Arguing that a shareholder does not have a right under the Massachusetts Business Corporation Act to inspect a corporation’s books and records after the board of directors has refused his litigation demand concerning alleged corporate wrongdoing.
In this case, which the Massachusetts Supreme Judicial Court has taken sua sponte for direct appellate review, the Court will decide under what circumstances a shareholder may be permitted to inspect a corporation’s books and records after the board of directors has refused his litigation demand concerning alleged corporate wrongdoing. Under the Massachusetts Business Corporations Act, G. L. c. 156D, § 16.02(1), a shareholder has the right to inspect certain corporate books and records if he establishes a “proper purpose” with “reasonable particularity,” among other statutory requirements. At issue, then, is what constitutes a “proper purpose” sufficient to permit a shareholder to inspect the board’s books and records after the board has refused the shareholder’s litigation demand.
NELF will argue, in support of Vertex, that a “demand refused” shareholder should not be permitted to inspect the board’s books and records unless he can show that the board’s decision making process may have lacked the good faith and diligence necessary to warrant protection under the business judgment rule. This is because another key provision of the Act, addressing shareholder derivative actions, expressly codifies the business judgment rule and requires a court to uphold a board’s refusal of a shareholder’s litigation demand, so long as a majority of independent directors “has determined in good faith after conducting a reasonable inquiry upon which its conclusions are based that the maintenance of the [shareholder derivative suit] is not in the best interests of the corporation . . . .” G. L. c. 156D, § 7.44(a). That is, a demand-refused shareholder is limited to seeking judicial review of the board’s decision making process itself, and only when the shareholder has presented a credible threshold challenge to the integrity of that process to overcome its presumptive validity. Therefore, to harmonize the books-and-records provision with the shareholder derivative provision of the same statute, as NELF will argue the Court should do, a demand-refused shareholder who seeks discovery of the board’s documents should be required to persuade the trial court that the board’s decision making process does not warrant protection under the business judgment rule. Accordingly, the shareholder should be required to show that the board’s decision has fallen short of at least one of the three statutory requirements quoted above: good faith, reasonableness, and independence. For these and other reasons discussed below, NELF will argue that the SJC should affirm the lower court’s dismissal of Chitwood’s books-and-records request.