Every investor or lender wants regular information from companies taking their money. And most of us are frustrated by the lack of regular communication – unless the company needs more money.
On the other side, entrepreneurs and CEOs usually have a natural fear of giving too much information to investors and bankers after the initial amounts have been received. They worry that – in the case of investors – investors will not keep the information confidential and that financial data will find its way into competitors’ hands. Others worry that investors will latch onto individual line items within financial data and engage in inquisitions regarding telephone bills, marketing costs and other tactical line items in detailed financial statements. So, let’s focus upon investors.
The minimum legal requirements
First, let’s cover the absolute minimum legal requirement a company must provide to its investors. There must be an annual meeting of the shareholders, and that meeting must be announced with written notice at least ten days prior to the meeting. (There is a provision that a waiver of notice may be signed preventing this need, but it requires that all shareholders sign).
Required actions by shareholders
[Email readers, continue here…] At the annual meeting (which can be attended by phone or video conference), there are actions that require a vote of the shares present either by proxy or in person. These include election or re-election of board members if required by the bylaws of the corporation, approval of any increases to stock option plans (which would dilute the worth of shares outstanding,) and approve any additions to the capital stock authorized to be issued. Shareholders may vote on other issues during the year by written consent, including acquisitions, stock issuances, changes to the articles of incorporation and bylaws, and more.
How much financial information must companies give?
But the question that is most often asked is: “How much financial information must be divulged?” The answer is that the minimum requirement is to provide an income statement and balance sheet to all shareholders annually. There is no requirement that either be detailed by general ledger account, and those statements should rarely be that detailed anyway. Summarizing income statements with a line for revenues, cost of revenue, general and administrative expenses, sales and other direct costs – all leading to net income, would satisfy the legal requirement for statement of income and expense.
Requirements created by investment documents
When a company accepts an investment from professional or organized investment groups – such as angel groups, venture capitalists or corporations, there is usually a document signed entitled “investors rights agreement” that calls for additional financial and narrative reporting requirements due to that class of shareholder. This could include the need for audited financials, monthly financial and narrative reporting and more. That burden is an ongoing cost of taking the investment, much as a public company takes on the additional burden of governmental reporting, both adding to costs over time.
Good practices vs. minimum requirements
Good relations with investors can be maintained only by keeping current with information between the company and the investors. If there is concern over some investors gaining a competitive advantage, the amount of information may be reduced to the minimum for some classes of investors. A good example of this is the information provided to common stockholders, many of whom may be former employees who have exercised stock options and moved on to join the ranks of the competition.
Of course, a public company is not entitled to pare its information to reduce exposure to competitors. That is one of the many costs of becoming a public entity as many CEOs have found and dealt with over the years.
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