Miller v. Register & Tribune Syndicate, Inc.

Supreme Court of Iowa · 1983 · Corporations

CorporationsDerivative litigationBoard delegationSpecial litigation committeesBusiness judgment ruleIowa chapter 491special litigation committeederivative suit

Facts

Register and Tribune Syndicate, Inc. was organized under Iowa Code chapter 491. A minority shareholder brought a derivative action alleging the corporation had sold stock at fraudulently low prices and for grossly inadequate consideration to key employees, including the four directors then serving on the board. While that action was pending, those four director-defendants expanded the board to six, elected two new directors, and by unanimous resolution created an "Independent Litigation Committee" composed of the two new directors, delegating to it all board power over investigating the derivative action and making a final, binding determination whether the corporation should continue the litigation. The committee later reported that no further expenditures should be made to continue the suit, and the corporation moved for summary judgment in federal court based on that report.

Issue

Under Iowa law, may the board of directors of a chapter 491 corporation, acting through directors who are named as defendants in a derivative action, appoint a special litigation committee of newer directors and give that committee authority to investigate the action, decide in good faith whether prosecution, dismissal, or settlement is in the corporation's best interests, and bind the corporation to that decision?

Rule

For Iowa corporations organized under chapter 491, articles and bylaws may generally authorize broad delegation of board authority, including delegation to a special litigation committee to investigate derivative claims and determine whether pursuit, dismissal, or settlement would serve the corporation's interests. But directors who are parties to the derivative action may not confer on such a committee the power to bind the corporation as to its conduct of that litigation, because of the potential for structural bias. A corporation instead may seek a court-appointed special panel to investigate and report, with board powers conferred by the court for that purpose.

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Prairie Lantern Media, an Iowa corporation formed under chapter 491 and headquartered in Des Moines, is sued derivatively by shareholder Elena Park over alleged waste in a licensing deal. Three of the five directors are named as defendants, and those three vote with the other two directors to create a two-member committee of recently added directors, giving it final authority to decide whether the corporation will dismiss or continue the suit.

Under Iowa law as stated by the majority opinion, is the committee's decision binding on the corporation?

Explanation. The majority recognized broad delegation power for chapter 491 corporations if authorized by organic law and governing documents. But it adopted a prophylactic rule: directors who are parties to a derivative action may not appoint a special committee with power to bind the corporation as to that litigation, due to the risk of structural bias in the selection process. The rule does not depend on proof of actual bad faith.