CITY OF BIRMINGHAM RELIEF AND RETIREMENT SYSTEM VS. EXXONMOBIL CORPORATION (C-000003-18, MERCER COUNTY AND STATEWIDE)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-4279-17T3
CITY OF BIRMINGHAM RELIEF
AND RETIREMENT SYSTEM,
Plaintiff-Appellant/
Cross-Respondent,
v.
EXXONMOBIL CORPORATION,
Defendant-Respondent/
Cross-Appellant.
Argued March 18, 2019 – Decided May 6, 2019
Before Judges Fasciale and Rose.
On appeal from Superior Court of New Jersey,
Chancery Division, Mercer County, Docket No. C-
000003-18.
Judith S. Scolnick argued the cause for appellant /cross-
respondent (Scott + Scott, attorneys; Judith S. Scolnick,
Thomas L. Laughlin, IV (Scott + Scott) of the New
York bar, admitted pro hac vice, and Rhiana L.
Schwartz (Scott + Scott) of the New York bar, admitted
pro hac vice, on the briefs).
Daniel J. Kramer (Paul, Weiss, Rifkind, Wharton &
Garrison, LLP) of the New York bar, admitted pro hac
vice, argued the cause for respondent/cross-appellant
(Day Pitney LLP and Paul Weiss Rifkind Wharton &
Garrison, LLP, attorneys; Daniel J. Toal (Paul, Weiss,
Rifkind, Wharton & Garrison, LLP) of the New York
bar, admitted pro hac vice, Jonathan H. Hurwitz (Paul,
Weiss, Rifkind, Wharton & Garrison, LLP) of the New
York bar, admitted pro hac vice, Daniel J. Kramer, and
Theodore V. Wells, Jr., of counsel and on the brief;
Anthony J. Marchetta, Dennis R. LaFiura, and
Elizabeth J. Sher, on the briefs).
PER CURIAM
Plaintiff City of Birmingham Relief and Retirement System is a beneficial
owner of approximately 60,000 shares of defendant ExxonMobil Corporation's
common stock, held in street name through a brokerage firm. Plaintiff is not a
shareholder of record nor a holder of trust certificates. After ExxonMobil denied
plaintiff's written demands to inspect its books and records, plaintiff filed a
summary action in the Chancery Division seeking a judgment permitting
inspection.
Plaintiff's verified complaint alleged violations of statutory and common
law rights of inspection. Plaintiff alleged "upon information and belief" that
ExxonMobil participated in a decades-long surreptitious practice of funding
"outside groups" to discredit the scientific community's opinions about climate
change. Plaintiff further claimed ExxonMobil's internal scientists nonetheless
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shared the view "that human-influenced global climate change was real and
required a dramatic reduction in the dependence of [sic] fossil fuels."
Accordingly, plaintiff sought "to investigate evidence that
Exxon[Mobil]'s management violated state and federal laws by (i) fraudulently
funding efforts to deceive the public and government about the risks of global
climate change, and (ii) misleading investors about how such risks could harm
the [c]ompany." Plaintiff also sought inspection to "potentially" file a
shareholder derivative lawsuit.
To support its purpose for inspection, plaintiff's complaint referenced
New York Times and Wall Street Journal newspaper articles, reporting the
Securities Exchange Commission and New York State Attorney General had
commenced separate investigations concerning ExxonMobil's purported
wrongdoing regarding "global climate change." Plaintiff's complaint also
briefly mentioned similar investigations commenced by the Attorneys General
of Massachusetts, California and the Virgin Islands, along with a referral by the
Department of Justice to the Federal Bureau of Investigation; and findings by
trial courts in Massachusetts and New York compelling ExxonMobil to compl y
with subpoenas issued by the respective Attorneys General.
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Claiming recent revisions to the New Jersey Business Corporation Act
barred demand-excused lawsuits, ExxonMobil asked plaintiff to dismiss its
action, but plaintiff declined. Thereafter, ExxonMobil filed an answer and
asserted several defenses, including lack of standing and a proper purpose for
inspection. ExxonMobil also contended plaintiff's demand was overly broad.
Following issuance of an order to show cause (OTSC), both parties filed
briefs. Among other things, plaintiff appended an academic article, which
generally concluded ExxonMobil "misled non-scientific audiences about
climate science[.]" Notably, neither party requested a plenary hearing, as
permitted under the OTSC. Following oral argument on April 20, 2018, the trial
judge rendered an oral decision, denying plaintiff's application, and entered a
memorializing order on May 4, 2018.
