Nonprofit Directors’ Rights of Inspection – Nonprofit Law Blog

As a board member (director) of a California nonprofit public benefit corporation, you have certain rights of inspection that allow you to access and review the corporation’s books, records, documents, and physical properties. Section 6334 of the Nonprofit Public Benefit Corporation Law and Section 8334 of the Nonprofit Mutual Benefit Corporation each provide:

Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director.

The inspection rights are different for a board member of a California religious corporation. Note that these rights are not described as absolute and are instead conditioned. Section 9513 of the Nonprofit Religious Corporation Law provides:

Every director shall have the right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director for a purpose reasonably related to such person’s interests as a director.

(emphasis added)

Application

If any person who is a board member of a California nonprofit public benefit or mutual benefit corporation requests an organizational document, generally, they have the right to inspect and copy them at any reasonable time (e.g., during business hours). Such documents may include:

• Financial records: In meeting their fiduciary duties, board members should regularly review the organization’s financial records, including budgets, financial statements, information returns, and audit reports (if any).
• Board and board committee meeting minutes: Board members should review and, as the board, approve the minutes of past board meetings to ensure accurate documentation of board actions and any important background information. Deleting certain information included on the minutes may also be important for multiple reasons, and board members may want to consider who may have access to the minutes (e.g., staff, members, current board members including those who may be under consideration for removal, government regulators upon demand, court).
• Governing documents and governance policies: Board members should periodically review and always have access to the organization’s articles of incorporation and bylaws, as well as any policies and procedures that govern the board’s operations and conduct. Failing to comply with the provisions of these documents may result in harm to the organization and, in certain circumstances, personal liability to the board members.
• Contracts and agreements: Board members should also have access to inspect and review the organization’s contracts, agreements, and other legal documents. The ‘absolute’ right to inspection means that the board member requesting such documents does not require a business rationale for exercising this right. However, board members have fiduciary duties including a duty to keep the organization’s confidential information confidential and a duty to exercise their rights as board members in the best interests of the organization (and not merely to benefit themselves personally).
• Nonpublic Information: Board members may have the right to access confidential information when necessary to fulfill their fiduciary duties (but see below).

Restrictions

While board members of a California nonprofit public benefit corporation or mutual benefit corporation have what is termed as ‘absolute’ inspection rights, those rights are not truly absolute and may be subject to other laws that supersede this corporate laws.

First, the board member must make the request for inspection in their capacity as a board member. If the board member is making the request in their personal capacity (e.g., because they want to take personal advantage of an opportunity described in the corporation’s documents), they should have such request denied. If a board member asserts that they are requesting a corporate document in their capacity as a board member but plans to use it primarily for their personal reasons, they may be in breach of their fiduciary duty of loyalty to the corporation. The duty includes the responsibility to maintain the confidentiality of sensitive information and to avoid receiving a prohibited private benefit using charitable assets.

Second, courts have held that there are some privacy rights and considerations that can be weighed against a director’s inspection rights:

• the privacy rights of members regarding ballots voting on a board of directors; and
• the harm to the corporation that would likely result from a disclosure, possibly only if accompanied by evidence that the requesting director intends to misuse the documents to harm the corporation.

See When “Absolute” Is Not – Does an Association Director have an Absolute Right to Inspect Association Records? (James O. Devereaux, Berding Weil). But see Litigation Does Not Necessarily Vitiate Director’s Absolute Right To Inspect (Allen Watkins).

Tips

Make sure your board members understand their fiduciary duties including as they pertain to their rights of inspection.

Confer with an attorney if receiving a request from a board member to view a document that may not have a clear connection to the board member’s responsibilities as a board member, particularly if such document might be protected by privacy laws (e.g., HIPAA) or made confidential pursuant to a contract.

Note that a former board member does not have rights of inspection, though there are some policy concerns associated with the circumstance where a board member is removed for making a valid request to inspect documents that they should be reviewing as a fiduciary (e.g., financial statements).

Be careful of corporate documents (including emails from the executive) regarding a board member that might contain information that could be characterized as defamatory or otherwise create problems if such board member were to see such documents.

Related