On July 11, 2023, Justice Masley of the New York County Commercial Division issued a decision in Burden v. General Elec. Co., 2023 NY Slip Op. 32365(U), holding that a demand for inspection of books and records made under the common law cannot be used to obtain discovery for use in litigation, explaining:
Plaintiffs’ second count in the complaint seeks books and records pursuant to New York common law. 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.
Proper purposes are those reasonably related to the shareholder’s interest in the corporation, and may include efforts to investigate management’s conduct and to obtain information in aid of legitimate litigation. Improper purposes are those which are inimical to the corporation, for example, to discover business secrets to aid a competitor of the corporation, to secure prospects for personal business, to find technical defects in corporate transactions to institute strike suits, and to locate information to pursue one’s own social or political goals.
Courts may dismiss a books and records demand where a plaintiff’s asserted purposes for the inspection [are] speculative, vague, and conclusory.
GE argues that plaintiffs’ true purpose for their demand is to institute a strike suit, and that this purpose is apparent from the Burdens’ filing a complaint in the Federal Action, withdrawing that complaint in the face of a motion to dismiss, and then intervening and staying the derivative action with plaintiff Walkover to fish for facts to allege a third complaint. Plaintiffs do not deny that they intend to use the information gathered from GE’s books and records to bolster the complaint in the Derivative Action but rather argue that there is no rule preventing inspection in this procedural posture and that they have asserted a proper purpose to evaluate the Board’s decision.
Plaintiffs do not have a proper purpose here. GE cites to several cases which demonstrate that, under New York law, the common-law right of inspection cannot be used to circumvent limitations on the scope or timing of disclosure in pending litigation.
GE also relies on cases denying discovery prior to a determination on a motion to dismiss in shareholder derivative actions. Specifically, in Lerner v Prince, the First Department, analyzing Delaware law, affirmed denial of the shareholder plaintiffs’ motions to compel discovery and convert defendants’ motions to dismiss to summary judgment motions. The court also stated, albeit dicta, that:
Even assuming for the sake of argument that New York law applies, plaintiff would not be entitled to discovery in this demand-refused case. Courts applying New York law in demand-refused cases presume that a board of directors’ decision was the exercise of valid business judgment. Therefore, where, as here, a complaint fails to set forth allegations overcoming the presumption that the board’s decision resulted from that valid judgment, courts will properly deny a plaintiff’s discovery request . . .
While the court does not decide here whether the pleading standards described in Lerner are applicable to New York derivative complaints, the principle of that holding remains, that the purpose of discovery is to find out additional facts about a well-pleaded claim, not to find out whether such a claim exists.
The cases cited by plaintiffs do not suggest otherwise. Specifically, plaintiffs cite to Santelli v Spitzer, in which the court, in dismissing a complaint by a shareholder asserting claims of mismanagement, held that the fact that plaintiffs are unable to furnish more particulars because [defendants’ company], as Managing Member, has all of the information in its control is not a basis to excuse their deficient pleading or to grant a continuance to allow discovery that would permit the pleading of such particulars. The court, citing Lerner, noted that plaintiffs could have, but did not, make a books and records demand which, even if refused, could have been pursued in a special proceeding. The court in Santelli did not suggest that a stay of an action to seek books and records is a proper method for bolstering an already filed complaint. Rather, it suggests that the plaintiffs here-particularly the Burdens who filed a complaint in federal court-could have, but chose not to, take advantage of their inspection rights. Thus, New York law makes clear that the purpose of bolstering a previously filed complaint is not a proper one for inspection.
Plaintiffs also cite to King v Verifone Holdings, Inc., in which the Delaware Supreme Court held that there is no bright-line rule barring stockholder-plaintiffs from pursuing inspection relief under 8 Del. C. § 220 solely because they filed a derivative action first. Even if it were necessary for this court to look to Delaware law for its decision, that case would not change it. As the Chancery Court in CHC Investments, LLC v FirstSun Capital Bancorp explained, that holding is limited to the factual circumstances of that case, where the plaintiff had previously filed a derivative action in California federal court, and in dismissing the claims, the California court expressly encouraged the plaintiff to demand inspection in order to meet the onerous pleading requirements applicable to derivative claims.
The same facts are not present here, and regardless of the precise timing of plaintiffs’ filing this books and records action and intervening in the Derivative Action, their purpose of bolstering the complaint in the Derivative Action is improper. Thus, contrary to plaintiffs’ argument, the fact that plaintiffs in this action are not the original plaintiffs in the Derivative Action, but rather intervened in the Derivative Action-very shortly-after filing this books and records demand is a distinction without a difference, and plaintiffs have admitted that they intend to use the information gathered in this proceeding to bolster the complaint in the
Derivative Action.Finally, plaintiffs cite In re Freeport-McMoRan Copper & Gold Inc. Derivative Litig. [Freeport], in which the Delaware Chancery Court permitted parties to intervene in a related derivative action, without filing a substantive complaint, while also pursuing a books and records action. However, in Freeport, the plaintiffs intervened to certify an interlocutory appeal of the court’s decision establishing a plaintiffs’ management structure and were simultaneously pursuing a books and records action to determine whether to file a derivative claim. This is a very different situation from the one here where plaintiffs have stayed the Derivative Action to pursue an inspection to bolster a previously filed complaint that they assert is inferior.
(Internal quotations and citations omitted).