Business lawyers at Gehres Law Library can provide assistance to business organizations in understanding and complying with their obligations under state law. One such obligation for companies with shareholders is a requirement to produce an annual report. Your organization needs to understand when an annual report must be made and the requirements associated with the report. . business lawyers

What Your Business Needs to Know About Annual Reports to Shareholders

According to California Corporations Code section 1501(a), the board of directors of a corporation is required to send an annual report to shareholders no later than 120 days after the fiscal year closes. This requirement is in place except when a corporation has less than 100 shareholders of record and the requirement is expressly waived in the corporate bylaws.

Unless otherwise specified in the articles of incorporation or the corporate bylaws, the report can be sent by electronic transmission. The report must contain a balance sheet at the close of the fiscal year. The report also must contain an income statement for the fiscal year and a statement of annual cash flows for the fiscal year.  The report either must be accompanied by a report created by independent accountants or must contain a certificate from an authorized corporate officer indicating that the financial statements were prepared without an audit from the corporate books and corporate records.

The report must also provide notice of certain specific transactions, such as when advances or indemnification of more than $10,000 was paid during the fiscal year to directors or officers of the corporation.

California courts have broadly interpreted section 1501(a) because an annual shareholder report is vital to investors being able to understand the operations of business entities in which they are invested. As a result, court opinions have held that even former shareholders may be entitled to receive an annual report from the organization under certain circumstances.

If a report is not sent in a timely manner, shareholders can make a request for the report. California Corporation Code section 1601 establishes the rule that there is no requirement for shareholders to specify a separate reasonable purpose for obtaining the reports to which they are entitled under section 1501(a). Instead, they are entitled to such reporting as a matter of law.  California law also imposes a statutory fine if a corporation neglects to send, fails to send, or refuses to send an annual report.

If the corporation produces a false, misleading, or an improperly prepared report, the corporation is in breach of its fiduciary duty and can be held legally liable for losses. Shareholders may pursue a damage claim to recover compensation for losses caused by the corporation’s misconduct in connection with the annual report, including in situations where negligence was the cause of the losses.  See Small v. Fritz Companies, Inc.

Getting Help From Business Lawyers

If your organization requires assistance in understanding your obligations or complying with the laws regarding annual reports to shareholders, give us a call today. If you are a shareholder who has not been furnished with a required annual report, you can also reach out to our legal team for assistance. Just give us a call at 858-964-2314 or contact us online to find out how our business lawyers can help you.