Financial statement disclosure obligations under the BCL and DGCL

November 12, 2021 | By Patrick T. McCloskey

Much is written and discussed about the differences between the New York Business Corporation Law (“BCL”) and the Delaware General Corporation Law (“DGCL”), but there is one stark contrast that should not be overlooked by founders seeking to incorporate: a corporation’s obligation to provide financial statements to shareholders.

Under Section 624(e) of the BCL, upon the written request of any shareholder, the corporation is obligated to provide a balance sheet and profit and loss statement for the preceding fiscal year, plus any interim financial statements that have been provided to shareholders or made public. This obligation applies even if the financial statements have not been prepared when a shareholder makes the written request, albeit subject to a “reasonable” grace period.1

There is no such express requirement in the DGCL. Although stockholders of a Delaware corporation have the right to inspect books and records under Section 220 of the DGCL,2 Delaware case law indicates that, absent special circumstances such as a request for stockholder approval or where the failure would constitute a breach of fiduciary duty, there is no affirmative obligation on a Delaware corporation to prepare financial statements in response to a stockholder request.3

Depending upon the stage and nature of the business, an express obligation to prepare and provide financial statements at the request of a shareholder could be onerous and costly, especially if the business has limited resources.

For founders seeking to incorporate, this is yet another reason why a Delaware corporation may be a more attractive alternative to New York.

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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

1See BCL § 624(e) (“The corporation shall be allowed a reasonable time to prepare such annual balance sheet and profit and loss statement.”)

2Shareholders of a New York corporation have a similar inspection right under BCL §624(b), but, in addition to such right, any shareholder is entitled to the financial statements specified in BCL § 624(e).

3See The Ravenswood Investment Company, L.P. v. Winmill & Co., Incorporated, (Civil Action No. 7048-VCN) (Delaware Court of Chancery, February 25, 2016) (“[D]elaware disclosure law . . . generally does not require disclosures to shareholders unless shareholder action is sought. Thus, the failure to provide financial reporting, by itself, does not state a claim. . . 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.”)