On suspicion of corporate misconduct or mismanagement, shareholders of a corporation will often begin their investigation by seeking the books and records of the corporation to determine whether they have a valid claim. In New York, shareholders have both statutory and common law rights to inspect their corporation’s books and records as long as they do so in good faith and for a valid purpose, which has historically been found to include “efforts to ascertain the financial condition of the corporation, to learn the propriety of dividend distribution, to calculate the value of stock, to investigate management’s conduct, and to obtain information in aid of legitimate litigation.” Matter of Tatko v. Tatko Bros. Slate, 173 A.D.2d 917, 918 (3d Dep’t 1991). The New York Business Corporation Law (BCL) provides that any shareholder of record, by written demand, may examine any minutes from shareholder proceedings or shareholder records, as well as certain financial records, that are reasonably related to that person’s interest as a shareholder. BCL Section 624(b), (e). In contrast, the common law right to inspection can extend to all corporate books and records that are relevant to an investigation or dispute.

The Evolution of the Inspection Right

Although the common law and statutory rights of inspection have existed in some form in New York law since the 19th century, they were not seen as particularly effective until relatively recently, owing to a 2014 First Department decision that overturned the dismissal of a pension fund’s petition for the books and records of McGraw-Hill, as part of an investigation of possible mismanagement and breaches of fiduciary duty by its board. McGraw-Hill had moved to dismiss on the grounds that petitioners had failed to identify specific wrongdoing, and thus there could be no valid purpose to the inspection. In granting dismissal, Justice Jeffrey K. Oing of the New York County Commercial Division expressed concerns that petitioners were essentially seeking to subject McGraw-Hill to pre-litigation discovery in order to avoid the evidentiary protections that would be available in litigation. This logic essentially crippled the common law right to inspection in New York because an inspection is intended, at least in part, to be a means by which a shareholder could determine if a viable claim even existed. The Appellate Division reversed, holding that “investigating alleged misconduct by management and obtaining information are, in fact, proper purposes for a BCL Section 624 request, even if the inspection ultimately establishes that the board had engaged in no wrongdoing.” Ret. Plan for Gen. Emps. of City of N. Miami Beach v. McGraw-Hill Companies, 120 A.D.3d 1052, 1056 (1st Dep’t 2014).