A victory for shareholders trying to learn about dark companies!

We often hear from shareholders in OTC-listed "dark" companies that have not only delisted and don't file quarterly financial reports with the SEC, but also don't send out financial statements to their shareholders - and sometimes refuse to provide financial reports to them even when asked!

When a company is incorporated in Delaware, a shareholders' right to information is governed by the Section 220 of the Delaware General Corporation Law. A basic summary is that shareholders have the right to examine company "books and records" as long as the request is made for a "proper purpose".

Since this is such an important tool for shareholders to find out what is going on at micro cap companies, we pay close attention to Delaware court cases that interpret the meaning of Section 220. The controversies tend to involve what purposes are "proper" and which particular "books and records" the shareholders will be allowed to see in connection with those purposes.

There was ruling last month by one of the heavyweights of the Delaware Court of Chancery (Vice Chancellor J. Travis Laster) that is a resounding victory for shareholders who are "outside the tent" of control at companies. It was in a case between a privately held investment fund (Sahara Enterprises, Inc.) and a woman who owned shares through a trust (Avery L. Woods Trust). You can download the whole opinion from the Delaware court website (link), but a key highlight is the decision that shareholders in Delaware have an absolute right to know about management compensation and related party transactions:

“[H]ow directors and senior officers are compensated and whether they are the beneficiaries of any related-party transactions are basic facts that stockholders are entitled to know. Section 220(b) defines a proper purpose as any purpose reasonably related to the stockholder’s interest as a stockholder. Some information is so foundational that a desire to have that information is itself a proper purpose. A stockholder should be entitled to obtain a general description of the company’s business, the identities of its directors and senior officers, and basic information about how they are compensated. Directors and officers are fiduciaries who have a duty to act loyally, in good faith, with due care to maximize the long-term value of the corporation for the benefit of its residual claimants. The residual claimants are entitled to know how their fiduciaries are taking money out of the corporation. A stockholder should not have to point to a valuation purpose or assert suspicions about corporate wrongdoing to be able to learn how much money the directors and senior officers are receiving.”

There are a number of Oddball companies that refuse to disclose this type of information to shareholders. It's not just that they don't put it in the annual reports, but when asked they pretend that shareholders do not have the right to know. Some examples where compensation information is opaque would be William Sadlier (SADL), Hanover Foods (HNFSA), or Bank of Utica (BKUTK).

We have been talking about this subject extensively in the Oddball Stocks Newsletter, and our concern is that if management is not talking about its own compensation, the compensation may be excessive. At Oddball, we pound the table for shareholder rights and better corporate governance, just as Benjamin Graham did:

"It is a notorious fact, however, that the typical American stockholder is the most docile and apathetic animal in captivity.  He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers.  The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who together own a majority of the stock but by a small group known as 'the management.'"

Do you know a dark company that needs to open up? If so, leave a comment below.