By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Business and Corporate Law Attorney
I was recently asked whether N.J.S.A. 14A:5-28 allows a shareholder(s)s to inspect the minutes of the board of directors and of an executive committee. That statue provides as follows:
- Each corporation shall keep books and records of account and minutes of the proceedings of its shareholders, board and executive committee, if any. The corporation shall keep at its principal office, its registered office, or at the office of its transfer agent, a record or records containing the names and addresses of all shareholders, the number, class and series of shares held by each and the dates when they respectively became the owners of record thereof. Any of the books, minutes or records may be in written form or in any other form capable of being converted into readable form within a reasonable time. A corporation shall convert into readable form without charge any such records not in such form, upon the written request of any person entitled to inspect them
. - Upon the written request of any shareholder, the corporation shall mail to such shareholders its balance sheet as at the end of the preceding fiscal year, and its profit and loss and surplus statement for such fiscal year.
- Any person who shall have been a shareholder of record of a corporation for at least six months immediately preceding his demand, or any person holding, or so authorized in writing by the holders of, at least 5% of the outstanding shares of any class or series, upon at least five days’ written demand shall have the right for any proper purpose to examine in person or by agent or attorney, during usual business hours, its minutes of the proceedings of its shareholders and record of shareholders and to make extracts therefrom, at the places where the same are kept pursuant to subsection (N.J.S.A.) 14A:5-28(1)
The statute I referred to is part of the New Jersey Business Corporation Act.
Our analysis reveals the following structure. Note that subsection (1) requires that a corporation maintain “books and records of account and minutes of proceedings of its shareholders, board and executive committee, if any and its record of shareholders. The reference to “board” means the board of directors. The reference to minutes is not limited to shareholder minutes, but includes minutes of the board and the executive committee. Referring back to the statute again, it reads as follows:
- Nothing herein contained shall impair the further power of any court, upon proof by a shareholder of proper purpose, irrespective of the period of time during which the shareholder shall have been a shareholder of record, and irrespective of the number of shares held by him, to compel the production for examination by such shareholder of the books and records of account, minutes, and record of shareholders of a corporation. The court may, in its discretion prescribe any limitations or conditions with reference to the inspection, or award any other or further relief as the court may deem just and proper. The court may order books, documents and records, pertinent extracts therefrom or duly authenticated copies thereof, to be brought within this State and kept in this State upon whatever terms and conditions as the order may prescribe. In any action for inspection the court may proceed summarily.
In subsection (3) of the law, it allows certain shareholders, based on their percentage of holdings or longevity as a shareholder, to examine “for any proper purpose” the corporation’s “minutes of the proceedings of its shareholders” and its “record of shareholders.” This subsection does not allow a shareholder access to the minutes of the board or the executive committee, or the corporate books and records of account, but is specifically limited to the minutes of shareholder proceedings and records of shareholders. In an application under subsection (3), the burden of proof is on the corporation to show that the shareholder has an improper purpose.
A shareholder who is not qualified to inspect the record of shareholders or minutes of shareholders proceedings under subsection (3) may be able to do so under subsection (4), provided the shareholder can prove a “proper purpose” and meets the common law good faith requirements. However, unlike a shareholder under subsection (3), a shareholder proceeding under subsection (4) has the burden of proving a “proper purpose.”
The use of the word “minutes” throughout N.J.S.A. 14A:5-28, refers to three types of minutes, those of the shareholders, those of the board, and those of the executive committee, stating that the corporation must maintain the “minutes of the proceedings of its shareholders, board and executive committee, if any the NJ Supreme court has.
As a result, most courts construe the reference to “interpreted minutes” in subsection (4) to refer to the shareholder, board, and executive committee minutes.
A dissatisfied shareholder is not entitled to conduct a fishing expedition based on general and unsupported allegations of mismanagement. Our courts require a shareholder who alleges as a proper purpose the need to investigate waste, mismanagement or wrongdoing, to present “some evidence” to establish “a ‘credible basis’ from which the court can infer there is possible mismanagement that would warrant further investigation”. Such a showing must be made “by a preponderance of the evidence” and “may be satisfied by a credible showing, through documents, logic, testimony or otherwise, that there are legitimate issues of wrongdoing.” Mere “suspicion” or “curiosity” is not enough. “An inspection to investigate possible wrongdoing where there is no ‘credible basis,’ is a license for ‘fishing expeditions’ and thus adverse to the interests of the corporation.”
To discuss your NJ business and/or shareholder matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.