A group of trustees elected by Penn State alumni has the right to review the background data developed by Louis B. Freeh and his staff in connection with their controversial report on the University’s handling of the sexual misconduct charges against former assistant football coach Jerry Sandusky.  A trial court judge sitting specially in Centre County has ordered the University to produce the materials for review, even though the full board had voted against reviewing the background material.  (In Re: Application by Nonprofit Corporation Trustees to Compel Inspection of Corporate Information, No. 1593 of 2015, Centre Co., PA, 11/19/15.)

The alumni trustees have expressed concerns about the Freeh Report and asked to see copies of the interview summaries and other information developed by the investigators.  They argued that the information was important to their fiduciary duty to oversee the University’s operations, and particularly on how to deal with a variety of court cases currently facing the University stemming from the Sandusky situation.  The University had refused to give them access to the information.  In part, the University claimed that a majority of the board had voted against authorizing a special committee, including several of the alumni trustees, to review the data and had instead voted not to further investigate. 

The trustees sued under section 5512 of the Pennsylvania Nonprofit Corporation Law.  The law provides that provides a director shall have the right, “to the extent reasonably related to the performance of the duties of the director,” to inspect and copy corporate records and documents.  The section also provides that if the corporation refuses, the court “shall” summarily order disclosure of the information unless the corporation proves that the information is not reasonably related to the director’s duties or that the director is “likely to use the information in a manner that would violate the duty of the director to the corporation.”

Tracing the history of the provision, the Court started with a 1912 decision of the Pennsylvania Supreme Court taking a broad view of a director’s rights.  “The duty to manage the corporation rests alike upon each and every one of the directors,” the Supreme Court had written, “and, therefore, it is the right of each director to inspect its books and documents.  There doubtless may be differences of opinion among directors as to the management of the affairs of the corporation, but while the majority will control, they have not the authority, and cannot be permitted to deprive the minority, by refusing an inspection of the books and papers, of the right to obtain information as to the affairs of the company.”

In 1939, dealing with a director of a business corporation, the state Supreme Court had again permitted review so that a director could “perform his duties to the corporation,” but placed a restriction that the director must act in good faith and refrain from using the information for purposes in conflict with his fiduciary obligation.

The 1988 provision in the Nonprofit Corporation Law adopted both of the limitations, the trial court said, but “the burden of establishing either of these restrictions is on the corporation.”  If the corporation fails to prove either restriction, “the statute provides the Court shall summarily order that the information be provided to a director.”

In applying the rules to this case, the Court said the trustees had set out the reasons they believe the requested information is related to their duty in managing the affairs of the University, including a number of pending lawsuits involving the Freeh Report.  The statute was not intended to “place a high bar” on access to information, the Court wrote,  and the determination that the information is fairly and reasonably related to the director’s duties “is one to be made solely by the court.”  The Court said it was “satisfied that a reasonable relationship exists.”

It also reviewed the University’s claims, filed under seal in August, that the trustees were likely to use the information in a manner that would violate their duties as directors.  It said that the information was not “of such import as to warrant a conclusion” that the directors would violate their fiduciary duties.

The University had argued that release of information disclosing which witnesses had made what specific statements would make witnesses less likely to come forward and be forthright in future investigations.   It also argued that the information could be used against some of the employees.  While the Court expressed some sympathy with the arguments, it concluded that no promise of confidentiality was expressly made to those interviewed.  The Court nevertheless limited the use of the information. 

The Court ordered that all of the source material that the University did not claim to be protected from disclosure by privilege or confidentiality or that is in the public domain be made available to the trustees within 20 days.  It also ordered the University to make information it claimed is subject to privilege or confidentiality available within 45 days and label it as such. The trustees are not permitted to discuss the privileged or confidential information outside privileged executive sessions of the board or with anyone other than University counsel or their own counsel.  Each trustee is required to acknowledge this requirement before viewing any of the information that is claimed to be privileged or confidential.

YOU NEED TO KNOW

The Court properly rejected the University’s argument that a majority of the board could tell individual directors that they could not look at information they believed was important to have to fulfill their fiduciary duty.  Fiduciary duty has always been an individual obligation.  A director is allowed to rely on others where it is reasonable to do so, but has never been obligated to rely on others to the exclusion of doing his or her own due diligence.