Case Name: FRANK O. ALFORD, WILKIE P. BEATTY, as Executrix of the Estate of PAUL B. BEATTY, CARSON INSURANCE AGENCY, INC., PATRICIA A. EDLUND, STANLEY EDLUND, JAMES M. GILFILLIN, LARRY G. GOLDBERG, RAQUEL T. GOLDBERG, BETTY F. RHYNE, ROBERT R. RHYNE and NORMAN V. SWENSON, derivatively in the right of ALL AMERICAN ASSURANCE COMPANY, Plaintiffs v. ROBERT T. SHAW, AMERICAN COMMONWEALTH FINANCIAL CORPORATION, GREAT COMMONWEALTH LIFE INSURANCE COMPANY, ICH CORPORATION, CHARLES E. BLACK, S. J. CAMPISI, ROY J. BROUSSARD, TRUMAN D. COX, FRED M. HURST, C. FRED RICE, and PEGGY P. WILEY, Defendants, and ALL AMERICAN ASSURANCE COMPANY, Beneficial Party
Court: Supreme Court of North Carolina
Jurisdiction: North Carolina
Decision Date: 1986-10-07
Citations: 318 N.C. 289
Docket Number: No. 132PA85
Parties: FRANK O. ALFORD, WILKIE P. BEATTY, as Executrix of the Estate of PAUL B. BEATTY, CARSON INSURANCE AGENCY, INC., PATRICIA A. EDLUND, STANLEY EDLUND, JAMES M. GILFILLIN, LARRY G. GOLDBERG, RAQUEL T. GOLDBERG, BETTY F. RHYNE, ROBERT R. RHYNE and NORMAN V. SWENSON, derivatively in the right of ALL AMERICAN ASSURANCE COMPANY, Plaintiffs v. ROBERT T. SHAW, AMERICAN COMMONWEALTH FINANCIAL CORPORATION, GREAT COMMONWEALTH LIFE INSURANCE COMPANY, ICH CORPORATION, CHARLES E. BLACK, S. J. CAMPISI, ROY J. BROUSSARD, TRUMAN D. COX, FRED M. HURST, C. FRED RICE, and PEGGY P. WILEY, Defendants, and ALL AMERICAN ASSURANCE COMPANY, Beneficial Party
Judges: 
Reporter: North Carolina Reports
Volume: 318
Pages: 289–330

Head Matter:
FRANK O. ALFORD, WILKIE P. BEATTY, as Executrix of the Estate of PAUL B. BEATTY, CARSON INSURANCE AGENCY, INC., PATRICIA A. EDLUND, STANLEY EDLUND, JAMES M. GILFILLIN, LARRY G. GOLDBERG, RAQUEL T. GOLDBERG, BETTY F. RHYNE, ROBERT R. RHYNE and NORMAN V. SWENSON, derivatively in the right of ALL AMERICAN ASSURANCE COMPANY, Plaintiffs v. ROBERT T. SHAW, AMERICAN COMMONWEALTH FINANCIAL CORPORATION, GREAT COMMONWEALTH LIFE INSURANCE COMPANY, ICH CORPORATION, CHARLES E. BLACK, S. J. CAMPISI, ROY J. BROUSSARD, TRUMAN D. COX, FRED M. HURST, C. FRED RICE, and PEGGY P. WILEY, Defendants, and ALL AMERICAN ASSURANCE COMPANY, Beneficial Party
No. 132PA85
(Filed 7 October 1986)
1. Corporations §8 4, 6— shareholders’ derivative action — fraud and self-dealing alleged against majority of directors — litigation committee recommends settling or not pursuing claims — modified business judgment rule adopted
In a shareholders’ derivative action in which self-dealing and fraud were alleged against the majority of the board of directors, the Supreme Court adopted a version of the business judgment rule of Auerbach v. Bennett, 393 N.E. 2d 994, which limits judicial inquiry into a special litigation committee’s judgment on pursuing litigation to whether the committee was composed of disinterested independent directors who acted in good faith and followed appropriate investigative procedures, modified to place the burden on defendants at a summary judgment hearing to show that the committee was composed of directors who were disinterested and independent and who conducted an appropriately thorough investigation. If the independence of the directors and the reasonableness of their investigation is established, the directors’ good faith in carrying out their duties will be presumed in the absence of evidence to the contrary.
