Zapata v. Maldonado

Supreme Court of Delaware · Corporations

CorporationsDerivative suitsBoard committeesDemand futilityBusiness judgment rulederivative actionspecial litigation committeeindependent committee

Facts

A Zapata stockholder, Maldonado, filed a derivative action in 1975 against ten officers and directors alleging breaches of fiduciary duty, without making demand because all directors were named as defendants and demand was alleged to be futile. By 1979, after changes in board membership, the remaining directors appointed two new outside directors and created an Independent Investigation Committee composed solely of those two directors to investigate this suit and a similar Texas action and determine whether the corporation should continue them. The committee's determination was stated to be final and binding on the corporation, and after investigating it concluded the actions should be dismissed as inimical to the company's best interests. Zapata then moved to dismiss or for summary judgment, but the Court of Chancery denied the motion on the ground that Delaware law did not sanction dismissal by this mechanism.

Issue

When demand is excused as futile and a derivative action has been properly initiated by a stockholder, may a board committee composed of disinterested directors seek dismissal of that action on the ground that continued litigation is not in the corporation's best interests? If so, what role must the Court of Chancery play in deciding such a motion?

Rule

Under Delaware law, a properly authorized independent committee of disinterested directors may seek dismissal of a derivative suit, even one properly initiated after demand was excused, because the board retains its statutory managerial authority over corporate litigation under 8 Del. C. § 141(a) and may delegate that authority under § 141(c). But dismissal is not automatic: the Court of Chancery must apply a two-step test, first inquiring into the committee's independence, good faith, and the reasonableness of its investigation and supporting bases, with the corporation bearing the burden, and second, if step one is satisfied, applying the court's own independent business judgment to determine whether dismissal should be granted.

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

Rivermill Systems, a Delaware corporation based in Denver, is sued derivatively by shareholder Elena Park, who did not make demand because five of six directors were accused of approving self-dealing leases. Eighteen months later, after two accused directors resign, the board appoints two new outside directors and authorizes them as a committee to decide whether the company should seek dismissal of the suit.

Which is the strongest statement of Delaware law governing the committee's authority?

Explanation. The majority held that demand excusal does not strip the board of its statutory authority under § 141(a) over corporate litigation. The problem is director disqualification, not loss of corporate power. Under § 141(c), that authority may be delegated to a properly authorized committee of disinterested directors, which may seek dismissal of a derivative suit. (Derived from Zapata v. Maldonado (n.d.).)