Drake v. Newton Amusement Corp.

• Decision Date: 08 December 1939
• Citation: 9 A.2d 636
• Parties: DRAKE et al. v. NEWTON AMUSEMENT CORPORATION et al.
• Court: New Jersey Supreme Court

9 A.2d 636

DRAKE et al.

v. NEWTON AMUSEMENT CORPORATION et al.

Supreme Court of New Jersey.

Dec. 8, 1939.

Proceeding by Arthur W. Drake and others against the Newton Amusement Corporation and another. On rule to show cause why a peremptory or alternative writ of mandamus should not issue, directing respondents to permit relators, with the aid and assistance of their attorneys and a certified accountant, to make an inspection and examination of all books, records and papers of the respondent corporation.

Peremptory writ granted.

Before Justice HEHER, at the Sussex Circuit, pursuant to R.S.1937, section 2:83-2 et seq., N.J.S.A. 2:83-2 et seq.

David Bobker, of Newark, for relators.

Coult, Satz & Tomlinson, of Newark (Joseph Coult, of Newark, of counsel), for respondents.

HEHER, Justice.

Relators hold in the aggregate 216 shares of the preferred stock of the respondent corporation and 240 shares of its common stock. The stock issues total 597 shares of preferred and 972 shares of common. Arthur W. Drake is, and has been since January 20, 1931, a director of the corporation. It is the operator of a motion-picture theatre in the Town of Newton. The business was established by respondent Sidney E. Samuelson and the relators' father, Newman E. Drake, who died in 1930. Relators succeeded to the latter's shareholdings; and Arthur W. Drake has represented the family interest on the board of directors.

Since June 18, 1937, when demand therefor was first made, relators have been denied an inspection of the corporation's books of account and records. In justification of this course, respondents impute "bad faith" to Arthur W. Drake, i. e., that he "is merely attempting to force a purchase of his family's stockholdings." Moreover, it is maintained that he is negotiating with the operator of a competing motion-picture theatre in a neighboring community for the purchase of the family's shareholdings; that respondent corporation's "film contracts are confidential because there is no set price in this business;" and that "the Newton Theater, due to Samuelson's connections in the industry, is able to obtain advantages which would be lost to it, if known to a competitor."

It is urged, in support of the asserted right of inspection, that the reports and financial statements submitted to relators by the corporation are deficient in essential and specific information, and do not furnish a trustworthy basis for determining whether there has been prudent management; that, in any event, it is the relator-director's and the stockholders' right to verify the contents of such statements; and that there is reason to believe that dividends to shareholders have been paid out of the capital fund and the company's business has been otherwise mismanaged.

The directors of a private corporation bear a fiduciary relation to the corporate body and its stockholders as well; and it is essential to the discharge of this function that the individual directors have access to the corporation's books of account and other records. It would seem to be axiomatic that the individual director cannot make his full contribution to the management of the corporate business unless given access to the corporation's books and records. The information therein contained is ordinarily requisite to the exercise of the judgment required of directors in the performance of their fiduciary duty —so much so that the director's right of inspection has been termed absolute. It is grounded in the common law, and has not been qualified by statute. Rosenfeld v. Einstein, 46 N.J.L. 479; Lawton v. Bedell, N.J.Ch, 71 A. 490; Machen v. Machen & M. Electrical Mfg. Co., 237 Pa. 212, 85 A. 100, 42 L.R.A., N.S, 1079, Ann.Cas. 1914B, 420. See, also, 22 A.L.R. 59, 80 A.L.R. 1510.

And the common law also accords the right of inspection to a stockholder, if exercised in good faith for some purpose germane to his status or interest as a shareholder. Such inspection is justified if only for the purpose of ascertaining whether there has been proper management of the corporate affairs and business. Proof of maladministration is not a sine qua non. It is self-evident that the right is essential to the...