Initially, the trial judge determined plaintiff's status as a beneficial owner
of ExxonMobil stock did not negate standing to inspect the company's books
and records under the common law. The judge did not, however, consider
plaintiff's statutory right of inspection. 1
1
See N.J.S.A. 14A:5-28(4), which provides in pertinent part:
Nothing herein contained shall impair the power of any
court, upon proof by a shareholder of proper purpose,
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Secondly, the trial judge rejected ExxonMobil's argument that, because
plaintiff's purpose for seeking inspection was premised on a potential derivative
shareholder lawsuit, its complaint should be dismissed for failure to make the
statutorily-mandated written demand on the company. 2 Instead, the judge
determined a potential derivative action was only one aspect of plaintiff's
application.
However, in considering whether plaintiff asserted a proper purpose for
inspection, the judge found "the crux of the request" was "an interest in climate
change[,]" which is "a rather amorphous concept[.]" The judge elaborated that
plaintiff's request was "certainly not as specific as the request that was . . . made
[]in Cain [v. Merck & Co., 415 N.J. Super. 319 (App. Div. 2010)]."
As the trial judge recognized, in Cain, we limited inspection of the
defendant company's minutes to its drug trial, but rejected the plaintiffs'
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.
2
See N.J.S.A. 14A:3-6.3 ("No shareholder may commence a derivative
proceeding until: (1) a written demand has been made upon the corporation to
take suitable action . . . .").
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application to the extent they sought "to explore unsubstantiated allegations of
general mismanagement." Id. at 323. Accordingly, the judge in the present
matter found plaintiff's general reference to "climate change" was not "a specific
enough request [when compared with a drug trial] . . . to qualify as a proper
purpose."
Finally, the judge determined plaintiff failed to present sufficient credible
evidence to support its application pursuant to the standards we recognized in
Cain. In particular, the judge here rejected plaintiff's evidence, including the
researcher's opinions and various governmental investigations, as "nothing more
than allegations[,]" which were inadmissible in court proceedings. Having
assumed arguendo that the evidence was admissible, the judge nonetheless
determined plaintiff's "evidence f[ell] woefully short" of meeting the
preponderance of the evidence standard required under Cain. See id. at 332.
Plaintiff now appeals, renewing its arguments that it asserted a proper
purpose for inspection, and presented sufficient credible evidence to support its
inspection demand. Although plaintiff's purpose for seeking inspection might
have been proper, we reject its contention that it presented reliable credible
evidence to support its demand. We therefore affirm on that basis.
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We begin our analysis by recognizing our well-established standard of
review. We will not disturb the factual findings and legal conclusions of a trial
judge unless we are convinced those findings and conclusions "are so manifestly
unsupported by or inconsistent with the competent, relevant and reasonably
credible evidence as to offend the interests of justice." Tractenberg v. Twp. of
W. Orange, 416 N.J. Super. 354, 365 (App. Div. 2010) (internal quotation marks
omitted) (quoting Rova Farms Resort, Inc. v. Inv'rs Ins. Co. of Am., 65 N.J. 474,
484 (1974)).
Further, we afford substantial deference to the trial judge's discretion on
evidentiary rulings, and reverse only where the judge's ruling was "so wide of
the mark that a manifest denial of justice resulted." State v. J.A.C., 210 N.J.
281, 295 (2012) (citation omitted); see also Benevenga v. Digregorio, 325 N.J.
Super. 27, 32 (App. Div. 1999). "However, '[a] trial court's interpretation of the
law and the legal consequences that flow from established facts are not entitled
to any special deference.'" Tractenberg, 416 N.J. Super. at 365 (alteration in
original) (quoting Manalapan Realty, LP v. Twp. Comm. of Manalapan, 140 N.J.
366, 378 (1995)).
Rule 4:67-1(a) permits summary proceedings in "all actions in which the
court is permitted by rule or by statute to proceed in a summary manner . . . ."
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As noted above, N.J.S.A. 14A:5-28 governs a shareholder's right to inspect a
company's books and records. Pursuant to subsection (4), "[i]n any action for
inspection the court may proceed summarily."
Actions brought in a "summary manner" are distinguishable from
summary judgment actions because in a summary action, the court makes
findings of fact and accords no favorable inferences to the action's opponent.
O'Connell v. N.J. Mfrs. Ins. Co., 306 N.J. Super. 166, 172 (App. Div. 1997),
appeal dismissed, 157 N.J. 537 (1998). If the court is "satisfied with the
sufficiency of the application, [it] shall order defendant to show cause why final
judgment should not be rendered for the relief sought." Courier News v.
Hunterdon Cty. Prosecutor's Office, 358 N.J. Super. 373, 378 (App. Div. 2003).
(alteration in original) (internal quotation marks omitted) (quoting R. 4:67-2(a)).