2. Corporations 88 4, 6— shareholders’ derivative action —fraud and self-dealing alleged against directors' — recommendation of special litigation committee against pursuing claims —summary judgment for defendants proper
The trial judge properly granted defendants’ motions for summary judgment in a shareholders’ derivative action in which plaintiffs were minority shareholders; plaintiffs had alleged fraud and self-dealing by a majority of the board of directors; the board of directors established a special investigative committee to conduct an investigation and determine whether any legal action should be initiated; the committee recommended that all except two of the claims investigated not be asserted and that the remaining two claims be settled; the record discloses that the board of directors made every effort to insure that outside counsel and the two outside directors comprising the special litigation committee met the requisite qualifications of independence and disinterestedness; plaintiffs did not challenge the independence of the committee except through general, broad allegations of structural bias; the committee interviewed sixteen people, reviewed approximately 3,750 documents, submit ted interrogatories to each person who served as a director during the relevant period, and prepared a 409-page report in addition to an appendix which included twenty-five exhibits; the affidavit submitted by plaintiffs contained a challenge to the committee’s judgment, not to its independence or good faith, and did not suggest any available information which the committee did not consider; plaintiffs’ counsel was afforded every opportunity to provide the committee with information which might have been helpful in assessing the merits of the claims; and the report of the special committee left no doubt that the investigation was exhaustive and undertaken seriously and in good faith, following procedures sufficiently broad in scope and conscientious in execution to insure a thorough review of all allegations and related matters.
Justice Frye concurring in part and dissenting in part.
Justice Martin dissenting.
On discretionary review, pursuant to N.C.G.S. § 7A-31 from a decision of the Court of Appeals, 72 N.C. App. 537, 324 S.E. 2d 878 (1985), reversing judgment entered by Snepp, J., on 12 December 1983 in Superior Court, Mecklenburg County. Heard in the Supreme Court on 18 December 1985.
Petree, Stockton, Robinson, Vaughn, Glaze & Maready, by Ralph M. Stockton, Jr. and Daniel R. Taylor, Jr., for plaintiff All American Assurance Company.
Cansler & Lockhart, P.A., by Thomas Ashe Lockhart and Bruce M. Simpson, for plaintiff-appellees.
Adams, Kleemeier, Hagan, Hannah & Fouts, by Daniel W. Fouts and Bruce H. Conners, and Peter G. Pappas, for defendant-appellants Charles E. Black, S. J. Campisi, Roy J. Broussard, Fred M. Hurst, Peggy P. Wiley and Truman D. Cox.

Opinion:
BILLINGS, Chief Justice.
The sole issue on appeal is whether, in North Carolina, the business judgment rule may be applied to a special litigation committee's decision not to pursue derivative claims based upon charges of fraud and self-dealing by a majority of the members of the board of directors of the corporation asserted by minority shareholders. The Court of Appeals concluded that the business judgment rule, "traditionally used by our courts as a defense on the merits to allegations of fraud," could not be invoked as "a procedural device to dispose of derivative litigation," 72 N.C. App. at 548, 324 S.E. 2d at 886, and reversed the order of the trial judge granting summary judgment on all but two claims and approving settlement of the remaining claims. We reverse.
A.
As a result of certain demands made on behalf of a number of minority shareholders of All American Assurance Company ("AAA"), that company's board of directors adopted a resolution establishing a "Special Investigative Committee." The Committee was authorized, "in their independent discretion and judgment," to conduct an investigation into the matters about which complaint had been made and "to determine in their independent judgment based upon such investigation whether in the best interest of AAA and its shareholders any claim or demand shall be made or asserted . or whether any legal action shall be initiated against any person or other entity."
Prior to completion by the special litigation committee of its investigation, plaintiffs filed a shareholder's derivative suit in Superior Court, Mecklenburg County. The allegations in the complaint, for the most part, paralleled the claims made earlier which were then under investigation by the Committee. Included in the complaint were allegations of "wrongful, unlawful and fraudulent transactions" undertaken by defendants "to the enormous loss and detriment of All American."
Within a year after the complaint was filed, the special litigation committee completed its investigation and filed its report. The Committee recommended that all except two of the claims investigated not be asserted and that the two remaining claims be settled.
Based on the recommendations of the special litigation committee, defendant AAA moved for summary judgment on all claims except the two which were the subject of a settlement agreement and for approval of the settlement agreement. In addition, defendants Wiley, Campisi, Hurst, Broussard, Black and Cox moved for summary judgment.
