Chitwood v. Vertex Pharmaceuticals

71 N.E.3d 492 (2017)

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Chitwood v. Vertex Pharmaceuticals

Massachusetts Supreme Judicial Court
71 N.E.3d 492 (2017)


Vertex Pharmaceuticals, Inc. (Vertex) (defendant) announced favorable test results for a new drug, leading its stock price to soar. However, three weeks later, Vertex disclosed that the test results actually were less positive than first announced, causing Vertex’s stock price to drop. In between these announcements, seven Vertex officers and directors sold $37 million in Vertex stock. Fred Chitwood (plaintiff), a Vertex shareholder, demanded that Vertex’s board of directors sue the persons responsible for the initial announcement. In response, the board established a special committee to investigate. The board subsequently advised Chitwood that, based on the special committee’s investigation and recommendation, the independent board members concluded that there had been no wrongdoing. The board described the special committee’s investigation and summarized its main findings but did not provide Chitwood with the special committee’s report. Chitwood then made a written demand pursuant to Massachusetts Business Corporation Act § 16.02 to inspect Vertex’s books and records for the purpose of investigating the matter for himself. Chitwood’s inspection request was broad, spanning seven document categories, including all board and special-committee meeting minutes, the special committee’s report and any drafts thereof, all documents distributed at any board or special-committee meeting, and all documents relating to the relevant drug studies. The board rejected Chitwood’s demand, stating that Chitwood failed to state a proper purpose because he supplied no credible basis to infer that further investigation was warranted and because the demand exceeded the permissible scope of a § 16.02 inspection. Chitwood then sued Vertex under § 16.02, seeking to compel Vertex to provide him with the requested documents. After a trial, the court ruled that Chitwood was not entitled to any documents because he did not show a proper purpose for his demand. Relying on Delaware-law precedent, the court held that Chitwood was obliged to come forward with evidence of wrongdoing and that just relying on the timing of certain events was insufficient. The court further ruled that even if Chitwood had stated a proper purpose, his demand was overbroad. Chitwood appealed.

Rule of Law


Holding and Reasoning (Gants, C.J.)

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