Further, summary actions are specifically designed to be expeditious and
avoid plenary hearings. Under Rule 4:67-5,
[t]he court shall try the action on the return day, or on
such short day as it fixes . . . [i]f . . . the affidavits show
palpably that there is no genuine issue as to any
material fact[.] . . . If any party objects to such a trial
and there may be a genuine issue as to a material fact,
the court shall hear the evidence as to those matters
which may be genuinely in issue, and render final
judgment. At the hearing or on motion at any stage of
the action, the court for good cause shown may order
the action to proceed as in a plenary action . . . .
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Consequently, judges deciding rights of inspection on summary
proceedings have broad discretion in determining the genuine nature of the
factual dispute and whether the issue may merit a plenary hearing. See
Tractenberg, 416 N.J. Super. at 365 (holding that a judge properly utilized a
summary proceeding to determine whether facts supported the claim that the
attorney-client privilege or attorney work product protected the release of
certain documents under the Open Public Records Act). That is especially so
where, as here, the parties did not request an evidentiary hearing to resolve their
competing factual contentions. Instead, pursuant to the parties' request, the
judge decided the matter based on the submissions of the parties, including
certifications and exhibits.
Applying those principles here, we find that the trial judge properly
decided the case based on the evidence produced and correctly determined that
information fell far short of the standard to prove a proper purpose for inspection
that we recognized in Cain.
In Cain, we looked to Delaware's "well-developed jurisprudence" in
analyzing corporate law issues, explaining that shareholders must establish "a
'credible basis' from which [the court] can infer there is possible mismanagement
that would warrant further investigation." 415 N.J. Super. at 332 (alteration in
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original) (quoting Seinfeld v. Verizon Commc'ns Inc., 909 A.2d 117, 118, 123
(Del. 2006)). We further observed, "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." Ibid.(citations omitted). As we recently noted in Feuer v. Merck & Co., 455 N.J.
Super. 69, 83 (App. Div.), certif. granted, 236 N.J. 227 (2018), N.J.S.A. 14A:5-
28 was not intended to be a "discovery" device.
Here, we agree with the trial judge that plaintiff failed to establish proof
of a proper purpose to support its inspection request. While we have
acknowledged a stockholder's intent to investigate mismanagement or
wrongdoing may be a proper purpose, we have likewise required the stockholder
to present "some evidence to establish a credible basis from which [the court]
can infer there is possible mismanagement that would warrant further
investigation." Cain, 415 N.J. Super at 332 (alteration in original) (internal
quotation marks omitted) (quoting Seinfeld, 909 A.2d at 118, 123).
Moreover, "[a]n 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." Ibid. (quoting Seinfeld, 909 A.2d at 123).
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As we recognized in Cain, while under our common law, a shareholder was not
required to prove actual mismanagement, the shareholder "generally came
forward with facts to substantiate the concern about mismanagement." Id. at
333. We expressed our rationale as follows:
The requirement that the stockholder come
forward with specific and supported, credible
allegations of mismanagement before allowing an
inspection recognizes the burden such requests place
upon a corporation, including large international
corporations. In an early case denying a stockholder's
request for inspection of records in order to explore an
unsupported allegation of mismanagement against a
corporation with an international business, the former
Supreme Court wrote:
The fact that [plaintiff's] holdings of
stock are small compared with the whole
amount outstanding is of course of no
importance. It is the duty of the courts in a
proper case to protect minority
stockholders, but the power to order an
inspection of books is so great, its exercise
may affect unfavorably so many innocent
stockholders, and may cause such
inconvenience or perhaps such ruinous
results to a corporation whose operations
are so extensive in two continents that the
court ought to exercise the power with the
greatest care and only when a case is
presented which indicates not only a bona
fide desire to safeguard the interests of all
stockholders but a probability that the
interests of all will be served by the
proposed investigation.
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[Id. at 333-34 (alteration in original)
(quoting In re De Vengoechea, 86 N.J.L.
35, 37 (Sup. Ct. 1914)).]
Against that legal backdrop, even assuming arguendo that plaintiff's desire
to investigate ExxonMobil's purported mismanagement and wrongdoing
constituted a proper purpose for inspection, we agree with the trial judge that
plaintiff provided insufficient evidence to demonstrate its general allegations
are credible.
In particular, plaintiff's reliance on negative newspaper and research
articles, and state and federal investigations are all grounded in hearsay and , as
such, the statements contained therein are inadmissible in a summary
proceeding. See N.J.R.E. 101(a)(2) (mandating application of the rules of
evidence "in all proceedings, civil or criminal, conducted by or under the
supervision of a court"); see also N.J.R.E. 802 ("Hearsay is not admissible
except as provided by the[ Rules of Evidence] or by other law."); In re Venezia,
191 N.J. 259, 278 n.7 (2007) (recognizing newspaper articles are "inadmissible
as hearsay"); Samuel Sheitelman, Inc. v. Hoffman, 106 N.J. Super. 353, 356
(App. Div. 1969) (recognizing the "general rule" that "newspapers or newspaper
articles are not ordinarily admissible as evidence of the facts stated therein").
