascertain that all actions and decisions are in his best interests and not providing benefits to another at his expense. This was especially relevant for minority shareholders in many instances, as the majority shareholders would appropriate profits in proportions diproportionate to the share capital held, by concealing books and records. Every shareholder has the right to vote on major decisions regarding corporate policy and management, to use this vote intelligently and effectively he needs to be well-informed of the operations and results of the companies current activities as well as past records. Hence, without access to records the very right to vote would be baseless and nominal only. Therefore, under federal statute and regulations the right to inspection of records is a privilege bestowed upon the shareholder due to ownership of stock. However, to protect the interests of all concerned, and to prevent misuse of this right for obtaining information with malafide intentions, this right is not an absolute right. The US Supreme Court in GuthrieVs Harkness, ruled that the court will not compel the books of a bank to be inspected under all circumstances. The court can grant absolute inspection rights only after ensuring that the reason for the same is valid and not simple curiosity, or malafide intentions. The permission can be granted if the purposes are legitimate. The entire right to inspection and it's refusal is based on proper purpose to be admissible. Proper purpose can be construed to be related to the shareholder's seeking the information to safeguard his own interests and the interests of the company. As all the information required by Miles is for ensuring his interests are being protected the bank has no right to refuse him.
However, a bank by the very nature of it's business holds sensitive information during it's regular business which can easily be misused by anybody. As protection of a customers information is a primary duty of a banking organisation, it has the right to refuse absolute access to such information until and unless the purpose for the same has valid reasons. If in case, a shareholder suspects and proves mismanagement, he can approach a court for a writ of mandamus, prove his purpose is proper and he is acting in good faith. Therefore, a bank can refuse absolute inspection unless proper purpose is evident to protect the larger interests of the organisation.