393 N.E.2d 994 (N.Y. 1979)
In the summer of 1975, following reports that other multinational companies had made questionable payments to foreign officials, management of General Telephone & Electronics Corporation directed an internal preliminary investigation.1 The report of this survey was received in October 1975, prompting the board of directors at its November 6 meeting to refer the matter to the board's audit committee.2 The audit committee retained the Washington law firm of Wilmer, Cutler & Pickering as special counsel, which had not previously represented the corporation, and worked with Arthur Andersen & Co., the corporation's outside auditors, to examine whether corporate funds had been used for bribes or kickbacks between January 1, 1971 and December 31, 1975.3
On March 4, 1976, the audit committee released its report, which was filed with the Securities and Exchange Commission and disclosed in a proxy statement to shareholders.4 The report found evidence that the corporation or its subsidiaries had made payments abroad and in the United States constituting bribes and kickbacks totaling more than 11 million dollars.5 Some of the individual defendant directors had been personally involved in the reported transactions.6 Almost immediately thereafter, shareholder Auerbach instituted a shareholders' derivative action on behalf of the corporation against its directors, Arthur Andersen & Co., and the corporation, alleging breaches of duties in connection with those transactions.7
On April 21, 1976, the board of directors adopted a resolution creating a special litigation committee composed of three directors who had joined the board after the challenged transactions occurred.8 The committee was authorized to determine the corporation's position with respect to the derivative claims.9 After conducting its investigation, the special litigation committee reported on November 22, 1976, that the claims were without merit, that none of the individual defendants had violated applicable standards or profited personally, and that it would not be in the best interests of the corporation for the action to proceed.10
Defendants moved for dismissal of the complaint or summary judgment. On May 13, 1977, Supreme Court, Special Term, granted the motions and dismissed the complaint on the merits.11 Plaintiff Auerbach did not appeal. On June 13, 1977, Stanley Wallenstein, executor of the estate of shareholder Ida S. Wallenstein, filed a notice of appeal.12 Defendants moved to dismiss the appeal, and Wallenstein cross-moved to intervene nunc pro tunc. The Appellate Division denied the motion to dismiss, granted intervention, and on August 7, 1978, reversed the order of Special Term.13 The Appellate Division granted defendants leave to appeal to the Court of Appeals on October 12, 1978.14
Whether a shareholder's estate executor may intervene in a pending derivative action at the appellate stage to appeal a dismissal after the original plaintiff elects not to appeal?15
In stockholders' derivative actions, traditionally regarded as in the nature of class actions, the interests of the stockholder and the corporation are united.16 A nonparty may be an aggrieved party under CPLR 5511 entitled to file a notice of appeal.17 A nonparty may be permitted to intervene under CPLR 1012 at the appellate stage when the original plaintiff's decision not to appeal leaves the nonparty's interests unrepresented.18 This is particularly true where a dismissal on the merits would generally bar other stockholders by res judicata or collateral estoppel.19
Yes. The established facts demonstrate that Auerbach elected not to appeal the Special Term order of May 13, 1977, dismissing the complaint.20 Wallenstein, as executor of the estate of Ida S. Wallenstein who had owned shares continuously since 1959, had filed his own derivative action in January 1977.21
Defendants moved to dismiss that action on res judicata grounds based on the Auerbach dismissal.22 The Appellate Division correctly recognized Wallenstein as aggrieved.23 It denied the motion to dismiss his appeal.24 It granted intervention nunc pro tunc because the inadequacy of Auerbach's representation became apparent only after the decision not to appeal.25
This made it a proper case for appellate-stage intervention to ensure the interests of the class of stockholders were heard.26
The executor was properly permitted to intervene and pursue the appeal from the dismissal.27
Whether the business judgment doctrine applies to a decision by a special litigation committee of disinterested directors to terminate a shareholders' derivative action?28
The business judgment doctrine bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.29 This includes the weighing of legal, ethical, commercial, fiscal, and public relations factors in deciding whether to pursue derivative claims against directors.30
