A Shareholder’s Right of Access To Board And Executive Committee Meetings

Shareholders in a New Jersey corporation have the statutory right to inspect books and records concerning the corporation and its affairs; but does this right extend to minutes of the board of directors and executive committees?  For example, can the shareholder who does not participate in the management of the business get behind the scenes minutes for any reason or no reason at all?scrutinize

The short answer is that when there is a reasonable need for those records, a New Jersey court is likely to require that they be provided to the shareholder.  A recent New Jersey Superior Court decision clarified this issue in holding that the New Jersey Business Corporation Act (“BCA”) §5-28(4) allows a court to grant to a shareholder, with proof of a proper purpose, the right to examine the minutes of the board of directors or executive committees as well.  See Cain v. Merck & Co., 415 N.J. Super. 319, 323 (App.Div. 2010).

Empty Complaints Are Insufficient to Gain Access

The Cain decision indicates that shareholders need more than a weak empty complaint of corporate misconduct in order to fulfill the “proper purpose,” requirement of the statute and secure the assistance of the court.  Board members and executives, although still protected from unreasonable shareholder interference, should not presume that conduct will not subject to inspection by shareholders, including private meetings of the board or executive committees. The Appellate Division analyzed the issue as one of statutory interpretation, parsing the language of the BCA in its determination of whether the word “minutes” applies to only shareholder meetings.

The issue arose when plaintiff shareholders Mary E. Cain and James D. Cain (the “Shareholders”), holders of eleven shares of defendant Schering-Plough Corporation (the “Company”), filed a shareholder derivative complaint against defendant Company for corporate mismanagement and wrongdoing in connection with the failure to make a timely disclosure of the results of a drug trial for one of Schering’s products called ENHANCE. Schering Plough responded with a motion to dismiss on the basis that Shareholders failed to plead futility of demand as required by the Federal Rules of Civil Procedure.

While the motion was pending, the shareholders made a demand in writing to inspect certain corporate documents, including minutes of the board of directors and executive committees, which Schering declined.  The trial court agreed with Shareholders that they had a “proper purpose” pursuant to the inspection statute, and allowed for the inspection of all documents (not just those relating to ENHANCE) by the plaintiffs.

Appellate Court Holding

On appeal, the Appellate Division held that reference to minutes in the BCA, N.J.S.A. § 14A:5-28(4), includes the minutes of the board of directors and the executive committee.  That section reads in part:

Nothing herein contained shall impair the power of any court, upon proof by a shareholder of proper purpose . . . to compel the production for examination by such shareholder of the books and records of account, minutes, and record of shareholders of a corporation.

However this right, the court held, does not permit a shareholder to “. . . conduct a fishing expedition based on general and unsupported allegations of mismanagement.”  Shareholders must have some proof of misconduct before proceeding with inspection.

Does The Statute Apply To Board Of Directors And Executive Meeting Minutes?

The Cain court construed N.J.S.A. §14A:5-28(4) by referring to other subsections provisions within the statute.  Section (1) refers to books and records of account and minutes “. . . of the proceedings of its shareholders, board and executive committee . . . .”  The appeals court held that the exclusion of minutes of executive committees could not be inferred from the fact that such inspections were not specifically excluded in the applicable provision, but excluded elsewhere.  The Court inferred, therefore, that the legislature did not intend to limit the right. 

Proper Purpose

Another issue that the Court clarified in Cain v. Merck & Co. is whether a request to inspect documents pursuant to §14A:5-28 is limited to the minutes/documents relating to the plaintiffs’ alleged “proper purpose.”  A requirement that a shareholder must meet before he or she is entitled to inspect a corporation’s books is to have a “proper purpose” for the inspection.  The law in N.J. regarding the showing of a “proper purpose” requires that the proponent investigate in some way the misconduct that it alleges in order to put forth some type of evidence to establish a credible basis for mismanagement.  Cain v. Merck & Co., 415 N.J. Super. 319 at 332.

This means, effectively, that a shareholder cannot simply cry foul and expect the corporation to hand over all of its financial information, minutes, and other business documents.  The Shareholders in Cain demanded access to minutes and documents for the period of April 1, 2006 to October 2, 2008, the length of time plaintiffs claim defendants failed to make a timely disclosure of ENHANCE.

Meanwhile, Schering Plough contended that the trial court’s order was too broad, and that the inspection should be limited to the “proper purpose” (documents relating to ENHANCE). The Court agreed and limited the inspection rights to just those minutes pertaining to ENHANCE, so as to avoid a “fishing expedition” to find some misconduct.

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