Minority Shareholder Demands to Inspect the Books and Receive Dividends, or Will Complain to the SEC: How to Respond

The conclusion first: inspection is a right, dividends are a decision, and they get separate answers

The right of inspection and a dividend demand are legally different things. Answering them together makes the company look wrong on inspection and defensive on dividends. Split them internally first, then respond to each on its own terms.

Inspection. A shareholder may inspect and copy certain statutory records of the corporation at reasonable hours. This is a basic right under the Revised Corporation Code, it does not depend on the size of the holding, and its exact scope and conditions follow the Code as currently applied and the company's by-laws. The company may set reasonable arrangements for time, place and manner, and may refuse in specific situations, for example where the shareholder previously misused information or seeks it for a purpose unrelated to their shareholding, but it cannot refuse merely because the requester is small or difficult. A company that refuses inspection is almost always the losing side before the SEC.

Dividends. Whether and how much to declare is, in principle, for the board, based on whether the company has unrestricted retained earnings, its operating needs and the by-laws. A shareholder may propose a dividend at the meeting and challenge the board's reasons, but cannot compel one by wanting it. The discretion is not unlimited, however: a company that accumulates profits far beyond reasonable business needs and never distributes may face tax-side questions and claims that the board is abusing its discretion. The standard follows current regulation and counsel's advice.

Where the two meet. A minority shareholder often asks for the books precisely to check whether there are profits and where they went. If the dividend decision is well founded, letting them look tends to end the argument. If the company actually has related-party dealings with the majority, inflated executive pay or profits leaking out sideways, inspection will expose it. In that case the real risk is not the minority shareholder but the company's own conduct.

So step one is an honest internal question: can the books bear scrutiny? The answer decides whether your next move is "arrange the inspection" or "get the lawyer and the accountant to clean up first."

Three things to do now: acknowledge, never refuse receipt, propose an inspection date

Within the first week of receiving the demand, do three things: acknowledge it in writing, verify the requester's shareholder status, and propose concrete inspection arrangements. Silence and refusal of delivery are the worst options, because both are recorded as "the company refused."

1. Acknowledge in writing. The corporate secretary or an authorised officer confirms receipt of the written demand, states that the company will deal with it under the by-laws and the Code, and promises a substantive reply within a reasonable time. The acknowledgement need not grant or refuse anything yet, but it must go out, with proof of delivery kept.
2. Verify shareholder status. Check the stock and transfer book and the latest General Information Sheet: is the requester a registered shareholder, how many shares, fully paid or not, any dispute or pledge on the shares. If the status itself is defective, for example an unpaid subscription or an unregistered transfer, the handling changes entirely. The link between the book and the GIS is explained in the General Information Sheet guide.
3. Propose the inspection. Offer a date, a place, the categories of records available, copying arrangements and who bears the cost (per the by-laws and practice), and whether an accountant or lawyer may attend. Proposing the arrangement takes the question "is the company cooperating" out of the requester's hands: you have arranged it, and attending is up to them.

Internally, do two more things: have the corporate secretary assemble every statutory record, including the articles and by-laws, the stock and transfer book, shareholder and board minutes, financial statements, recent GIS filings and audit reports; and have the accountant check that the financial records are complete and compliant, so any problem is known to you before it is known to the requester.

If the demand letter is threatening or insulting, do not reply in kind. Your letters may later be read by the SEC or a court, and restraint helps. Keep everything in writing and confirm any conversation by email. The secretary's duties and authority in this kind of matter are covered in the corporate secretary and treasurer guide.

Arranging the inspection: what may be seen, how, and when refusal is legitimate

The principle: statutory records are open to the extent the law and the by-laws provide, the manner is reasonably arranged by the company, and refusal is possible only on grounds the law allows and must be explained in writing. Meet those three and the company is rarely caught out on inspection.

Records usually open to inspection. The Code generally lets shareholders inspect the articles and amendments, records of all business transactions, minutes of shareholder and board meetings, the stock and transfer book and financial statements. Whether detailed vouchers are included and what may be copied follows the Code as currently applied and the by-laws; have counsel confirm item by item. Shareholders may also demand the most recent financial statements.

Material usually outside the right. Trade secrets unrelated to shareholder rights, employees' personal data, litigation strategy documents, and third-party material under confidentiality obligations may be reasonably limited after counsel's review, but each limitation needs a specific reason; a blanket "confidential" does not work.

How to arrange it. During business hours at the company's premises; accompanied by the secretary or a designated officer; with a log of date, time, inspector and documents viewed; copying or extracts permitted as the law and by-laws allow; and a reasonable confidentiality undertaking if appropriate, so long as it does not obstruct the statutory right. Prepare the records in advance; hunting for files on the day signals disorder.

When refusal is legitimate. The law typically permits refusal where the requester has previously misused information obtained through inspection, is not acting in good faith or for a purpose connected to their shareholding, or is a competitor or a competitor's agent. These grounds require facts, must be stated in writing, and the burden of proving them generally falls on the company. Where unsure, have counsel assess before refusing, because a wrongful refusal carries heavier consequences than an open inspection.

The majority owner's personal accounts are not in scope. The minority inspects the company's books, not the majority's. But transactions between the company and the majority owner or their affiliates are company records and may be inspected, which is exactly why related-party dealings must be documented and approved properly in advance.

Dividends: when the company is obliged to declare, and how to justify not declaring

The core rule: a dividend requires unrestricted retained earnings and a board declaration under the by-laws. Without distributable earnings, none can be paid; with them, the board is still not obliged to distribute everything. Explaining "can we" separately from "should we" is what makes a written answer hold up.

