Article By: Doug Colvard
Oftentimes, entrepreneurs ask Fourscore Law what, when, how and why to disclose certain information to their shareholders:What type of information must I disclose? North Carolina corporations have an obligation to provide, upon shareholder request, copies of its articles of incorporation, bylaws, board resolutions, annual reports, written communication to shareholders, as well as the names and addresses of directors [See N.C.G.S. §55-16-01]. They must also provide access to corporate books and records, including but not limited to, certain reports that reflect the financial condition of the corporation to certain “qualified shareholders” upon request [See N.C.G.S. §55-16-01]. There are a number of events which, although not required, may be prudent to disclose to shareholders, such as the corporation’s intention to raise an additional round of financing. For advice on these matters, feel free to reach out to Fourscore Law. When must I disclose certain facts to the shareholders? Most demands to inspect made by shareholders must be granted within five (5) business days. Although certain situations may call for required disclosure dates and/or immediate disclosure, it is oftentimes hard for entrepreneurs to gauge when to tell their shareholders about certain events. Disclosing information too early may provide unnecessary concern for speculative events; disclosing information too late could cause catastrophic loss that may have been avoided if it were disclosed earlier. Fourscore Law’s team of experienced attorneys and business advisors can help entrepreneurs navigate the waters to determine when the timing is appropriate to disclose such information. What is the most appropriate method for conveying important information to shareholders? The manner and method of delivery can create vastly different results when an entrepreneur is disclosing information to shareholders. Poorly communicated information can unnecessarily confuse and worry shareholders, and lead to wasting time discussing ancillary information. The corporation’s administrative documents, such as board consents, notices, resolutions, annual reports, and written communications, should follow a consistent format and pattern that specifies the authorization and actions of the corporation. Further, the corporation should consult with trusted advisors, such as Fourscore Law, when determining how to appropriately convey both positive and potentially upsetting information to shareholders. Why is it important I disclose this information to the shareholders? Besides the obvious mandatory disclosures that North Carolina corporations must make to their shareholders under North Carolina law, there are many instances in which a corporation may find it prudent to communicate certain information to shareholders. Common examples include launching important new business lines, selling stocks or doing stock buybacks, or when the board of directors makes an important change to the business.
Although each case will be specific to particular facts and circumstances, the North Carolina Business Court recently clarified some of the ambiguity as it relates to North Carolina corporations in Sharman v. Fortran Corp. This case dealt with shareholder inspection rights and the court’s holding is worth understanding for business people in North Carolina. Here, the court held that, North Carolina corporations must grant all shareholders the absolute right to inspect the articles of incorporation, bylaws, board resolutions, annual reports, written communication to shareholders, as well as the names and addresses of directors. They must also grant “qualified shareholders” (i.e. those holding at least 5% equity) the right to inspect the corporate books to assess the company’s financial and management condition, and have the burden of proof to show that any such inspection is overly burdensome or not presented in good faith. In summary, as an entrepreneur, make sure you’re prepared to answer these questions so that you can continue doing what you love – after all, happy shareholders typically make for happy entrepreneurs.
Please note – the lawyers at Fourscore Business Law are experienced in business matters of many kinds, which give us the opportunity to be involved in tax discussions on a regular basis. However, we are not CPAs or “tax” lawyers. We have many great contacts and refer our clients to them when needed. Please do not take the summary set forth in this article as tax or business planning advice!Based in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in Raleigh, Durham, Chapel Hill, Wilmington, Charlotte and throughout the Southeast. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.