Judge Snepp granted the motions, reasoning that:
The Court is of the opinion that the business judgment rule controls the disposition of this case and, therefore, that the only issues before it are whether the Special Committee was composed of disinterested, independent directors who acted in good faith, and whether the scope of the investigation and the procedures adopted and followed were appropriate . . . [and] that there is no genuine issue of a material fact as to the disinterestedness, independence and good faith of the Special Committee, or as to the scope of the investigation or the appropriateness of the procedures adopted and followed by the Special Committee in investigating the claims asserted. . .
The Court of Appeals reversed, holding that "directors of North Carolina corporations who are parties to a derivative action may not confer upon a special committee of the board of directors the power to bind the corporation as to its conduct of the litigation." 72 N.C. App. at 547, 324 S.E. 2d at 886. In reaching this conclusion, the Court of Appeals considered each of three prevailing views, rejected both the view first articulated in the landmark case of Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994, 419 N.Y.S. 2d 920 (1979), and the view as represented by Zapata Corp. v. Maldonado, 430 A. 2d 779 (Del. 1981), both of which recognize the authority of the courts to rely, with different degrees of deference, upon litigation decisions made by special litigation committees of the corporation's board of directors, and adopted the rule enunciated in Miller v. Register And Tribune Syndicate, Inc., 336 N.W. 2d 709 (Iowa 1983).
The claims made on behalf of certain minority shareholders of AAA were first asserted by letter dated 28 October 1981 from Attorney Thomas A. Lockhart and directed to the board of directors of All American Assurance Company. The letter questioned the propriety of certain transactions undertaken by the officers and directors of AAA in conducting business for the corporation. These included failing to exercise an option to purchase shares of AAA stock from Great Commonwealth Life Insurance Company (GCL) and failing to exercise a "put" to sell shares of AAA stock to American Commonwealth Financial Corporation (ACFC); paying excessive amounts to affiliated companies for administrative expenses; entering into certain allegedly improper reinsurance and coinsurance agreements; redeeming certain 8% debentures held by affiliated companies; releasing American Bank and Trust Company (ABTC) of Baton Rouge, Louisiana, from an obligation to purchase an office building; and engaging in other allegedly improper transactions with affiliates, including unsecured loans and joint ownership of airplanes.
By letter dated 11 May 1982, Mr. Lockhart, as attorney for the minority shareholders of AAA, made the following demands of the board of directors with regard to the earlier claims: recovery from GCL of 232,678 AAA shares purchased at $5.00 per share when AAA had a "put" option to sell 51,774 shares at $10.00 per share to ACFC; recovery of all loans and advances to affiliates; recovery of all investments, amounting to at least $4,259,149.00, in National American Life Insurance Company (NAD; and demand that the company refrain from coinsurance and reinsurance treaties and transactions with affiliates which had not been approved by the North Carolina Department of Insurance.
The complaint in the present action, filed on 4 November 1982, asserted liability on the part of the defendants based on the transactions described above and the failure of AAA's directors to take action.
B.
As one commentator recently noted, this case "clearly presents policy choices of major significance in the corporation law of North Carolina." R. Robinson, North Carolina Corporation Law and Practice, § 14-15 (3d ed. 1983 and Supp. 1985). We therefore deem it appropriate to approach the issue from a historical and economic as well as a legal perspective.
The shareholder derivative action, codified in N.C.G.S. § 55-55, traces its roots to English common law as first described in the case of Foss v. Harbottle, 2 Hare 461, 67 Eng. Rep. 189 (1843).
The Supreme Court of the United States, after a brief encounter with the propriety of derivative actions in Dodge v. Woolsey, 59 U.S. 331, 15 L.Ed. 401 (1855), fully recognized and set out the common law requirements for derivative actions in Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827 (1882). With respect to the right of the shareholder to bring a derivative action, the Court observed:
That the vast and increasing proportion of the active business of modern life which is done by corporations should call into exercise the beneficent powers and flexible methods of courts of equity, is neither to be wondered at nor regretted; and this is especially true of controversies growing out of the relations between the stockholder and the corporation of which he is a member. The exercise of this power in protecting the stockholder against the frauds of the governing body of directors or trustees, and in preventing their exercise, in the name of the corporation, of powers which are outside of their charters or articles of association, has been frequent, and is most beneficial, and is undisputed.
Id. at 453, 26 L.Ed. at 829.