Can we. Have the accountant confirm from the audited financial statements whether the company has retained earnings available for distribution and whether any legal or contractual restriction applies, such as covenants in a loan agreement, statutory reserves or capital requirements of a regulated industry. If there are no distributable earnings, the reply simply attaches the statements and says so; there is no need to argue "should we."

Should we. Where distributable earnings exist but the board declares little or nothing, legitimate reasons commonly include retention for an approved expansion or investment plan, working capital to absorb cash-flow swings, debt repayment or lender conditions, reserves for pending litigation or tax disputes, or a regulatory capital level. The reasons must be specific and ideally supported by a board resolution, a budget or a plan, not a bare "business needs."

The risk of retaining too much. A company that accumulates profits well beyond reasonable needs for years without distributing may be challenged on the tax side for improper accumulation and by minority shareholders for abuse of discretion. The standard of reasonable need and the tax consequence follow current regulation, so have the accountant and counsel assess together. "We don't want to pay the minority" must never be the only real reason.

Dividends must treat shareholders equally. Shares of the same class receive dividends pro rata. Profits may not be channelled to the majority under other labels, such as excessive executive pay, related-party pricing in their favour or long-outstanding shareholder loans. Those are the first things a minority inspection finds and the most common allegations in an SEC complaint or lawsuit.

Remitting dividends to foreign shareholders. If the board does declare, dividends to foreign shareholders involve central bank registration and tax handling; the process is in how profits are remitted out of a Philippine company.

Writing the reply: structure, tone, attachments, and what to leave out

A good reply does three things: gives concrete inspection arrangements, gives a documented explanation on dividends, and says nothing in response to the threat of a complaint. It is signed by the corporate secretary or an officer authorised by the board and reviewed by counsel before it goes out.

Structure. First paragraph: acknowledge the letter of the stated date and summarise the requests. Second: on inspection, state that the company respects the shareholder's statutory right, list the categories of records available, the date, place, accompaniment and copying arrangements, and any reasonable confidentiality request. Third: on dividends, summarise the latest audited financial statements, the board's resolution and reasons on distribution, and the company's dividend policy or the point at which the board will next review it. Fourth: offer to discuss further at the shareholders' meeting or a dedicated meeting.

Tone. Plain, specific, non-defensive, non-accusatory. Do not write "you have been obstructing the business" or "your demand has no basis," even if you believe it. Do not respond at all to "I will complain to the SEC": no threat, no discouragement, no sarcasm. The shareholder has the right to complain; your letter only needs to make any third party reading it see the company as the reasonable party.

Attachments. The latest audited financial statements, an extract of the board resolution on distribution if any, the dividend policy if any, and the inspection timetable. The fuller the attachments, the harder it is to claim the company is opaque.

What to leave out. No promise that dividends will or will not be paid in future; no statements about prospects that could be read as guarantees; no sensitive commercial information unrelated to the requests; no discussion of the majority owner's personal affairs; and no "sell me your shares and you won't need to inspect," which reads as pressure. If a buy-out is genuinely on the table, open it as a separate, formal, lawyer-assisted negotiation; see buying back a partner's shares.

After sending, file the letter, attachments and proof of delivery, and minute the matter at the next board meeting. Answer every subsequent letter in the same rhythm and tone.

If the shareholder does go to the SEC: how to cooperate, and the structural fix

On receiving a notice from the SEC, the company responds in writing within the deadline, produces documents truthfully and lets counsel handle the contact. It does not confront the shareholder or apply pressure. The SEC's concern is whether governance was followed; a company that took the earlier steps properly usually passes this stage without great difficulty.

How to cooperate. Appoint counsel as the company's point of contact; assemble all correspondence, the inspection arrangements, board resolutions and financial statements into one complete written submission; file within the SEC's timeline; and attend any mediation or hearing on schedule. The company's position is always the same: inspection was arranged as the law requires, the dividend decision rests on financial and operational grounds, and the company remains open to dialogue.

What not to do. Do not contact the shareholder to ask for withdrawal; do not discuss them with staff, customers or the industry; do not suddenly alter their rights during the complaint, such as dropping them from meeting notices; do not delete or alter any record. Each of those turns a governance dispute into something more serious.

Possible outcomes. If the company did have procedural lapses, the SEC may require corrective action, such as holding the overdue meeting, completing records or arranging the inspection. If the company was in order, the complaint may go nowhere. Either way, comply fully and document the corrective steps. Individual outcomes cannot be predicted and rest with the SEC.

The structural fix. Repeated inspection and dividend demands are at bottom a trust and information problem. The cure is routine: hold the annual shareholders' meeting on time with financial statements circulated in advance; adopt a written dividend policy at board level and review it every year; disclose related-party transactions beforehand and have them approved by disinterested directors or shareholders; and write disclosure frequency and dividend policy into the shareholders' agreement. With those in place, the minority's requests become routine business rather than an annual confrontation. If the real issue is that the company needs fresh capital and the minority will not contribute, that is a different deadlock, covered in the capital call deadlock guide in this series.

If the company needs its shareholder meetings, board resolutions, inspection arrangements and SEC submission prepared properly in one pass, Yixing can help.

Shareholder meeting documents, dividend resolutions and the SEC submission, done right the first time? → Yixing company setup and corporate governance services

Yixing (SEC Registration No. CS202009551, BI Accreditation No. CA-202624381-1, DOLE accredited) can organise statutory records, prepare board and shareholder documents, handle SEC filings, and refer licensed counsel where needed. Consult a licensed attorney for your specific case; this article is not legal advice.