Shareholders' Right To Inspect Corporate Books And Records Properly Invoked To Aid Investigation of Misconduct By Management And To Obtain Information In Aid of Litigation

On September 11, 2014, the First Department issued a decision in Retirement Plan for General Employees of the City of North Miami Beach v. The McGraw-Hill Companies, Inc., 2014 NY Slip Op. 06154, reversing a trial court's denial of a shareholder's petition to inspect corporate books and records.

Under New York law, shareholders have a statutory right, under BCL 624, to inspect certain categories of corporate records—specifically, "a record of shareholders, shareholder meeting minutes, and profit and loss statements." New York common law, however, also provides a broader inspection right, provided that "the shareholders seek the inspection in good faith and for a valid purpose." In McGraw-Hill, shareholders of The McGraw-Hill Companies brought a petition seeking access to documents that the company's board 'received, prepared, reviewed or distributed . . . concerning the board knowledge about and oversight of [the ratings agency] S&P," a wholly-owned subsidiary of McGraw-Hill, that had been accused of wrongdoing in connection with the rating of mortgage-backed securities. New York County Commercial Division Justice Jeffrey K. Oing denied the petition, and the First Department reversed, finding that the petition stated valid grounds for inspection, and remanded the case for a hearing on the proper scope of the inspection:

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).

(Citations omitted.)