Teamsters Local 443 Health Services & Insurance Plan v. Chou

Court of Chancery of the State of Delaware · 2023 · Corporations

CorporationsDerivative litigationSpecial litigation committeesCaremark oversightZapata reviewderivative suitspecial litigation committeeSLC

Facts

Plaintiffs alleged that AmerisourceBergen’s subsidiary pharmacy, MII, repackaged oncology drugs into pre-filled syringes through illegal and unsanitary practices, leading to major DOJ settlements. The board later formed a special litigation committee consisting ultimately of one independent director, Dennis Nally, and the court stayed the action so the SLC could investigate whether continuing the case was in the company’s best interests. The SLC conducted a seven-month investigation, reviewed a large documentary record, interviewed numerous witnesses, and concluded that the directors and officers had not breached fiduciary duties and that dismissal served the company’s interests. Plaintiffs opposed dismissal, arguing that a single-member SLC was inherently suspect, that Nally lacked independence, and that the investigation and conclusions were unreasonable.

Issue

Whether the special litigation committee satisfied Zapata’s first-prong requirements by showing independence, good faith, a reasonable investigation, and reasonable bases for its conclusions, such that the derivative action should be dismissed. Also, whether the court should exercise its discretion under Zapata’s second prong to deny dismissal despite the SLC’s showing.

Rule

Under Zapata, when a special litigation committee moves to dismiss a derivative action, the committee bears the burden of demonstrating that there are no genuine issues of material fact as to its independence, the reasonableness and good faith of its investigation, and the reasonableness of the bases for its conclusions. The court may then, in its discretion, apply its own independent business judgment to determine whether dismissal is in the corporation’s best interest. In reviewing independence, the court asks whether the SLC member could decide on the merits rather than being governed by extraneous considerations or influences; in reviewing the investigation, the court examines whether the SLC reasonably investigated the theories actually asserted in the complaint.

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

A Delaware corporation based in Seattle faces a derivative suit alleging oversight failures at a medical-device division. After the suit survives a pleading-stage motion, the board appoints a one-member special litigation committee consisting of Elena Park, a director who joined the board after the alleged misconduct. Plaintiffs show only that Park and former nonparty board chair Martin Velez belong to the same private sailing club in San Diego and occasionally attend club dinners.

On the committee’s motion to dismiss, how should the court most likely rule on plaintiffs’ challenge to Park’s independence?

Explanation. Under Zapata prong one, the SLC must show no genuine issue of material fact as to independence. The inquiry is whether the SLC member can decide on the merits rather than being governed by extraneous influences. The majority held that even a single-member SLC is not invalid per se, though reviewed with a gimlet eye, and that an attenuated club relationship with a nonparty former chair was too remote to undermine independence. (Derived from Teamsters Local 443 Health Services & Insurance Plan v. Chou (n.d.).)