Summary
The Massachusetts Supreme Judicial Court held that a shareholder seeking corporate records under G. L. c. 156D, § 16.02(b), need only demonstrate a proper purpose reasonably relevant to the shareholder’s interests and identify facts permitting a reasonable inference that the requested records could reveal corporate wrongdoing or mismanagement. The court rejected the application of the more demanding Delaware credible-basis standard and held that the statutory inspection right is independent of discovery limitations applicable to derivative actions. Because the shareholder’s demand was overbroad but the trial judge applied an excessively demanding standard, the court vacated the judgment and remanded for further proceedings.
Topics
Practice areas
Questions Presented
- What standard governs whether a shareholder has a proper purpose to inspect corporate records under G. L. c. 156D, § 16.02(b) and (c)?
- Whether a shareholder seeking records to investigate alleged corporate wrongdoing must present evidence beyond particular facts or circumstances permitting a reasonable inference that the requested records could reveal wrongdoing or mismanagement.
- Whether a prior rejection of a shareholder's derivative demand imposes the same evidentiary burden applicable to defeating a motion to dismiss the derivative action under G. L. c. 156D, § 7.44(d).
- What records fall within the statutory inspection right when the shareholder seeks records concerning a board or special committee's response to a derivative demand?
Holdings
- A shareholder seeking corporate books and records under § 16.02 to investigate possible corporate wrongdoing or mismanagement establishes a proper purpose by identifying particular facts or circumstances permitting a reasonable inference that the requested records could possibly reveal information tending to indicate wrongdoing or mismanagement, provided the demand is made in good faith.
- A shareholder's right to inspect corporate records under § 16.02 is independent of the limitations governing discovery or dismissal of a derivative action under G. L. c. 156D, §§ 7.43 and 7.44. A rejected derivative demand does not require the shareholder to prove that the independent directors lacked independence, acted in bad faith, or conducted an unreasonable inquiry in order to establish a proper purpose for inspection.
- Under § 16.02(b), a shareholder seeking to verify a board or special committee's response to a derivative demand is entitled, if the statutory requirements are met, to inspect excerpts from original minutes or comparable records reflecting action taken at the relevant board or committee meetings, but not reports, discussion, documents supplied to directors, or records memorializing decisions not to act.
Key quotations
“Where a shareholder seeks corporate books and records under § 16.02 and claims a proper purpose of investigating corporate wrongdoing or mismanagement, the shareholder demonstrates a proper purpose where he or she identifies particular facts or circumstances that permit a reasonable inference that the requested books and records could possibly reveal information that would tend to indicate the existence of corporate wrongdoing or mismanagement.” (at 680)
“Section 16.02, however, provides "an independent right of inspection," and its drafters made clear in their comments that the right of inspection under § 16.02 is available "at any time."” (at 681-682)
“The shareholder need not, as the judge ruled, provide evidence of wrongdoing beyond the timing of the press releases and the insider trades to obtain these excerpts of the original minutes.” (at 678)
Factual background
Vertex announced interim phase-two study results concerning drugs for treating cystic fibrosis, causing its stock price to rise, and later issued a corrective announcement that caused the price to decline. Between the announcements, seven Vertex officers and directors sold more than $37 million of Vertex stock. After an earlier shareholder demand for derivative litigation was investigated and rejected by a special committee of independent directors, Chitwood demanded corporate records to investigate potential wrongdoing, mismanagement, and fiduciary-duty breaches.
Procedural history
Chitwood sought corporate records to investigate alleged fiduciary-duty breaches involving Vertex's financial reporting and insider stock sales after the corporation declined his earlier derivative-litigation demand. Following cross motions for judgment on the pleadings, a denied motion for summary judgment, and a one-day bench trial, the Superior Court concluded that Chitwood had not shown a proper purpose and dismissed the complaint with prejudice. The Supreme Judicial Court vacated and remanded.
Remand instructions
Remand to the Superior Court to isolate the portions of the shareholder's demand that fall within the scope of § 16.02(b), particularly excerpts of minutes or comparable records reflecting actions taken by the board or special committee, and then determine whether inspection of that subset is supported by a good-faith proper purpose and satisfies the other statutory requirements.