On appeal from Superior Court of New Jersey, Chancery Division, Union County, Docket No. C-134-08.
The opinion of the court was delivered by: Chambers, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Rodríguez, Reisner and Chambers.
In this appeal, we address whether the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 to 14A:16-4, entitles shareholders to inspect the minutes of the board of directors and the minutes of executive committees, and if so, the breadth of that right of inspection. Resolution of these questions centers on the proper construction of N.J.S.A. 14A:5-28(4) of the Act. In pertinent part, that statute allows shareholders, upon proof of a "proper purpose," to examine "the books and records of account, minutes, and record of shareholders of a corporation." N.J.S.A. 14A:5-28(4).
We are required to determine whether reference to "minutes" in this statute refers only to minutes of shareholder meetings or includes the minutes of the board of directors and the executive committee. We conclude that the qualified right of inspection under the statute extends to the minutes of the board of directors and the executive committee. However, the shareholders are entitled to examine only those portions of the minutes that address their "proper purpose." They are not entitled to examine the minutes in order to explore unsubstantiated allegations of general mismanagement.
The decision of the trial court is affirmed in part, reversed in part, and remanded.
Plaintiffs Mary E. Cain and James D. Cain are the owners of eleven shares of common stock of defendant Schering-Plough Corporation (Schering). Before bringing this action, plaintiffs filed a shareholder-derivative complaint in federal court against Schering, its board of directors and certain executive officers. In that suit, plaintiffs contended that defendants engaged in corporate mismanagement and wrongdoing in connection with the failure to make a timely disclosure of the results of a clinical trial of a cholesterol-lowering drug, known as the ENHANCE study, and they also asserted that certain individual defendants engaged in insider trading. Plaintiffs alleged breach of fiduciary duty, gross mismanagement, waste of corporate assets, and unjust enrichment. Defendants filed a motion to dismiss the federal complaint on the basis that plaintiffs had failed to plead futility of demand with the particularity required by the Federal Rule of Civil Procedure 23.1.
While that motion was pending in federal court, plaintiffs made a written demand on July 22, 2008, upon Schering to inspect certain books, minutes, and records of the company "germane to our interest as Shareholders to review the manner in which the Company is being managed." Plaintiffs' counsel's letter to defendant dated August 7, 2008, provided further clarification of the purpose for seeking the documents, alleging that Schering had engaged in wrongful conduct that harmed investors and others when it delayed "for twenty-one months the release of the results of the ENHANCE trial."
After Schering rejected the request, plaintiffs commenced this litigation in state court by way of verified complaint and order to show cause, seeking an injunction ordering Schering to give them access to certain books and records of the corporation. Plaintiffs contended that they had a "proper purpose" in seeking these documents based on their allegations that the corporation was being mismanaged. Schering moved to dismiss the complaint.
On the return date of the order to show cause, plaintiffs clarified that the documents they were requesting were the minutes of the board of directors and the minutes of the executive committees from April 1, 2006 forward. April 2006 is when plaintiffs assert that the ENHANCE study ended.
The trial court denied Schering's motion to dismiss and granted plaintiffs' application for an examination of the minutes. The trial court concluded that N.J.S.A. 14A:5-28(4) allows shareholders who demonstrate a "proper purpose" to examine the minutes of the corporate board of directors and executive committee, and the court found that plaintiffs had come forward with a proper purpose to allow such an examination.
By order dated December 5, 2008, Schering was directed to provide to plaintiffs for inspection and copying "any non-privileged portions of the minutes of and any documents made part of the minute books for meetings of the Company's Board of Directors and Executive Committee for the period April 1, 2006 through October 2, 2008." This period represented the timespan from the date plaintiffs asserted the ENHANCE study ended in April 2006, until the return date of the order to show cause on October 2, 2008. Documents made part of the minute books were included in the inspection; those that were disseminated at the meetings but not included in the minute books were exempt. The court also required that any material in the minutes withheld due to a claim of privilege or work product had to be acknowledged in a log pursuant to Rule 4:10-2(e)(1). Notably, the court did not limit the inspection to ...