In the recent decision Cain v. Merck & Co., Inc., the New Jersey Appellate Division held that shareholders of New Jersey corporations are entitled to inspect board of directors and executive committees minutes, in addition to minutes of shareholder meetings. The Appellate Division made clear, however, that shareholders must demonstrate a “proper purpose” in exercising this right and that the scope of board of directors and executive committee minutes required to be made available for shareholder review are limited to only those minutes pertinent to that proper purpose.
In Cain, the plaintiffs made a written demand, pursuant to N.J.S.A. 14A:5-28(4), for the inspection of certain books, minutes and records of the company in connection with the plaintiffs’ claim that the company had engaged in wrongful conduct and mismanagement in failing to disclose the results of a clinical drug trial for a period of twenty-one (21) months. The trial court ruled that the plaintiffs were entitled to inspect all of the board of director and executive committee minutes for that period.
Section 14A:5-28 provides that: (1) a corporation is required to “keep the books and records of account and minutes of the proceedings of its shareholders, board and executive committee”; (2) upon request, a corporation shall provide certain financial statements to a shareholder; (3) a shareholder holding at least five (5%) percent of the outstanding stock of a corporation, or who has owned his stock for at least six (6) months, has the right to inspect “for any proper purpose” a corporation’s “minutes of the proceedings of its shareholders and records of shareholders”; and (4) a court may, “upon proof by a shareholder of proper purpose . . . compel production . . . of the books and records of account, minutes, and record of shareholders” of the corporation. In construing the statute, the Appellate Division acknowledged that shareholders have a qualified common law right, not limited to simply stock transfer records, to examine corporate books and records, provided that the inspection request was made in good faith and for a proper purpose. The Appellate Division further noted that unlike the language of subsection (3) of the statute, the language of subsection (4) was not specifically limited to minutes of shareholder meetings. Accordingly, the Appellate Division held that under N.J.S.A. 14A:5-28(4), a shareholder is entitled to inspect the minutes of the board of directors and executive committees of a corporation.
Recognizing that an unfettered right to inspect board of directors and executive committee minutes could be detrimental to the best interests of the corporation and its shareholders, the Appellate Division made clear that this inspection right is not unqualified. A shareholder has the burden of proving a “proper purpose” for its inspection demand, based upon “specific and supported, credible allegations of mismanagement.” “Fishing expeditions” by shareholders based upon general or unsubstantiated claims of mismanagement are not permitted. Additionally, a court has the power to specifically circumscribe the scope of the inspection, limiting the inspection to only those documents relevant to the shareholder’s demonstrated proper purpose. In Cain, therefore, the Appellate Division limited the scope of the minutes available for plaintiffs’ inspection to only those portions of board of directors and executive committee minutes dealing with the clinical drug trial during the period the plaintiffs alleged the company wrongfully withheld the results of the trial. The plaintiffs were not entitled to inspect all corporate minutes for that period, as previously allowed by the trial court.