Corporate Governance Field Guide - Texas Books & Records Demands

Texas Business Organizations Code Section 21.218 provides shareholders of Texas corporations with rights to examine the corporation’s books and records, if certain conditions are met. Shareholders’ reasons for making such a request vary—such as valuing shares, communicating with other shareholders, assessing director independence, or investigating breaches of fiduciary duty and potential derivative claims. Understanding the contours of what Section 21.218 allows will help shareholders ensure their demands are appropriate and help Texas corporations prepare for and respond to these demands when they arrive.

Who Can Make a Demand?

• Section 21.218 limits these examination rights to shareholders who either:
1. have held shares for at least six months, or
2. hold at least 5% of all outstanding shares.

The Demand Must Be Written and Must State a “Proper Purpose”

• A Section 218 demand must be in writing, and it must state a “proper purpose.”
• The requested records must be “reasonably related to and appropriate to examine and copy for that proper purpose.”
• The term “proper purpose” is not expressly defined in Section 218, and courts may address whether a purpose is proper on a case-by-case basis. Examples of improper purposes include unsupported fishing expeditions, harassment, attempts to unfairly compete with the corporation, or other purposes that are unrelated to the requestor’s stock ownership.

“Proper Purpose” When the Corporation Is Public

• The statute provides additional guidance on what constitutes a proper purpose when the demand is made on a public company or any corporation that has elected to be governed by TBOC Section 21.419.
• For shareholders of these corporations, demands are by definition not made for a proper purpose if the corporation reasonably determines that the demand is in connection with:
  1. an active or pending derivative proceeding, brought in the name of the corporation, that is or is expected to be instituted or maintained by the requesting shareholder; or
  2. an active or pending civil lawsuit to which the corporation and the shareholder are, or are expected to be, adversarial named parties.

What Records Must Be Provided?

• Section 218 permits examination of the corporation’s “books, records of account, minutes, share transfer records, and other records, whether in written or other tangible form.”
• The statute does not define the contours of these records but does make clear that certain records may not be examined: “the records of the corporation shall not include e-mails, text messages or similar electronic communications, or information from social media accounts unless the particular e-mail, communication, or social media information effectuates an action by the corporation.”
• Separately, pursuant to Section 219, the corporation must, on written request of any shareholder (regardless of the size or length of the holding or the purpose), provide:
  1. the corporation’s prior fiscal year’s annual financial statements, and
  2. the most recent interim financial statements that have been published.

In most cases involving public companies, of course, these would already be available to all stockholders without the need to make a request.

Protecting the Company’s Confidentiality and Privilege

• Because the records sought likely contain confidential material, companies should take steps to impose reasonable restrictions on the confidentiality, use, and distribution of any books and records produced under Section 218. Typically, the corporation and stockholder will enter into a confidentiality agreement governing those terms.
• If the records being produced also include information that is not specifically related to the shareholder’s purpose (for example, minutes that include discussion of multiple topics), the corporation should consider whether redacting irrelevant information is appropriate.
• Section 218 does not explicitly require a corporation to divulge privileged information, though the issue has been contested in other jurisdictions.

The Potential for an Award of Fees to the Shareholder for Noncompliance

• A corporation that refuses a proper Section 218 request may be liable for the requesting shareholder’s costs and expenses incurred in enforcing its rights, including attorney’s fees.
• It is a defense for the corporation if the requesting shareholder:
  1. was not acting in good faith or for a proper purpose in making the request;
  2. has improperly used information gained from a past request for books and records; or
  3. has, within the last two years, sold or offered to sell a list of shareholders for any corporation, or aided or abetted such activity.

Different Rules Govern Texas Limited Liability Companies

• While there are similarities in the rules for demanding books and records for Texas corporations and limited liability companies, there are important differences, and a limited liability company should refer to the procedures in Chapter 101 of the Texas Business Organizations Code, including Section 101.502.

The  Corporate Governance Field Guide is our series offering concise, practical insights on the issues that matter most to public and private company officers, directors, stockholders, and other stakeholders. Each installment delivers quick, actionable perspectives from our Securities Litigation and Corporate Governance teams. Designed to keep busy leaders informed, the series highlights best practices, emerging risks, and trends shaping today’s boardroom. If you’re looking for further advice on these issues, our  Board Governance and Fiduciary Duty team is ready to help. Please reach out to any member of our team to learn more.