The board’s duty to provide information to shareholders: what should you bear in mind?
Some shareholders simply turn up once a year to listen and are happy to collect their dividend, whilst others are critical and demand immediate access to figures or confidential contracts. For you as a director, director and major shareholder (DMS) or entrepreneur, this raises the question: how far does the right to information extend, and when are you allowed to say ‘no’? Anyone who wants to maintain control over their investors must know the rules of the game.
The basic principle: the general meeting has the right to information, not the individual
The law does not grant the right to information to individual shareholders, but to the general meeting (GM) as a whole. In practice, this means that a shareholder may ask questions during the meeting, to which the board must respond. Anyone who is unable to attend and submits the same question by email the day after the meeting is, in principle, too late. The formal opportunity to demand information is therefore the meeting itself.
Furthermore, during that meeting, the board does not itself determine which questions are relevant. In principle, the general meeting is entitled to all answers. Questions may well be confrontational: the AGM may openly question whether the director’s remuneration is still appropriate given disappointing results, may insist on attention being paid to business risks such as cyber security, and may continue to press for sustainability. It is not compulsory to submit questions in advance, but a shareholder who expects a serious and substantiated answer would be well advised to do so.
The exception: the overriding interest
There is one important exception to the main rule. The board may refuse to answer if there is an ‘overriding interest’ involved, with particular regard to the company’s competitive position. In principle, a shareholder is free to compete with their own private limited company, but the company is, of course, under no obligation to assist that shareholder with competitively sensitive information. Whether such an interest is sufficiently compelling to prevent a response is a judgement to be made by the board.
Above all this lies a general principle: shareholders and the board must behave reasonably towards one another. This works both ways. A shareholder may not indiscriminately demand ‘all’ conceivable information, whilst the board must, on the other hand, make every effort to provide the information requested. Sometimes a proper response involves the submission of documents; sometimes a verbal explanation suffices; and sometimes the board genuinely does not know the answer.
In practice, the approach is more generous than the law suggests
So much for the theory. In practice, the notion that shareholders are only entitled to information during the annual general meeting is interpreted much more flexibly. This applies less to listed public limited companies with numerous shareholders, but the bar is set higher precisely in the case of family businesses with a limited circle of shareholders. In such circumstances, shareholders are not only entitled to information outside the meeting, but the board is sometimes even under a duty to share important information on its own initiative.
This obligation applies not only to shareholders, but even to certificate holders who, through a trust company (STAK), effectively have little say. The underlying principle is that they, too, contribute capital and must therefore be enabled to protect their interests. If votes are to be taken on material matters, they must be able to prepare themselves. If they were only able to request information during the meeting, it would be too late to form a considered position.
The more private the private limited company, the broader the right to information
Exactly how the right to information plays out cannot be captured in black and white. The rule is that the right to information increases the more closed the private limited company is. Three brothers who jointly hold the shares are more likely to be entitled to information than a minority shareholder who has joined solely as an investor and has no other (family) ties to the company. If all shareholders are also directors, the issue does not arise: everyone is already fully informed. Problems arise precisely in situations where one part of the (often family-based) circle runs the company whilst another part remains at a distance.
The nature of the information requested is also a determining factor. Matters that directly affect shareholders — such as dividend policy, the company’s investments and its financial position — must be disclosed. Day-to-day business, however, such as a dispute with an individual customer or an issue involving a member of staff, falls under the responsibility of the board. A curious shareholder need not be informed about such matters.
Stay in control: shareholders are not co-directors
At the same time, it is unwise to go too far in providing information. Shareholders are, ultimately, providers of capital; management lies with the board. They may be curious and engaged, but they should not take the place of the directors. A striking example is the break-up and sale of ABN Amro, which was set in motion in 2007 by a letter from an activist shareholder with a stake of just 1 per cent. It is easy to be wise after the event, but it is argued that the board should have responded to that letter with less urgency.
The balance of power remains clear in this regard. If shareholders believe they know better, the ultimate means of exerting pressure is to dismiss the director and appoint someone else via the AGM. If the AGM does not wish to do so, it will have to accept that the director leads in his own way.
Transparency is particularly important when relations are strained
As long as the atmosphere within the private limited company is good, nobody worries about information rights. Questions are simply answered and the board often proactively involves shareholders in important developments — sometimes even without being obliged to do so.
Problems only arise when relations sour. Then the willingness to involve shareholders disappears, and they begin to fear that plans are being hatched behind their backs to, as the saying goes, ‘clean out the company’.
Strikingly, this is precisely the moment when greater openness is required. The Enterprise Chamber has ruled that “it is precisely where personal relationships are governed by suspicion that the provision of generous, factual and verifiable information is crucial”. The instinct to ignore suspicious shareholders may be understandable, but it is legally untenable — and, moreover, counterproductive: it solves nothing and exacerbates the conflict.
Prevention is better: make concrete agreements
The best strategy is to prevent shareholders from becoming suspicious. In a shareholders’ agreement or through an informal arrangement, you can stipulate that shareholders receive financial reports at regular intervals and, for example, are briefed by the board every quarter. Shareholders in a highly private setting do not suddenly gain more rights as a result — after all, they already have a broader right to information than just the annual question-and-answer session at the AGM. The point is that these broader rights have never been specifically elaborated in case law. Should a dispute arise, it is therefore unclear exactly what shareholders are entitled to. With clear agreements, everyone knows where they stand in advance.
Bear in mind one important precondition: shareholders in similar circumstances must be treated equally. The board must not, therefore, update only some of the shareholders on a regular basis. What is, of course, permitted is to invite all shareholders to consultations — the fact that some of them never turn up in practice is their own choice.
Q&A: frequently asked questions about the duty to provide information to shareholders
Who is entitled to information: the individual shareholder or the meeting?
Formally, it is the general meeting, not the individual shareholder. In principle, questions are asked and answered during the meeting; a question received by email only after the meeting is, in principle, too late.
Can the board refuse to answer a question?
Only if there is a compelling interest, such as protecting the company’s competitive position. The board does not decide for itself whether a question is ‘relevant’ enough; the basic principle is that the meeting is entitled to an answer.
Are shareholders also entitled to information outside the annual general meeting?
In the case of closely held companies, such as family businesses with a small circle of shareholders, they do. In such cases, the board may even have a duty to provide important information on its own initiative.
Does the duty to provide information also apply to certificate holders?
Yes. Even certificate holders who have little say via a STAK provide capital and must be able to protect their interests and prepare for votes.
What information must always be disclosed?
Matters that directly affect shareholders: dividend policy, the company’s investments and its financial position. Day-to-day operational matters are the responsibility of the board and do not need to be disclosed.
What if relations between the board and shareholders deteriorate?
It is precisely then that the provision of generous, factual and verifiable information is crucial. Ignoring suspicious shareholders exacerbates the conflict and is not legally tenable.
How do I prevent conflicts over information?
Set out in a shareholders’ agreement or informal arrangement that shareholders receive financial reports periodically and are updated, for example, on a quarterly basis. In doing so, treat shareholders equally in comparable circumstances.
Are shareholders allowed to interfere with the board’s management?
They may be critical and engaged, but management lies with the board. The ultimate means of pressure available to the shareholders’ meeting is to dismiss and replace a director; if this does not happen, the shareholders must accept the board’s management style.
Questions
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