Expansion of Shareholder Access to Corporate Documents Rightly Rejected in Merck Case
In our view, plaintiff was trying to backdoor a derivative action. The opinion refused to expand the common law to access the documents that would not have existed but for the requester's demands.
July 14, 2019 at 10:00 AM
6 minute read
The New Jersey Supreme Court recently adopted an Appellate Division decision rejecting an expansion of the right of shareholders not bringing a derivative suit to inspect corporate documents beyond “books and records of account, minutes, and record of shareholders.”
The plaintiff in Feuer v. Merck & Co, owned 288 shares of Merck stock when Merck consummated the purchase of Cubist Pharmaceuticals Inc. for $9.6 billion, despite its knowledge that certain Cubist patents were subject to challenge and then later invalidated. Feuer's counsel contacted the Merck board, questioning the deal since there was no discount to the acquisition price for the loss of the patents. Counsel asked that Merck reconsider or renegotiate the deal and, failing that, commence litigation against those responsible. The board did appoint a “Working Group” to review the matter, which concluded that the board's actions were a proper exercise of its business judgment and rejected Feuer's demands. His lawyer then submitted numerous questions to Merck's counsel about the Working Group and later wrote to the board demanding that the board sue the Working Group and its counsel for aiding and abetting the “underlying wrongdoing.” Subsequently, Feuer's counsel demanded twelve categories of “Merck's 'Books and Records'” on the issue of the Working Group and the Cubist transaction, as well as the board's consideration of his demands. The board refused his demand other than providing minutes of both the company and the Working Group which plaintiff received with confidentiality restrictions.
Feuer then brought suit, pursuant to N.J. S.A. 14A: 5-28(4), to access various Merck corporate records, claiming that he had a “proper purpose” because his demand “was reasonably related to his interests as a stockholder … and his forthcoming commencement of a shareholder's derivative suit on behalf of Merck.” He also relied on the common law. The trial court granted Merck's motion to dismiss and held that although Feuer did, indeed, have a proper purpose under the statute, the documents he requested were not covered by the “books and records of account” articulated in N.J. S.A. 14A: 5-28(4) and the common law did not expand the statutory inspection right.
Plaintiff appealed. The Appellate Division meticulously outlined N.J.S.A. 14A: 5-28. Subjection (1) mandates the maintenance of books and records by corporations; subsection (2) allows any shareholder to receive balance sheets and profit and loss statements; subsection (3) gives a long term shareholder and a more than 5% shareholder the rights to inspect minutes of the shareholders and records of the shareholders upon a showing of “any proper purpose”; and subsection (4) which, upon provision of the “proper purpose,” regardless of the ownership duration or the number of shares, gives any shareholder the right to compel production of ”books and records of account, minutes, and record of shareholders.” Under subsection (4), the court may impose conditions “or award any other or further relief as the court may deem just and proper.”
Feuer sought documents beyond those listed in subsection 4. He relied on the discretion accorded to judges in the second sentence of subsection 4 to obtain the documents beyond the books and records, minutes and record of shareholders. The Appellate Division opinion, however, makes it clear that this provision was not intended to expand shareholder's access with a court's intervention, but rather to “circumscribe” the scope of inspection in accordance with the legislative intent. If plaintiff's reading were correct, the first sentence of Section 4 would be surplusage because the judicial sentence allows the court to authorize inspection of whatever documents it deems “just and proper.”
The Appellate Division refused to interpret subsection four “to help [plaintiff] assess whether he has a well-founded derivative claim.” A derivative action under N.J.S.A. 14A: 3-6.5(3) has specific pleading requirements, including allegations of particular facts demonstrating that a majority of the board, or a committee, if applicable, were not independent when the determination was made to reject a demand. Motions to dismiss by corporations are common on the basis that such an action is not in the best interests of the corporation. In order to obtain discovery for a derivative action, plaintiff must make a “good cause showing of alleged facts which evidence a lack of independence by the person or group making the determination for the corporation or a lack of good faith determination.” Importantly, because Feuer owned shares worth less than $250,000 and less than five percent of the outstanding shares, he would have had to post security for Merck's reasonable expenses in a derivative action.
Although Merck argued that adoption of N.J.S.A. 14A: 5-28 by the Legislature had abrogated the common law upon which plaintiff relied, the Appellate Division decided that that question need not be decided since it would not be available to plaintiff under the facts and circumstance of this matter. Common law access requires a plaintiff to demonstrate good faith, a germane purpose, and “'facts to substantiate the concern about mismanagement,'” citing Cain v. Merck & Co, 415 N.J.Super. 319, 333 (App .Div. 2010). Additionally, plaintiff with insubstantial holdings could not demonstrate “a probability that all shareholders would be served by his proposed inspection.” Therefore, common law with its more generous approach would not be available to the plaintiff as he sought documents related to the Working Group and its work.
We support the Appellate Division opinion. In our view, plaintiff was trying to backdoor a derivative action. There is a statutory model to be followed and it is N.J.S.A. 14A: 3-6.8, requirement of a bond, and N.J.S.A. 14A: 3-6.5(3), requirement for discovery of making a good cause showing of lack of independence by the board or a lack of good faith. Furthermore, as the court pointed out, Feuer was demanding documents he himself caused the corporation to create in response to his demands; they were not documents prepared in the ordinary course of business. Only one of his requests dealt with the Cubist transaction itself. The opinion refused to expand the common law to access the documents that would not have existed but for the requester's demands and refused to ignore the dictates of the derivative statute. We agree.
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