WHAT IS THE NATURE OF THE RIGHT TO INSPECT?

CORPORATE BOOKS AND RECORDS AND

THE RIGHT OF INSPECTION

WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. 74)

(1) Record of all business transactions;

(2) Minutes of all meetings of stockholders or members;

(3) Minutes of all meetings of Board of Directors or Trustees;

(4) Stock and Transfer book

WHAT IS A STOCK AND TRANSFER BOOK? (Sec. 75)

A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged. It likewise contains the following information:

 Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment;

 A statement of every alienation, sale or transfer of stock made, the date thereof,

and by whom and to whom made;

 Such other entries as the by-laws may prescribe

The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent, and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.

WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)

A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf of a stock corporation. He or she must be licensed by the SEC;

however, a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee, shall be applicable.

WHO IS THE CUSTODIAN OF CORPORATE RECORDS?

In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries. (Torres, et al. vs. CA, 278 SCRA 793; 1997)

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect their investment.

WHAT IS THE NATURE OF THE RIGHT TO INSPECT?

Corporate Books and Records

Basis of the Right of Inspection

PREVENTIVE : deterrent to an ill-intentioned management knowing its acts are subject to scrutiny; and

REMEDIAL: A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and appropriate remedies against mismanagement.

1. Records of ALL business transactions

This includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 59)

2. By-laws

These are expressly required to be open to inspection by SH/members during office hours (Sec.

46). Note: There is no similar provision as to AOI, but these are filed with the SEC anyway.

3. Minutes of director’s meetings

This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however.

4. Minutes of stockholders' meetings

5. Stock and transfer books

These are records of all stocks in the names of the stockholders alphabetically arranged. contain all names of the stockholders of record. Useful for proxy solicitation for elections. SEC has however ruled that a SH cannot demand that he be furnished such a list but he is free to examine corp. books.

6. Most recent financial statement

Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a written request from any stockholder or member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year.

Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation are NOT open to inspection, EXCEPT under the following circumstances:

(1) Upon written consent of concerned depositor (presumably the corporation);

(2) In cases of impeachment;

(3) Upon court order in cases of bribery or dereliction of duty of a public official; and

(4) In cases where the money deposited / invested is the subject matter of litigation

(5) Upon order of a competent court in cases of unexplained wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act (6) Upon order of the Ombudsman

What Records Covered

Extent and Limitations on Right

1. The exercise of this right is subject to reasonable limitations similar to a citizen‟s exercise of the right to information. Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs.

2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46).

3. A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute discretion to allow or disallow inspection are prohibited.

Limitations as to time and place:

 Exercise of right only at REASONABLE HOURS on BUSINESS DAYS.

 Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the year. (Pardo v. Hercules Lumber)

4. By-laws cannot prescribe that authority of president must first be obtained.

5. Inspection should be made in such a manner as not to impede the efficient operations

6. Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the principal office.

7. As to purpose:

 PRESUMPTION: that SH‟s purpose is proper. Corp. cannot refuse on the mere belief that his motive is improper (sec 74).

 BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.

 To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it is not contrary to the interests of the corporation.

Legitimate: inquiry about failure to declare dividends Not legitimate: for mere satisfaction or speculation.

 Belief in good faith that a corp. is being mismanaged may be given due course even if later, this

is proven unfounded.

 If motive can be clearly shown as inimical to corp., right may be denied.

Every director, trustee, stockholder, member may exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer).

As to VTA: both voting trustee and transferor

SH of parent corp. over subsidiary:

If the two are operated as SEPARATE entities : NO right of inspection

If they are ONE AND THE SAME with respect to management and control, and inspection is demanded due to mismanagement of subsidiary by the parent‟s directors who are also

directors of the subsidiary : With right of inspection

If the subsidiary is wholly-owned by the parent, and its books & records are in the possession

and control of the parent corporation : With right of inspection Who May Exercise Right

(Gokongwei v. SEC)