Chitwood v. Vertex Pharms: Massachusetts Supreme Judicial Court Provides Guidance on Shareholder Inspection Demands
In Chitwood v. Vertex Pharms., Inc., 71 N.E.3d 492 (Mass. 2017), the Supreme Judicial Court of Massachusetts vacated the lower court’s decision to dismiss Fred Chitwood’s (“Shareholder”) claim for inspection of corporate records of Vertex Pharmaceuticals, Inc. (“Vertex”). The Court held that the lower court applied too demanding of a standard and the scope of the demand made by the shareholder far exceeded the authorized scope of inspection under § 16.02 (b).
According to the complaint, Vertex, in the spring of 2012, issued “false and misleading” statements in a press release about the initial study results of the effectiveness of two drugs. Vertex’s stock rose due to the announcement. Three weeks later, Vertex issued a second press release which indicated the drug study did not result in a new medical breakthrough and Vertex’s stock declined. Seven of Vertex’s officers and directors allegedly sold over $37 million in Vertex stock between the first and second announcement.
Plaintiff sent a letter to Vertex’s board of directors (the “Board”), claiming Vertex officers and directors wrongly engaged in insider trading prior to the second announcement and demanded that the Board initiate a derivative action based on the alleged misconduct. The Board investigated the Shareholder’s allegations and determined there was no breach of fiduciary duty by any officer or director. Shortly thereafter, Shareholder demanded to inspect and copy seven categories of Vertex’s books and records to investigate the actions of the Board. The Board rejected Shareholder’s request, and the Shareholder filed suit to compel inspection of the requested records. After concluding Shareholder failed to sufficiently show “proper purpose,” the trial court dismissed the complaint.
Under G. L. c. 156D, § 16.02 (b) of the Massachusetts Business Corporation Act (“Act”), a shareholder, 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 Court rejected the “credible basis” standard used by Delaware courts, concluding that while “modest,” the standard imposed a burden that was “more demanding than is appropriate for the more limited scope of books and records subject to inspection under § 16.02.” As a result, the Shareholder did not need to provide evidence of wrongdoing beyond “the timing of the press releases and the insider trades” to establish “proper purpose” for demanding records. The Court found the Shareholder had a proper purpose for requesting excerpts from the original meetings of the Board and committee. Therefore, the Court held that the trial court misapplied the “proper purpose” standard of § 16.02.
For the above reasons, the court vacated the judgment of dismissal and remanded the case to the Superior Court for further proceedings.
The primary materials for this case may be found on the DU Corporate Governance website.