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Cain v. Merck & Co., Inc.

415 N.J. Super. 319, 1 A.3d 834 (App. Div. 2010)

CORPORATIONS; SHAREHOLDERS; INSPECTION RIGHTS — New Jersey statutes permit shareholders, with a proper purpose, to request a court order to examine the minutes of board of directors meetings and those of executive committee meetings, and not just those of shareholder meetings.

Shareholders who owned eleven shares of stock in a publicly held corporation filed a derivative suit in federal court against the corporation, its board of directors, and certain officers. They alleged that the corporation and its board engaged in corporate mismanagement and wrongdoing by failing to timely disclose the results of a clinical trial for a cholesterol-lowering drug under development. The shareholders made a written demand to the corporation to inspect certain books and records that were pertinent to their interests, as shareholders, and to review the way by which the corporation was managed. The corporation’s counsel requested clarification of the shareholders’ purpose for the records request. The shareholders replied that they were seeking documentation relating to the corporation’s wrongful conduct that allegedly harmed investors when the corporation delayed the results of the clinical drug trial for almost two years.

After the corporation rejected the shareholders’ inspection request, the shareholders filed a state court suit seeking an injunction requiring the corporation to grant it access to corporate books. Pursuant to New Jersey’s Business Corporations Act, N.J.S.A. 14A:5-28(4), a court, upon proof of a proper purpose, may compel a corporation to allow a shareholder to examine its books and records of account, minutes, and shareholders records of the corporation. The corporation and the shareholders disagreed as to the interpretation of the statute. The corporation argued that the statute only permitted the shareholders to examine the minutes of shareholder meetings, while the shareholders argued that it permitted examination of the minutes for meetings of the board of directors and its executive committee. The lower court found that the shareholders were entitled to review those minutes as well. The corporation appealed.

The Appellate Division held that in order to determine whether shareholders had a right, under the statute, to inspect minutes of board meetings and executive committee meetings, it needed to examine the use of the word “minutes” throughout the entire subsection of the statute (N.J.S.A. 14A:5-28) . It noted that in clause (1) of the subsection, a corporation is required to maintain the “minutes” and in that case “minutes” referred to minutes of meetings of shareholders, board of directors, and the executive committee. In part (3) of the subsection, which provides a qualified right of inspection for certain shareholders who either held a certain percentage of shares or held shares for a certain amount of time, the word “minutes” specifically referred to minutes of shareholder meetings. However, with respect to part (4), the statute refers to “minutes” without any qualifications. Therefore, the Court interpreted the statute as permitting the shareholders to request a court order to examine the minutes of board of directors meetings and those of executive committee meetings.

The Court, on the other hand, found that the lower court’s order was too broad in that it did not limit the disclosure to the portions of the minutes that were relevant to the shareholders’ “proper purpose.” The shareholders’ “proper purpose” for examining the corporate records was related to its suit with respect to the delayed release of the results of the clinical drug trials. The Court rejected the shareholders’ argument that they were entitled to review all corporate records to examine the breadth of corporate mismanagement. It found that this was not a “proper purpose” and that the shareholders were not entitled to conduct a “fishing expedition” based on general and unsupported allegations of corporate mismanagement.


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