Zapata Corporation v. Maldonado

Supreme Court of Delaware · 1981 · Corporations

CorporationsDerivative suitsBoard committeesDemand futilityderivative actionspecial litigation committeeindependent committeedemand futility

Facts

A Zapata stockholder filed a derivative action alleging breaches of fiduciary duty by ten officers and directors, and he did not make a demand on the board because all directors were named as defendants and allegedly participated in the challenged acts. After several years, changes in board membership left four original defendant-directors off the board, and the remaining directors appointed two new outside directors and created an Independent Investigation Committee composed solely of those two directors. The committee was given final and binding authority to investigate the derivative actions and determine whether the corporation should continue them. After investigating, the committee concluded the suits should be dismissed as contrary to the company's best interests, and Zapata moved to dismiss or for summary judgment.

Issue

When demand on the board is excused as futile and a stockholder properly initiates a derivative action, may a board committee of disinterested directors seek dismissal of that action on the corporation's behalf? If so, what role should the Court of Chancery play in deciding whether dismissal should be granted?

Rule

A properly authorized independent committee may, under DGCL §§ 141(a) and 141(c), seek dismissal of a derivative action that was properly initiated without demand. The Court of Chancery must apply a two-step analysis: first, it must examine the committee's independence, good faith, and the reasonableness of its investigation and supporting bases, with the corporation bearing the burden; second, if step one is satisfied, the court may apply its own independent business judgment to determine whether dismissal is in the corporation's best interests.

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

A stockholder of Lakefront Robotics, Inc., a Delaware corporation based in Chicago, files a derivative suit without making demand, alleging the full board approved self-dealing compensation arrangements. A year later, the corporation appoints a committee of newly added outside directors, and the corporation argues that the committee may seek dismissal because the business judgment rule itself gives that authority.

Which is the best assessment of the corporation's argument?

Explanation. The majority drew a sharp distinction between the source of authority and the standard of review. Directorial power to decide whether the corporation should pursue litigation comes from DGCL § 141(a), and that authority may be delegated to a committee under § 141(c). The business judgment rule is a judicial presumption used defensively after a decision is made; it does not itself confer power to dismiss derivative litigation.