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Shareholders’ Requests for Documents for Investigation of Possible Wrongdoing by Corporation Were Facially Legitimate Under the Business Corporation Law (BCL) and Common Law–No Need for Shareholders to Bring a Shareholders’ Derivative Action to Procure the Documents

The First Department determined shareholders’ (petitioners’) requests for documents from the respondent corporation were facially legitimate pursuant to the Business Corporation Law (BCL) and common law and disputes about the propriety of the requests should be resolved in a hearing.  Supreme Court’s ruling that the petitioners were required to institute a shareholders’ derivative action was reversed.  The shareholders were investigating whether respondent’s board of directors failed to oversee wrongdoing by S & P, a credit rating agency wholly owned by respondent:

Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose … . The statutory right supplemented, but did not replace, the common-law right … .

Here, petitioners sufficiently showed that they were acting in good faith and for a proper purpose in seeking to enforce their common-law right to inspect respondent’s books and records. Specifically, the petition alleges that petitioners seek to investigate alleged mismanagement and breaches of fiduciary duty by respondent’s board of directors in failing to oversee purported wrongdoing by S & P; this alleged wrongdoing, petitioners assert, exposed respondent to substantial potential liability in multiple civil actions and investigations. These allegations form a proper basis for petitioners’ request … .

Contrary to respondent’s contentions, investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are, in fact, proper purposes for a BCL § 624 request, even if the inspection ultimately establishes that the board had engaged in no wrongdoing … . Indeed, petitioners identified several reasons for making their demand, including assessment of policies that the board had implemented when issuing credit ratings and investigation of possible wrongdoing by the respondent’s board of directors. Each of these purposes adequately justifies petitioners’ access to certain board documents. Moreover, because the common-law right of inspection is broader than the statutory right, petitioners are entitled to inspect books and records beyond the specific materials delineated in BCL § 624(b) and (e) … . Retirement Plan for Gen Empls of City of N Miami Beach vs McGraw-Hill Cos Inc, 2014 NY Slip Op 06154, 1st Dept 9-11-14

 

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