Chitwood v. Vertex Pharmaceuticals, Inc.
476 Mass. 667
| Mass. | 2017Background
- Chitwood, a Vertex shareholder, demanded corporate records under G. L. c. 156D, § 16.02(b) to investigate alleged misstatements about a drug trial and insider stock sales that followed an interim press release and preceded a corrective release.
- Vertex formed a special committee of independent directors, investigated, and informed Chitwood that it would not pursue a derivative suit; it did not provide the committee’s full report.
- Chitwood’s § 16.02 demand sought seven broad categories of materials (minutes, committee report and drafts, materials distributed to directors, internal review documents, policies, calendars, etc.).
- Vertex refused, arguing the demand was not for a proper purpose, was overbroad, sought material beyond § 16.02’s scope, and implicated § 7.44 limitations on derivative-litigation discovery.
- Chitwood sued under § 16.04(b). After a bench trial, the Superior Court dismissed with prejudice, concluding Chitwood failed to show a proper purpose; the judge applied a Delaware-derived, more demanding standard.
- The SJC vacated that judgment, holding the trial judge applied an incorrect standard and that most of Chitwood’s requested documents exceeded § 16.02’s authorized scope; remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Chitwood's demand under § 16.02(b) was made in good faith and for a proper purpose | Chitwood: verifying whether the board/special committee properly responded to alleged wrongdoing (insider trading and misleading press release) is a proper shareholder purpose | Vertex: demand is speculative, overbroad, and an impermissible attempt to obtain discovery for a derivative claim after the board reasonably declined to sue | Held: Desire to verify board/committee actions is a proper purpose for inspecting excerpts of minutes reflecting actions taken; Chitwood need not meet Delaware’s higher “credible basis” threshold |
| Proper standard to apply when inspecting books and records to investigate wrongdoing | Chitwood: § 16.02’s “proper purpose” test requires reasonable relevance to shareholder interest; modest showing that records could possibly reveal wrongdoing suffices | Vertex: Delaware standard (preponderance showing of a credible basis for possible mismanagement) should apply | Held: Massachusetts § 16.02 requires a less demanding showing than Delaware; a reasonable inference that requested records could possibly reveal wrongdoing suffices |
| Scope of documents available under § 16.02(b) | Chitwood: sought broad categories including committee reports, drafts, and materials provided to directors | Vertex: § 16.02(b) does not authorize such broad discovery and the request seeks impermissible materials | Held: § 16.02(b) limits inspection mainly to excerpts of minutes reflecting action taken (not reports, deliberations, or director materials); most of Chitwood’s seven categories exceeded § 16.02’s scope |
| Effect of rejected derivative demand and § 7.44 on inspection rights under § 16.02 | Vertex: because board rejected the derivative demand after a reasonable inquiry, Chitwood should face the § 7.44 standard and be barred from inspection that would circumvent discovery limits | Chitwood: § 16.02 is an independent right of inspection available regardless of § 7.44’s derivative-demand consequences | Held: § 16.02 is independent from § 7.44; denial of a derivative demand does not raise § 7.44’s standard for § 16.02 inspection, though § 7.44 may be relevant to good faith |
Key Cases Cited
- Halebian v. Berv, 457 Mass. 620 (2010) (discusses drafters’ comments and statutory interpretation guidance for G. L. c. 156D)
- Albee v. Lamson & Hubbard Corp., 320 Mass. 421 (1946) (shareholders entitled to information about corporate condition and management; limits on curiosity-driven inspections)
- Gavin v. Purdy, 335 Mass. 236 (1957) (good faith and proper purpose require honest purpose not adverse to corporation)
- Seinfeld v. Verizon Communications, Inc., 909 A.2d 117 (Del. 2006) (Delaware requires a credible basis showing of possible mismanagement for investigatory inspections)
- United Techs. Corp. v. Treppel, 109 A.3d 553 (Del. 2014) (Delaware courts have broad discretion to limit scope of inspection)
- Security First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563 (Del. 1997) (Delaware standard describing threshold for investigation based on credible showing)