A derivative action brought by the shareholder against the corporation and others for wrongdoing, however, was subject to two requirements: (1) an exhaustion of intra-corporate remedies, and (2) ownership of shares in the corporation at the time of the complained-of transaction. In this regard, Justice Miller relied on the decisions of the English courts, quoting with approval MacDougall v. Gardiner, 1 Ch. D. 13 (1875):
"[N]othing connected with internal disputes between shareholders is to be made the subject of a bill by some one shareholder on behalf of himself and others, unless there be something illegal, oppressive, or fraudulent; unless there is something ultra vires in the part of the company qua company, or on the part of the majority of the company, so that they are not fit persons to determine it, but that every litigation must be in the name of the company, if the company really desire it. Because there may be a great many wrongs committed in a company, — there may be claims against directors, there may be claims against officers, there may be claims against debtors; there may be a variety of things which a company may well be entitled to complain of, but which, as a matter of good sense, they do not think it right to make the subject of litigation; and it is the company, as a company, which has to determine whether it will make anything that is a wrong to the company a subject-matter of litigation, or whether it will take steps to prevent the wrong from being done."
Id. at 456-57, 26 L.Ed. at 830-31.
Although citing to and adopting the requirements for maintaining a derivative action enunciated in Hawes v. Oakland, the North Carolina Supreme Court in Moore v. Mining Company, 104 N.C. 534, 10 S.E. 679 (1889) first approached the derivative action with caution, reasoning that:
In the nature of the matter it would contravene every principle of intelligent procedure, be impractical and absurd to allow ordinarily one or more of the stockholders of a corporation to bring actions to recover property, or the value of it, that belongs to it, or to recover damages for injuries to it, or its property, or to collect debts due to it. Such actions imply corporate disorganization and the absence of corporate integrity and entity. . . . The right to bring and the occasion of bringing such actions arises only when and because the proper corporate officers will not, for some improper con sideration, discharge their duties as they should do. But stockholders, as such, may not bring such actions at their pleasure .
Id. at 542-43, 10 S.E. at 682. (Emphasis added.)
Since the decision in Moore, our courts have entertained shareholder derivative actions, subject to the requirements of exhaustion of intra-corporate remedies, including demand on directors, and contemporaneous ownership. See Goodwin v. Whitener, 262 N.C. 582, 138 S.E. 2d 232 (1964) (mismanagement); Sales Corp. v. Townsend, 248 N.C. 687, 104 S.E. 2d 826 (1958) (fraudulent withdrawal and appropriation of corporate assets); Caldlaw, Inc. v. Caldwell, 248 N.C. 235, 102 S.E. 2d 829 (1958) (preempting profit on sale of corporate property); Jordan v. Hartness, 230 N.C. 718, 55 S.E. 2d 484 (1949) (fraudulently dissipating assets).
C.
Of particular significance in the development of the law concerning the shareholder derivative action are the early and thereafter consistent statements requiring prior demand on the directors of a corporation and a recognition of the necessity and validity of business judgment in conducting corporate affairs.
The rationale for the prerequisite of demand speaks to the essence of corporate governance. "When a person becomes a stockholder in a corporation he assents to the execution of all the powers which the law confers upon the corporation and agrees to abide by the action of the governing body as to all matters properly under its control." Murphy v. Greensboro, 190 N.C. 268, 275, 129 S.E. 614, 617 (1925); see Hill v. Erwin Mills, Inc., 239 N.C. 437, 80 S.E. 2d 358 (1954). The directors are responsible for the total management of the corporation, including decisions to forego suits or pursue actions which in their judgment are in the best interests of the corporation. To require the shareholder to pursue and exhaust intra-corporate remedies through demand on directors assures corporate management the opportunity to pursue alternative remedies, thus avoiding unnecessary litigation. It is only in those cases where demand would be futile, as where corporate management is under control of the alleged guilty parties, that demand is excused. See Gaines v. Manufacturing Co., 234 N.C. 331, 67 S.E. 2d 355 (1951) (a shareholder may show facts ex cusing demand); Hill v. Erwin Mills, Inc., 239 N.C. 437, 80 S.E. 2d 358 (where control of a corporation is in the directors whose actions are questioned, and a minority shareholder has exhausted all means available to him to obtain redress of grievances within the corporation itself, demand is not required); Excelsior Pebble Phosphate Co. v. Brown, 74 F. 321, 323 (4th Cir. 1896) ("to require the complainants to show that they had exhaused all effort in inducing the directors to convict themselves of fraud, is absurd").
