430 A.2d 779 (Del. 1981)
In June 1975 William Maldonado, a stockholder of Zapata Corporation, instituted a derivative action in the Court of Chancery on behalf of the corporation against ten of its officers and directors, alleging breaches of fiduciary duty.1 He did not make a prior demand on the board, asserting that demand would be futile because all directors were named as defendants.2
By June 1979 four of the defendant-directors were no longer on the board.3 The remaining directors appointed two new outside directors to the board.4 They created an Independent Investigation Committee composed solely of those two directors. The committee was tasked to investigate Maldonado’s action as well as a similar derivative action pending in Texas and to determine whether the corporation should continue any or all of the litigation.5
Following its investigation the Committee concluded in September 1979 that each action should be dismissed forthwith as continued maintenance was inimical to the company’s best interests.6 Zapata thereafter moved for dismissal or summary judgment in the three derivative actions.7
On January 24, 1980 the United States District Court for the Southern District of New York granted Zapata’s motion for summary judgment.8 On March 18, 1980 the Court of Chancery denied Zapata’s motions in a reported opinion and entered its order on April 9, 1980.9 Zapata filed an interlocutory appeal that this Court accepted on June 5, 1980.10
On May 29, 1980 the Court of Chancery dismissed Maldonado’s cause of action on res judicata grounds expressly conditioned upon the Second Circuit affirming the New York District Court decision.11 The Second Circuit stayed its appeal pending this Court’s resolution of the interlocutory appeal from the April 9 order.12
Whether a stockholder who files a derivative action without prior demand on the board possesses an absolute individual right to continue the suit over objection by the corporation?13
No. In June 1975 William Maldonado instituted a derivative action in the Court of Chancery on behalf of Zapata against ten officers and directors alleging breaches of fiduciary duty.16 He did so without prior demand on the board, asserting futility because all directors were named as defendants.17 The Court of Chancery held that a stockholder possesses an individual right to continue a derivative suit over objection by the corporation as an absolute rule.18 This Court finds that determination erroneous.19 The language in Sohland supports only the stockholder's right to initiate the lawsuit and does not support an absolute right to continue to control it.20 The McKee rule states that a stockholder cannot be permitted to invade the discretionary field committed to the judgment of the directors when the managing body refuses.21 The board later created the Independent Investigation Committee after four defendant-directors left, but that does not grant the stockholder absolute control.22
The demand requirement itself evidences that managerial power is retained by the board.23 When demand is excused the stockholder possesses the ability to initiate the action but not sole control throughout the litigation.24 A single stockholder in an extreme case might otherwise control the destiny of the entire corporation, which the Court rejects as an inflexible rule.25
The stockholder does not possess an absolute individual right to continue the suit over objection by the corporation.26
Whether an authorized board committee composed of disinterested directors has the corporate power under Delaware law to cause dismissal of derivative litigation properly initiated by a stockholder?27
Yes. By June 1979 four of the defendant-directors were no longer on the board and the remaining directors appointed two new outside directors to create the Independent Investigation Committee composed solely of those two directors.30 The Committee was authorized to investigate the derivative actions and determine whether the corporation should continue any or all of the litigation, with its determination stated to be final and binding upon the corporation.31 Section 141(c) allows a board to delegate all of its authority to a committee.32 The interest taint of the board majority is not a per se legal bar to the delegation of the board's power to an independent committee composed of disinterested board members.33 The committee can properly act for the corporation to move to dismiss derivative litigation believed to be detrimental to the corporation's best interests.34
Zapata moved for dismissal or summary judgment after the Committee concluded in September 1979 that each action should be dismissed forthwith as continued maintenance was inimical to the company's best interests.35 The board retained its corporate power concerning litigation decisions even though demand was not made initially.36
An authorized board committee composed of disinterested directors has the corporate power under Delaware law to cause dismissal of derivative litigation properly initiated by a stockholder.37
Whether the Court of Chancery should apply a two-step review process, including its own independent business judgment, when considering a pretrial motion to dismiss filed by such a committee?38
When an independent committee moves to dismiss a derivative suit the Court of Chancery should apply a two-step test.39 First the court inquires into the independence and good faith of the committee and the bases supporting its conclusions with the corporation bearing the burden of proof.40 Second the court applies its own independent business judgment to determine whether the motion should be granted.41
Yes. After the Committee concluded that the actions should be dismissed the Court of Chancery denied Zapata's motions for dismissal or summary judgment.42 This Court holds that the motion should rest in the independent discretion of the Court of Chancery and steers a middle course by requiring a two-step review.43 The first step examines the independence good faith and reasonable investigation of the committee under Rule 56 standards with limited discovery permitted and the corporation bearing the burden rather than presuming those elements.44 The second step allows the court to exercise its own business judgment.45 It permits denial of the motion even if the committee satisfies the first step.46 This applies if the result does not appear to satisfy the spirit of the inquiry or if the lawsuit deserves further consideration in the corporation's interest.47
The timing of the committee's creation four years after the suit was filed and the fact that directors were passing judgment on fellow directors justify the additional judicial review beyond mere business judgment deference.48 The court must weigh how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit and give special consideration to matters of law and public policy.49
The Court of Chancery should apply a two-step review process, including its own independent business judgment, when considering a pretrial motion to dismiss filed by such a committee.50