A minority owner who suspects something is wrong usually has a problem before they have a claim: they cannot see the numbers. Books-and-records inspection is the statutory answer, and it is badly underused.
What it is
Most corporate and LLC statutes give owners a right to inspect certain company records on written demand, for a proper purpose. It runs outside litigation. You do not need to have filed anything, and you do not need to prove wrongdoing first — that is the point.
Why it is worth doing first
Three reasons.
It is fast and cheap relative to discovery. Discovery in a filed case takes months and costs a multiple of what a well-drafted demand costs.
It tells you whether you have a case. Compensation history, related-party transactions and distribution records answer most of the questions a shareholder-oppression or fiduciary-duty claim turns on. Sometimes the answer is that the majority’s conduct is defensible, and finding that out for the price of a demand letter is a good outcome.
The response is itself evidence. A company that produces records promptly looks different from one that stonewalls, and courts notice.
What “proper purpose” means
A purpose reasonably related to the person’s interest as an owner. Valuing a stake, investigating suspected mismanagement or self-dealing, and communicating with other owners are the familiar ones. Purposes aimed at something other than the ownership interest — pursuing an unrelated dispute, or gathering material for a competing business — are where demands get refused.
Write the purpose down carefully. It defines the scope of what you are entitled to, and a vague demand invites a narrow response.
What you can usually get
The categories vary by state and entity type, but typically include formation documents and the operating or shareholders’ agreement, minutes and written consents, financial statements, tax returns, and the owner list. Access to underlying accounting detail and to related-party transaction documents is generally narrower and more likely to be contested.
How companies push back
Expect some combination of: a challenge to the stated purpose, an argument that the categories are overbroad, a demand for a confidentiality agreement as a condition of production, and delay. A confidentiality agreement is often reasonable and worth agreeing to — but read what it says about the use of the records in later litigation, because that clause is doing more work than the rest of it.
Practical points
- Put it in writing and keep proof of delivery. The statutes are formal, and a demand that does not comply can be refused on that basis alone.
- Ask for categories, not everything. Narrow, specific, and tied to the stated purpose is far more likely to be produced and far more likely to be enforced if it is not.
- Note the deadline to respond. Statutes usually set one, and the failure to meet it is what gives rise to an action to compel.
- Decide who inspects. The right generally extends to inspection by an accountant or attorney on the owner’s behalf, which usually produces better results than reading the file yourself.
The goal is not to win the inspection. It is to learn enough to decide whether there is a claim worth bringing — and, often, to make clear that the records will be looked at either way.