## Facts

- Vertex Pharmaceuticals issued a May 2012 press release describing early drug-study results as “rapid, substantial, and sustained,” after which its stock price rose.
- About three weeks later, Vertex issued a corrective press release clarifying that the data had been misinterpreted and the results were less promising; the stock price fell.
- During the interval, seven Vertex officers and directors sold over $37 million in company stock.
- A shareholder, Fred Chitwood, sent the board a demand alleging insider trading and misleading statements and requested that the board pursue derivative action; the board formed a special committee, which investigated and recommended no action.
- Chitwood then demanded inspection of books and records under G.L. c. 156D, § 16.02(b) to investigate possible breaches of fiduciary duty and mismanagement, seeking broad categories of materials (board and committee minutes, the committee report and drafts, all documents distributed at meetings, and documents relating to the drug studies).
- Vertex refused, asserting the demand lacked a “proper purpose” and was overbroad.

## Issues

1. Whether § 16.02(b) requires a shareholder to show a Delaware-style “credible basis” to infer wrongdoing to establish a “proper purpose” for inspection.
2. If a proper purpose exists, what limits § 16.02(b) imposes on the scope of documents a shareholder may inspect, and whether the shareholder’s demand was overbroad.

## Decision

- The Supreme Judicial Court vacated the judgment dismissing the action and remanded.
- The court held the trial judge used an overly demanding standard by requiring a “credible basis” showing of wrongdoing; Massachusetts law under § 16.02(b) does not impose that evidentiary threshold.
- The court held the shareholder established a proper purpose: investigating potential insider trading and fiduciary breaches connected to corporate disclosures and insider sales.
- The court agreed the inspection request, as drafted, exceeded the statute’s permissible scope and required tailoring to records directly connected to the stated purpose.
- On remand, the court directed entry of a narrowed inspection order, including at least relevant excerpts of minutes and committee materials directly bearing on the board’s consideration of the disclosures and insider trading concerns.

## Legal Principles

- Under G.L. c. 156D, § 16.02(b), a shareholder may inspect specified corporate records if the demand is made in good faith, for a proper purpose, and the records sought are directly connected with that purpose.
- A “proper purpose” is one reasonably related to the shareholder’s interest, including investigating possible mismanagement or breaches of fiduciary duty.
- Massachusetts does not require a shareholder seeking inspection under § 16.02(b) to prove a Delaware-style “credible basis” from which wrongdoing can be inferred.
- The “directly connected” requirement limits inspection to a tailored set of records tied to the investigative purpose; § 16.02(b) is not a vehicle for broad, discovery-like production.

## Conclusion

The court held that a shareholder seeking inspection under § 16.02(b) need only show a good-faith, shareholder-related purpose—not a preliminary evidentiary showing of wrongdoing—but must narrowly tailor requested records to those directly connected to that purpose; dismissal was vacated and the matter remanded to craft a limited inspection order.


Chitwood v. Vertex Pharms., Inc., 476 Mass. 667, 71 N.E.3d 492 (Mass. 2017)