Also known as: special litigation committees · SLC
Written by attorneys · grounded in primary & secondary sources — see below
A committee of independent and disinterested individuals appointed by an entity to investigate claims asserted in a derivative proceeding and determine whether pursuing the action serves the entity's best interests. The committee's members may include partners or members of the entity. After investigation the committee files a report with the court, which reviews the committee's independence, good faith, and reasonable care before enforcing or rejecting its recommendation.
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Sebastian Santos, a member of Sterling Manufacturing LLC, filed a derivative action alleging that managers diverted company funds. The LLC appointed a special litigation committee consisting of one disinterested member. The committee investigated the diversion and recommended dismissal because litigation costs exceeded any recovery. The court stayed discovery pending the committee's report.
Selena Singh, a limited partner in Stonehaven Properties LP, sued derivatively claiming general partners mismanaged orchard assets. The partnership appointed a special litigation committee of independent consultants to review the claims. The committee determined that continued litigation would harm upcoming harvest contracts. On the committee's motion the court stayed discovery for the investigation period.
Seth Shapiro, a limited partner in Southland Foods LP, brought a derivative claim alleging self-dealing by general partners. The partnership formed a special litigation committee composed solely of two disinterested partners. The committee investigated and recommended that the suit be dismissed. The court enforced the recommendation after confirming the members' independence.
Simone Sanders, a shareholder of Sentinel Security, sued derivatively over risky loans approved by inside directors. The board appointed a special litigation committee of outside directors. After nine months of review the committee concluded that pursuing the claims against outside directors would produce no reasonable recovery. The court granted dismissal based on the committee's recommendation.
Spencer Silver, a shareholder of a Delaware corporation, filed a derivative suit alleging excessive compensation approved by an interested board. The board created a special litigation committee of two newly elected outside directors. The committee investigated and moved to dismiss. The court examined whether the committee members satisfied independence standards before ruling on the motion.
Stephen Shaw, a mutual-fund shareholder, brought a derivative action in federal court alleging trading-desk misconduct. The investment company appointed a special litigation committee of independent directors. The committee recommended dismissal after a good-faith investigation. The court applied state law to determine whether the committee's determination controlled the federal proceeding.
The committee must consist of one or more disinterested and independent individuals, who may be members or partners of the entity. Courts review whether the members meet this standard before enforcing any recommendation.
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The committee files a statement of its determination and a supporting report with the court and serves the parties. The court then decides whether the members were independent, the investigation was conducted in good faith and with reasonable care, and enforces the determination only if those requirements are satisfied.
…boards to deal with it have received much attention by commentators. See, e.g., Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U.Pitt.L.Rev. 601 (1982); Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 Colum.L.Rev. 261 (1981); Schnell, A…
…legal oddity known as the derivative action, thought by many to be an endangered species as a consequence of the evolution of special litigation committees
…made in those transactions.[^maj-2] On April 21, 1976 the board of directors of the corporation adopted a resolution creating a special litigation committee
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Yes. Once the entity appoints the committee, the court must stay discovery for the time reasonably necessary for the investigation, unless good cause is shown to deny the stay.
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Yes. The committee's authority extends to every claim asserted in the derivative proceeding, including statutory claims to enforce a partner's or member's right to information, provided the court later finds the committee satisfied the statutory standards.
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The plaintiff must allege with particularity facts showing that the committee members were not disinterested and independent or that the investigation was not conducted in good faith, independently, and with reasonable care.
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