Why You Must Have Your Stock Certificates Properly Documented

The Michigan Court of Appeals, in Hammoud v. Advent Home Medical, Inc., recently heard a case examining the importance of making sure stock ownership is properly documented for the corporation and for the shareholder.

The Facts in a Nutshell

Amanda Hammoud requested shareholder and accounting records from Advent claiming she was entitled to receive this information as a shareholder to “monitor the financial health of the corporation, especially given recent communications about the corporation’s financial position and financial decisions, reducing benefit and payments to the shareholders, employees… to affirm her ownership / shareholder share… and to ensure Advent was in compliance with the Articles of Incorporation and Bylaws.”

Advent did not respond to Hammoud’s request for the records so she filed a lawsuit pursuant to MCL 450.1487(3) which states “(3) If the corporation does not permit an inspection within 5 business days after a demand has been received in compliance with subsection (2) . . . the shareholder may apply to the circuit court . . . for an order to compel the inspection.”

In response, Advent claimed that Hammoud was not a legitimate shareholder, but as proof of her shareholder status Hammoud presented a notarized transfer of stock certificate for 400 shares.

Summary of the Courts’ Findings

The Michigan Court of Appeals determined that Hammoud provided sufficient proof she was a shareholder and that “how or why Hammoud became a shareholder is not probative of whether she is, in fact, a shareholder.”  The court also found that  “a shareholder who has a genuine, good faith interest in the corporation’s welfare or her own as a shareholder is entitled to inspect those corporate books that bear on her concerns.”

Why This Case is Important

• For shareholders:  this case reinforces that corporate records matter.  A lot.   In order to have the rights associated with ownership, the ownership has to be documented.  If Hammoud did not have documents to prove she was a shareholder, this case would have ended very differently.  Many people claim ownership in a company because they were either promised ownership, told they had ownership, or there was some informal documentation that they had ownership; however, unless it’s documented, it doesn’t count. Also, as a shareholder this case clearly sets out what records you are entitled to receive.

• For companies: the court laid out a very broad standard and one that will essentially permit any shareholder to have access to all the records of the company.  Corporations should consider the effects of offering stock to key employees in order to retain or reward them.  If they do issue shares, these companies will be opening a Pandora’s Box for a shareholder to request voluminous corporate information to make sure officers and directors are acting in the best interest of all shareholders, and not breaching fiduciary duty.  These requests for information invariably cause distraction from running the business and can cause turmoil among all those involved.  A high price to pay.

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