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Why Some Delaware Corporations Should Be Careful About Relying On This Vice Chancellor’s Ruling

Francis Pileggi in his Delaware Corporate & Commercial Litigation Blog recently wrote that there is no per se duty on the part of a closely held company to disclose financial statements .  In The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Transcript) (Del. Ch. Feb. 25, 2016), former Vice Chancellor John W. Noble wrote:

That brings us to Delaware disclosure law which generally does not require disclosures to shareholders unless shareholder action is sought. Winmill seeks no such action. Thus, the failure to provide financial reporting, by itself, does not state a claim. Whether that is good policy or bad policy is not my task to resolve today.

The failure to provide the audited annual financial reports, without more, does not state a claim under Delaware law, especially because it appears that accounting records are maintained, bills are being paid, and one presumes tax returns are being filed.

That may be the law in Delaware, but many Delaware corporations maintain their executive offices in California or customarily hold meetings of their boards of directors in California.  These corporations are subject to the annual report requirement in Section 1501 of the California Corporations Code.  That statute requires the Board of Directors to cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year, unless in the case of a corporation with less than 100 holders of record of its shares (determined as provided in Section 605) this requirement is expressly waived in the bylaws.  If no annual report for the last fiscal year has been sent to shareholders, the corporation must, upon the written request of any shareholder made more than 120 days after the close of that fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements.

Even if a Delaware corporation does not maintain its executive office or customarily hold board meetings in California, it could be subject to the annual report requirement in Section 1501.  Foreign corporations subject to Section 2115 of the Corporations Code are subject to Section 1501.  Cal. Corp. Code § 2115(b).

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