Yes. The established facts show that on April 21, 1976, the board created a special litigation committee of three directors who joined after the 1971-1975 transactions.31 The board vested it with authority to determine the corporation's position on the derivative claims.32 The committee reported on November 22, 1976, that the claims lacked merit.33
No defendant had violated the statutory standard of care or profited personally.34 Litigation would waste senior management time and incur high costs with low likelihood of success.35 Continuing publicity could damage the business.36 Exercising its delegated authority, the committee directed general counsel to seek dismissal.37
This substantive decision falls within the doctrine's protection as a classic business judgment.38
The business judgment doctrine applies to and shields the special litigation committee's decision to terminate the action.39
Related opinions on this issue
Chief Judge Cooke would affirm the Appellate Division reversal for the reasons stated by Justice Hopkins.40 He agrees the business judgment rule is potentially applicable but emphasizes that this case differs markedly because the alleged wrongdoers are directors who would otherwise insulate themselves.41 The lawsuit should be terminated only if the special litigation committee rendered a good faith unprejudiced exercise of judgment.42
Because continuation of the suit depends on the motives and actions of defendants and the committee, and such knowledge is peculiarly in their possession, summary judgment should not be granted prior to disclosure proceedings.43 Denying disclosure places the intervenor in a Catch-22 and may render corporate directors largely unaccountable to shareholders.44
Whether a court may inquire into the disinterested independence of the members of a special litigation committee appointed by the board?45
The business judgment rule shields the deliberations and conclusions of a special litigation committee only if its members possess disinterested independence.46 They must not stand in a dual relation preventing an unprejudicial exercise of judgment.47 Courts may therefore inquire into the disinterested independence of committee members but must respect their determinations absent evidence of bad faith or fraud.48
Yes. The established facts establish that the three committee members had no prior affiliation with the corporation.49 Howard Blauvelt was elected to the board on October 9, 1975.50 Dr. John T.
Dunlop was elected on April 21, 1976.51 James R. Barker was elected on July 19, 1976.52 The audit committee report specifically found that no other directors had any prior knowledge of or were involved in the transactions.53
Notwithstanding counsel's hypothesizing, the record contains nothing raising a triable issue of fact as to their independence and disinterested status.54 The board properly excluded interested directors while the remaining members acted, consistent with Business Corporation Law § 713.55
A court may inquire into the disinterested independence of the special litigation committee members, but no basis exists on these facts to question their independence.56
Whether a court may inquire into the appropriateness and sufficiency of the investigative procedures chosen and pursued by the special litigation committee?57
While the substantive decision of a special litigation committee is protected by the business judgment doctrine, courts may inquire into the adequacy and appropriateness of the committee's investigative procedures and methodologies.58 Courts may require a showing of good-faith pursuit of the chosen methods.59 They may not trespass into the domain of the business judgment itself.60
Yes. The established facts show that the committee promptly engaged eminent special counsel to guide its deliberations.61 It reviewed the audit committee's prior work by interviewing representatives of Wilmer, Cutler & Pickering, reviewing transcripts of testimony of 10 corporate officers and employees before the Securities and Exchange Commission, and studying documents and work papers.62 Individual interviews were conducted with the directors found to have participated in the questioned payments and with representatives of Arthur Andersen & Co. Questionnaires were sent to and answered by each of the corporation's nonmanagement directors.63
At the conclusion, the committee sought and obtained pertinent legal advice from its special counsel.64 Nothing in the record raises a triable issue as to the sufficiency or appropriateness of these procedures or the good-faith pursuit of the examination.65 No application for disclosure relief was made at Special Term with an affidavit showing essential facts could be obtained.66
A court may inquire into the appropriateness and sufficiency of the investigative procedures, but the procedures here were adequate and pursued in good faith.67