Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Chitwood v. Vertex Pharmaceuticals, Inc.

Supreme Judicial Court of Massachusetts, Suffolk

March 20, 2017


          Heard: November 9, 2016.

         Civil action commenced in the Superior Court Department on August 15, 2013. The case was heard by Janet L. Sanders, J.

         The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.

          Steven J. Purcell, of New York (Justin Sherman, of New York, & Mitchell J. Matorin also present) for the plaintiff.

          R. Todd Cronan (William B. Brady also present) for the defendant.

          Ben Robbins & Martin J. Newhouse, for New England Legal Foundation, amicus curiae, submitted a brief.

          Present: Gants, C.J., Botsford, Lenk, Hines, Gaziano, Lowy, & Budd, JJ. [1]

          GANTS, C.J.

         Under G. L. c. 156D, § 16.02 (b), of the Massachusetts Business Corporation Act (act), a shareholder of a corporation, upon written notice, is entitled to inspect and copy various categories of corporate records if the shareholder makes the demand "in good faith and for a proper purpose, " and if the particular records sought to be inspected are "directly connected" with that purpose. The plaintiff, Fred Chitwood, a shareholder of the defendant Vertex Pharmaceuticals, Inc. (Vertex or the corporation), made a demand for corporate records pursuant to § 16.02 (b), claiming that inspection of the records was needed to investigate his allegation that the board of directors had committed a breach of its fiduciary duty of oversight with regard to Vertex's financial reporting and insider stock sales. Vertex "rejected" the demand, claiming that the demand was "invalid under Massachusetts law" and that it was improper because the board, following a reasonable inquiry by a special committee of independent directors, had rejected his earlier demand to commence derivative litigation based on the same allegations of misconduct. The plaintiff commenced an action in the Superior Court, seeking an order compelling Vertex to make the requested corporate records available to the plaintiff. After a bench trial, the judge dismissed the complaint with prejudice, concluding that the plaintiff had failed to meet his burden of showing a proper purpose.

          The issue on appeal is whether the judge applied the correct standard regarding the proper purpose required to inspect corporate records under § 16.02 (b). We conclude that she did not. Because the judge applied too demanding a standard and because the scope of the demand made by the shareholder far exceeded the authorized scope of inspection under § 16.02 (b), we vacate the judgment dismissing the shareholder's claim for inspection and remand the case for further proceedings consistent with this opinion.[2]

         The right of inspection.

         Under § 16.02, a shareholder of a Massachusetts corporation is entitled to inspect two categories of corporate records. The first category of records, delineated in G. L. c. 156D, § 16.01 (e), includes the corporation's articles of organization and bylaws (and all amendments thereto); resolutions adopted by the board of directors creating one or more classes of shares, and setting the rights, preferences, and limitations of those classes of shares (where the shares issued are outstanding); the minutes of all shareholders' meetings, as well as the records of all actions taken by shareholders without a meeting, for the past three years; all written communications to shareholders within the past three years, including the annual financial statements provided to shareholders, for the past three years; the names and business addresses of the corporation's current directors and officers; and the corporation's most recent annual report delivered to the Secretary of State. To inspect the corporate records in this first category, a shareholder need only provide written notice at least five business days before the shareholder wishes to inspect and copy; no showing of good faith or proper purpose is required. G. L. c. 156D, § 16.02 (a.).

         The second category of records, delineated in G. L. c. 156D, § 16.02 (b), includes records of "excerpts from minutes reflecting action taken" by the board of directors or a committee acting in place of the board;[3] the "accounting records of the corporation, but if the financial statements of the corporation are audited by a certified public accountant, inspection shall be limited to the financial statements and the supporting schedules reasonably necessary to verify any line item on those statements;" and the list of the names and addresses of all corporate shareholders, showing the number and class of shares held by each. See G. L. c. 156D, § 16.01 (c). To inspect this second category of corporate records a shareholder not only must provide five days' written notice but also must meet the following three requirements: (1) the shareholder must show that the "demand is made in good faith and for a proper purpose, " (2) the shareholder must describe "with reasonable particularity his purpose and the records he desires to inspect, " and (3) the shareholder must show that "the records are directly connected with his purpose." G. L. c. 156D, § 16.02 (c). In interpreting the meaning of these requirements, we are guided by the comments prepared by the task force on the revision of the Massachusetts business corporation law that drafted the act, "which included more than fifty experienced Massachusetts corporate lawyers." See Halebian v. Berv, 457 Mass. 620, 625 (2010), citing comment to G. L. c. 156D, 25 Mass. Gen. Laws Ann. at 48 (West Supp. 2010).

         "A 'proper purpose' means a purpose that is reasonably relevant to the demanding shareholder's interest as a shareholder." Comment to G. L. c. 156D, 25A Mass. Gen. Laws Ann. at 46 (West Supp. 2016) (comment). The drafters also noted that the phrase "proper purpose" is "well understood" and that the "very substantial case law defining 'proper purpose' will continue to be applicable." Id. That case law recognizes that "[s]tockholders are the beneficial owners of all the assets of the corporation, and they are entitled to reliable information as to the financial condition of the corporation, the manner in which business has been conducted and its affairs have been managed, and whether those to whom they have entrusted their property have acted faithfully and efficiently in the interests of the corporation." Albee v. Lamson & Hubbard Corp., 320 Mass. 421, 424 (1946). A proper purpose is one that protects the shareholder's rights as an owner in the corporation and that advances the interests of the corporation itself. Id. A shareholder's purpose is improper where it is driven by "mere curiosity, " speculation, or vexatious motives (citation omitted). Gavin v. Purdy, 335 Mass. 236, 239 (1957). See Albee, supra (shareholder has no "right to an examination if his purpose be to satisfy his curiosity, to annoy or harass the corporation, or to accomplish some object hostile to the corporation or detrimental to its interests").

         "Good faith, " paired as it is with "proper purpose, " means that the stated proper purpose also must be the shareholder's true purpose. See Gavin, 335 Mass. at 239 (shareholder must act with "an honest purpose, not adverse to the interests of the corporation"); Albee, 320 Mass. at 424 (stockholder "who is acting in good faith" for proper purpose "is generally entitled to examine the corporate records and accounts"). This understanding of the meaning of good faith is supported by the Uniform Commercial Code's definition of "good faith, " which requires "honesty in fact and the ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.