Legal Question in Business Law in California

Financial disclosure to Investors/shareholders

The company I work for has sold a significant amount of shares to investors. The company is in severe financial trouble due to inability to secure funding from a venture group. They are at least $250,000.00 in arrears with creditors/investors yet continue to spend corporate dollars on expenses which one might argue are not company-related. I have personally witnessed this. Don't the investors/shareholders have the right to demand an audit of the corporation's accounts? The COO has written numerous letters to them in attempts to delay suits. Who can I talk to about what I know. What they are doing is wrong, at least from a moral standpoint and I know if I had my money tied up in their business I would want to know where and how it is spent. What statutes might I research?


Asked on 9/26/99, 1:49 pm

1 Answer from Attorneys
Jed Somit Jed Somit, Attorney at Law

Re: Financial disclosure to Investors/shareholders

Shareholders have limited rights to information, but some right

to demand that the Board of Directors look into crucial issues. If a

demand on the Board would be futile, sometimes shareholders can bring

a shareholder's derivative suit to collect monies due the corporation

from directors or officers.

The first place to report suspicion is the Board of Directors. The company's

attorney or accountant may also be appropriate. Note that this could incite a

defamation suit or your firing.

Investors and shareholders may be able to sue if there were material

misrepresentations made to them in connection with the sale of the shares,

or significant omissions which made what was said misleading.

Assuming that the corporation is a California corporation, look at California

Corporations Code, Title 1, Chapters 3, 6, 8, and the general law of the fiduciary

duty of officers and directors. See also the Corporations Code Sections 25400 and following.

There is also federal law; I cannot tell if it would apply.

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Answered on 9/27/99, 8:37 pm


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