Viewed in historical perspective, the evolving law of shareholder derivative actions also presaged what is now referred to as the business judgment rule. In Hawes v. Oakland, 104 U.S. 450, 458, 26 L.E. 827, 831, the Court noted the important distinction between the class of cases involving directors who were allegedly guilty of fraud, breach of trust, or were proceeding ultra vires, and those cases "in which there is no breach of trust, but only error and misapprehension or simple negligence on the part of the directors."
We find similar language in our early case of Besseliew v. Brown, 177 N.C. 65, 97 S.E. 743 (1918). In the context of a suit by the receivers of a corporation against its officers and directors to recover loss of the company's assets, our Court affirmed a judgment overruling a demurrer from which defendants had appealed. Plaintiff alleged that the directors had negligently entrusted the management of corporate affairs to its secretary who misappropriated the company's funds. In determining the extent of defendants' liability this Court observed that:
It is fully established in this jurisdiction and elsewhere that the directors and managing officers of a corporation are to be properly considered and dealt with as trustees, or quasi trustees, in respect to their corporate management, and may, in proper instances, be held liable for loss or depletion of the company's assets due to their willful or negligent failure to perform their official duties. They are not, as a rule, responsible for mere errors of judgment (Fisher v. Fisher, 170 N.C. 378, and authorities cited), nor for slight omissions from which the loss complained of could not have reasonably been expected; but where they accept these positions of trust they are expected and required to give them the care and attention that a prudent man should exercise in like circumstances and charged with a like duty, usually the care that he shows in the conduct of his own affairs of a similar kind; and if there is a breach of legal duty in this respect, causing a loss of the company's assets, the corporation may sue .
Id. at 67, 97 S.E. at 744. (Emphasis added.) See also Gordon v. Pendleton, 202 N.C. 241, 162 S.E. 546 (1932) (nonsuit for defendants affirmed — no convincing or satisfactory evidence that alleged negligent acts of defendants in making loans resulted in pecuniary loss).
Thus, in North Carolina as elsewhere, the business judgment rule has provided the yardstick against which the duties and decisions of corporate officers and directors are measured in order to achieve a balance between the need to hold management accountable for legitimate wrongs committed against the corporation and the need to ensure that management is accorded necessary decision-making discretion and concomitant protection from liability for injury to the corporation resulting from good faith decisions undertaken within the scope of authority and with loyalty and due care.
As a defensive mechanism, the rule has spawned the business judgment doctrine that courts will not normally review or interfere with corporate management decisions, given "the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments." Auerbach v. Bennett, 47 N.Y. 2d at 630, 393 N.E. 2d at 1000, 419 N.Y.S. 2d at 926. Thus, the decisions of directors are accorded a presumption of propriety which can be overcome only upon a showing of misconduct — lack of good faith, dishonesty, etc.
The applicability of the business judgment rule to a particular board decision, however, has not been limited to purely commercial business decisions; that is, as a substantive defense to shareholder attacks on the soundness of business decisions. Through an evolving line of judicial decisions, the rule has been applied to litigation decisions determining whether or not a corporation should pursue an available cause of action. See United Copper Co. v. Amalgamated Copper Co., 244 U.S. 261, 61 L.Ed. 1119 (1917); Corbus v. Alaska Treadwell Gold Mining Co., 187 U.S. 455, 47 L.Ed. 256 (1903); Hawes v. Oakland, 104 U.S. 450, 26 L.Ed. 827. To the extent that the good faith and honesty requirements are met, a litigation decision not to sue made by disinterested board members has been accorded by courts the same presumption of propriety and judicial deference under the business judgment doctrine as decisions made regarding the day-to-day operation of the company. Unless the minority shareholders who institute a derivative suit can provide a forecast of evidence that the disinterested board either did not make the decision not to pursue the litigation in good faith or failed to conduct an adequate investigation of the claim before making the decision, summary judgment dismissing the action is appropriate.
The recognition by American courts that the business judgment rule may serve as a procedural tool to terminate derivative action has not been without controversy. It is, nevertheless, the critical starting point toward resolution of the issue presented in this case.
II.
A.
