Kaplan v. Wyatt

Supreme Court of Delaware · Corporations

CorporationsDerivative suitsSpecial Litigation CommitteesZapata dismissal procedureDirector independencederivative actionspecial litigation committeemotion to dismiss

Facts

Kaplan's derivative complaint alleged that Wyatt improperly profited from oil trading opportunities belonging to Coastal, caused Coastal to enter an unfair tanker sale-and-leaseback transaction with WJS, and received excessive compensation, including excessive payments for leasing his personal aircraft to Coastal. Coastal's board formed a two-member Special Litigation Committee composed of outside directors Holliday and Marshall, who retained independent outside counsel and accountants and conducted an extensive investigation, including many interviews and review of documents. The Committee found the tanker transaction and aircraft lease reasonably fair to Coastal, found unsupported the allegations that Wyatt improperly traded and profited at Coastal's expense, and concluded that pursuing the litigation would not be in Coastal's best interest. Kaplan challenged the Committee's independence, good faith, and investigative adequacy, and also challenged the Chancery court's refusal to proceed to Zapata's second step and its limits on discovery.

Issue

Whether the Court of Chancery correctly applied Zapata in granting dismissal of the derivative suit based on the Special Litigation Committee's report. More specifically, the questions were whether the Committee was independent, acted in good faith, and conducted a reasonable investigation, and whether the court abused its discretion by declining to proceed to Zapata's second step or by limiting discovery.

Rule

Under the first step of Zapata, the court must examine the conduct and activities of the Special Litigation Committee to determine whether the committee acted independently of the corporation and, in good faith, conducted a reasonable investigation on which it based its conclusions; if the committee fails any of these requirements, the motion to dismiss must be denied. A director is independent when he is in a position to base his decision on the merits of the issue rather than being governed by extraneous considerations or influences. Proceeding to Zapata's discretionary second step is wholly within the court's discretion, and discovery in this context may be ordered to facilitate inquiry into independence, good faith, and reasonableness, but is not available as of right.

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

A shareholder in Lakefront Biofuels, Inc., a Delaware corporation based in Houston, files a derivative suit alleging that the CEO steered a refinery contract to his cousin. The board appoints Dana Mercer, an outside director who was already on the board when the contract was approved, to a one-member special litigation committee; the shareholder offers no evidence that Mercer had any personal stake in the transaction or was influenced by anyone involved.

On these facts, how should a Delaware court most likely rule on the corporation's argument that the committee was independent for step one of the dismissal analysis?

Explanation. Under the majority opinion, a director is independent if positioned to decide on the merits rather than being governed by extraneous influences. Mere presence on the board at the time of the alleged wrongdoing does not alone establish dependence or lack of independence. Without evidence that Dana Mercer was actually influenced by outside considerations, step-one independence can still be satisfied. (Derived from Kaplan v. Wyatt (n.d.).)