Houle v. Low

Supreme Judicial Court of Massachusetts · 1990 · Corporations

556 N.E.2d 51 (1990)

Updated August 22, 2026

CorporationsShareholder derivative suitsSpecial litigation committeesStatute of limitationsFiduciary dutyderivative actionspecial litigation committeebusiness judgment

Facts

The plaintiff and the individual defendants practiced ophthalmology through Eye Health Services, Inc. and discussed creating an outpatient surgical center. In February 1984, the individual defendants met without the plaintiff, decided to launch the surgical center as a venture separate from Eye Health, and unanimously decided not to invite the plaintiff to participate; the opportunity was not offered to Eye Health. After the plaintiff brought a derivative action on Eye Health's behalf, Eye Health appointed Dr. McKee, a director and shareholder but not a defendant, as a one-member special litigation committee. McKee, relying on counsel's investigation, recommended that Eye Health not pursue the derivative claims, and the corporation sought summary judgment on that basis.

Issue

Whether Massachusetts law permits a board whose majority members are interested defendants to appoint a special litigation committee to decide whether a corporation should pursue a derivative action, and if so, what level of judicial scrutiny applies to the committee's decision. The case also presented whether the plaintiff's individual claims against the individual defendants were time-barred.

Rule

In Massachusetts, a corporation may use a special litigation committee to determine whether pursuing a derivative action is in the corporation's best interest, even when a majority of directors are named as defendants. To obtain dismissal, the corporation bears the burden of proving that the committee was independent, unbiased, acted in good faith, and conducted a thorough and careful analysis; if that showing is made, the court must also determine whether the committee reached a reasonable and principled decision. Relevant factors in that second inquiry include the likelihood of plaintiff's success, expected recovery versus out-of-pocket costs, corrective action by the corporation, the balance of corporate interests, and whether dismissal would let a controlling defendant retain a significant improper benefit.

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

Summit Harbor Imaging, Inc., a Massachusetts corporation based in Worcester, is sued derivatively by shareholder Nina Patel, who alleges that three director-defendants diverted a profitable service line to another entity they own. After demand is excused because those three directors control the board, the board appoints a special litigation committee composed of two directors who are not defendants to evaluate whether the corporation should continue the suit.

Under Massachusetts law as stated by the majority, which is the best answer regarding the committee's authority to consider dismissal?

Explanation. Massachusetts allows a corporation to use a special litigation committee even when a majority of directors are interested defendants. The majority reasoned that boards have corporate power to delegate litigation decisions, and that appointment by an interested board is not categorically barred. But dismissal is not automatic: the court must scrutinize the committee rather than adopt either a blanket prohibition or total deference.