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Indeed, plaintiff acknowledges before us, as it did before the trial judge,
that its proffered evidence is inadmissible in a judicial proceeding. Rather,
plaintiff contends "the [credible basis] standard can be satisfied by documents,
logic, testimony, circumstantial evidence, credible hearsay or other proof." To
support its argument, plaintiff primarily relies on various Delaware reported and
unreported decisions, which are not binding on us. We only note that the thread
of published Delaware cases cited by plaintiff does not establish a clear
willingness to permit inadmissible hearsay evidence to satisfy the credible basis
standard. In each case permitting inspection, either the corporation did not
contest that plaintiff had a proper purpose in seeking inspection or the
shareholder presented more than newspaper articles or academic studies, such
as internal documents previously obtained from the corporation. To permit
shareholders to rely on inadmissible evidence to establish a credible basis would
effectively eliminate their burden of proof entirely. As the Delaware Supreme
Court observed:
Although the threshold for a stockholder in [a
books and records] proceeding is not insubstantial, the
"credible basis" standard sets the lowest possible
burden of proof. The only way to reduce the burden of
proof further would be to eliminate any requirement
that a stockholder show some evidence of possible
wrongdoing. That would be tantamount to permitting
inspection based on the "mere suspicion" standard that
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[the plaintiff] advances . . . . However, such a standard
has been repeatedly rejected as a basis to justify the
enterprise cost of an inspection.
[Seinfeld, 909 A.2d at 123 (emphasis added) (footnotes omitted).]
Moreover, plaintiff's reliance on Cain is misplaced. Plaintiff claims we
permitted inspection in Cain where, like here, the plaintiffs' demand was
supported by inadmissible evidence. Unlike the present case, however, the
corporation in Cain conceded inspection for the limited purpose of investigating
the propriety of a single clinical trial. 415 N.J. Super. at 334-35. As noted
above, we limited the plaintiffs' inspection to that trial, refusing to permit the
plaintiffs "to conduct a fishing expedition based on general and unsupported
allegations of mismanagement." Id. at 332.
In sum, in the present case, plaintiff relies on news articles, research
articles, and pending investigations, all of which are replete with hearsay.
Accordingly that evidence fails to provide a sufficiently reliable basis to warrant
inspection of ExxonMobil's books and records. See James v. Ruiz, 440 N.J.
Super. 45, 59 (App. Div. 2015) (recognizing the "long-standing policy" of our
courts "disfavor[s] the admission of hearsay" because it is "presumptively
deemed to be 'untrustworthy and unreliable'"). Because we conclude plaintiff's
general allegations constitute inadmissible hearsay and fall far short of
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establishing a proper purpose, we discern no error in the judge's ultimate
decision to exclude the proffered evidence and deny inspection.
Finally, we note ExxonMobil has filed what it terms a "contingent cross-
appeal" to preserve its claims in the event plaintiff's claims on appeal are
successful. In doing so, ExxonMobil contends the trial judge "erroneously
decided, in dictum" that plaintiff as a beneficial shareholder had standing to
assert inspection rights, and plaintiff's purpose for inspection was to determine
whether to submit a litigation demand. Because we have concluded plaintiff's
claims before us lack merit, we need not reach ExxonMobil's arguments, and
instead dismiss its contingent cross-appeal as moot.3
Affirmed.
3
We note, however, that in deciding standing, the trial judge failed to consider
N.J.S.A. 14A:5-28(4), which by its plain terms appears to apply to "a
shareholder of record" and not beneficial owners like plaintiff. Further, in
deciding standing under the common law, the judge cited our former Supreme
Court's opinion, Mateer v. New Jersey Telephone Co., 5 N.J. Misc. 261 (1927),
but nonetheless determined O'Connor v. International Silver Co., 68 N.J. Eq. 67(1904), decided two decades earlier by a chancery court, controlled. O'Connor,
however, did not address a shareholder's rights to inspect the books and records
of the corporation, but rather decided the distinct issue as to whether a
shareholder had equitable standing based on its beneficial ownership of stock,
to prevent corporate officers and directors from voting at a shareholders '
meeting. 68 N.J. Eq. at 68. Conversely, the Court in Mateer held, "The relator,
to have a proper status, must appear as a stockholder of record on the books of
the company." 5 N.J. Misc. at 262.
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