Access Denied: NJ Appellate Division Clarifies Shareholder’s Right to Inspection of Corporate Records

In R.A. Feuer v. Merck & Co., Inc., the New Jersey Appellate Division, in a to-be-published opinion, narrowly construed the scope of a shareholder’s right to inspect a corporation’s records under N.J.S.A. 14A:5-28 and the common law.

A Merck & Co, Inc. shareholder appealed from the dismissal of his complaint seeking various corporate records, including twelve broad categories of documents. The shareholder sought evidence that Merck acted wrongfully in its acquisition of another pharmaceutical firm. After Merck appointed a working group to assess the shareholder’s concerns, the shareholder requested documents pertaining generally to the working group’s activities, communications, and formation; documents provided to the board regarding the target pharmaceutical firm and two of its drugs; and the board’s considerations of the shareholder’s demands and the working group’s recommendation. Merck disclosed pertinent minutes of the board and of the working group, but denied the remainder of the shareholder’s demand.

The trial court determined that the shareholder’s demand exceeded the scope of the “books and records of account, minutes, and record of shareholders,” which the shareholder had a statutory right to inspect and that the common law did not expand that statutory right.

The Appellate Division affirmed, narrowly construing the plain language of N.J.S.A. 14A:5-28(4). According to the court, “minutes” refers to “shareholder, board, and executive committee minutes,” and does not encompass any documents presented at a corporate meeting. “Books and records of account” consist of “accounting or financial documents,” not “any and all records, books and documents of a corporation.” The court also determined that the second sentence of subsection four, empowering the court, in its discretion, to “prescribe any limitations or conditions with reference to the inspection or award any other or further relief as the court may deem just and proper,” was designed to restrict or burden inspection, not provide broad grounds for inspection as argued by the shareholder. Finally, the court rejected the shareholder’s argument that he was entitled to “broad-ranging inspection” under the statute in order to pursue a derivative action.

The Appellate Division also held that the common law did not provide an avenue of relief to the shareholder. The court observed that, historically, the common law “created an inspection right that is simultaneously both broader and more restrictive than the statutory right created in our modern act.” While the common-law right of inspection is not necessarily limited to the categories of documents set forth in the statute, a requesting shareholder must prove “good faith and a germane purpose.” Indeed, a shareholder must “substantiate” concern about mismanagement by the corporation’s board and show “a probability” that the proposed inspection would serve the interests of all stakeholders. The court declined to decide whether the common-law right of inspection is abrogated by N.J.S.A. 14A:5-28 but concluded that, even if the common law survives, it provided no remedy to the shareholder on the facts presented. Fatally, the shareholder set forth insufficient allegations regarding the Merck acquisition to demonstrate the good faith, germane purpose, and substantial concern for mismanagement sufficient to warrant inspection. The court also noted that the size of the shareholder’s stake in the company bears on the “probability” that all shareholders would be served by the requested inspection. Moreover, the court questioned whether the types of documents requested – much of which consisted of documents the shareholder prompted the corporation to create – would fall within the scope of the common law.

Ultimately, the Appellate Division’s decision clarifies the narrow scope of N.J.S.A. 14A:5-28, but raises questions about the continued viability (if any) of the common law right to inspection.

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