Einhorn v. Culea

Supreme Court of Wisconsin · 2000 · Corporations

CorporationsDerivative actionsSpecial litigation committeesDirector independencederivative suitspecial litigation committeeindependent directorsbusiness judgment rule

Facts

Einhorn, a minority shareholder and director of Northern Labs, brought a derivative action challenging a retroactive bonus and stock issuance approved for Culea, the corporation's president and majority shareholder. After the derivative complaint was filed, the board created a special litigation committee consisting of Chewning, Bonk, Chua, and Beagle to decide whether maintaining the suit was in the corporation's best interests. The committee voted three to one that the action should not continue, and the corporation moved to dismiss under Wis. Stat. § 180.0744. The record showed various relationships between committee members and either Culea or the corporation, including employment, friendship, neighborhood, and social ties, and the circuit court applied what it called an "extremely low" threshold for independence.

Issue

What is the proper standard under Wis. Stat. § 180.0744 for determining whether members of a special litigation committee are independent? Did the lower courts err by treating the statutory threshold for independence as "extremely low" and dismissing the derivative action on that basis?

Rule

Under Wis. Stat. § 180.0744, the threshold for determining whether a special litigation committee member is independent is not "extremely low." Independence is determined objectively, as of the time of appointment, by considering the totality of the circumstances to decide whether a reasonable person in the member's position can base the decision on the merits of the issue rather than on extraneous considerations or influences; stated differently, the question is whether the member has a relationship with an individual defendant or the corporation that would reasonably be expected to affect the member's judgment regarding the litigation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Biologics, a Wisconsin corporation based in Milwaukee, faces a shareholder derivative suit alleging that its president diverted a corporate opportunity to himself. The board forms a three-member special litigation committee consisting of Nora Patel, who was elected to the board by the president; Evan Ross, who was also elected by the president and is not a defendant; and Mia Torres, who was elected by other directors. The trial court dismisses the suit after ruling that directors elected by a defendant are automatically independent unless the plaintiff proves actual misconduct during the investigation.

Under the governing standard, was the trial court's approach correct?

Explanation. The majority held that independence is not subject to an 'extremely low' threshold and cannot be resolved by per se rules. A director's nomination or election by defendants may not be solely determinative either way. The court must ask objectively, as of appointment and under the totality of the circumstances, whether a reasonable person in that director's position could decide on the merits rather than on extraneous influences.