We first note that "derivative claims . . . belong to the corporation itself," Auerbach, 47 N.Y. 2d at 631, 393 N.E. 2d at 1000, 419 N.Y.S. 2d at 927; that is, the rights to be vindicated are those of AAA, not those of plaintiffs suing derivatively on the corporation's behalf. See Gall v. Exxon Corp., 418 F. Supp. 508 (S.D.N.Y. 1976). With this in mind, courts have acknowledged that the decision whether to prosecute derivative claims generally lies within the judgment and control of management. In United Copper Co. v. Amalgamated Copper Co., 244 U.S. 261, 263-64, 61 L.Ed. 1119, 1124, Justice Brandéis observed that:
Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders. Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in a dual relation which prevents an unprejudiced exercise of judgment.
In United Copper, the issue was whether a court should entertain a shareholder's derivative suit brought on behalf of a corporation to recover damages against a third party for conduct in violation of the Sherman Act following the corporation's refusal to institute the suit. The Court acknowledged that there was no allegation of misconduct on the part of the directors or that the directors were in control of the wrongdoers or stood in any relation to them. The district court had sustained a demurrer and dismissed the complaint. Its judgment was affirmed by the Circuit Court of Appeals, and the Supreme Court affirmed.
The protective mantle of the business judgment rule to litigation decisions, while admittedly a barrier to shareholders seeking to assert a derivative action over board opposition, is not without rational basis. Indeed, assuming that a compensatory rationale underlies the derivative action, factors militating against even potentially successful litigation, such as the disruption of business, adverse impact on employee morale, and impact of adverse publicity, are considerations well within the expertise of corporate management. Frequently, derivative action is predicated on a multitude of complicated business transactions occurring over an extended period of time (as is the situation in the present case). The corporate cost of conducting such complex litigation is frequently formidable. See, e.g., Gaines v. Haughton, 645 F. 2d 761; Cramer v. General Tel & Electronics Corp., 582 F. 2d 259 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 59 L.Ed. 2d 90 (1979); Rosengarten v. Intern. Tel & Tel Corp., 466 F. Supp. 817 (S.D.N.Y. 1979); Gall v. Exxon Corp., 418 F. Supp. 508. Thus, the decision whether and to what extent to prosecute is generally predicated on considerations which are ultimately calculated to protect and advance the economic best interest of the corporation, a responsibility which belongs to the management of the corporation.
In principle then we recognize that the decision of disinterested directors, made in good faith and in the exercise of honest judgment, not to pursue claims should be accorded judicial deference under the business judgment doctrine, thereby precluding judicial inquiry into the merits of such claims. See Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E. 2d 279.
The business judgment rule, however, presupposes that management decisions have been made by disinterested and impartial board members acting honestly and in good faith, with loyalty and due care. Where shareholders' claims allege wrongdoing on the part of a majority of the officers or directors, as is the case in the present lawsuit, the practice has emerged of appointing a committee of directors, a special litigation committee not implicated in the wrongdoing, to assume responsibility for the litigation decision. Briefly, courts in other jurisdictions have adopted one of three approaches in according judicial deference to the decision of a special litigation committee. The so-called Auerbach view holds that the business judgment rule forecloses judicial in quiry into the merits of a shareholder derivative suit where the decision to terminate has been made by a committee of disinterested directors acting in good faith and following appropriate investigative procedures. See Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994, 419 N.Y.S. 2d 920. The Zapata view essentially adopts the Auerbach position in cases where formal demand was made and acted upon by the special litigation committee; i.e., where a majority of the board of directors was not implicated in the charges of wrongdoing. A committee decision rejecting a derivative claim where demand was excused as being futile is subject to closer judicial scrutiny — a two-step test necessitating inquiry into the independence, good faith, and basis supporting the committee's conclusions as well as a determination by the court, applying its own independent judgment, whether the action should be dismissed. See Zapata Corp. v. Maldonado, 430 A. 2d 779. Finally, Miller v. Register And Tribune Syndicate, Inc., 336 N.W. 2d 709 holds that directors who are parties to a derivative action may not confer upon a special litigation committee the power to bind the corporation as to its conduct of the litigation, a position taken only by the Iowa courts.
B.
Inasmuch as we have recognized in principle that litigation decisions made by corporate management should be accorded judicial deference under the business judgment doctrine, the issue then becomes whether and to what extent the decisions of a special litigation committee should be recognized by our courts in North Carolina where the appointment of that committee is necessitated by allegations of misconduct on the part of a majority of the board of directors — misconduct which disqualifies the directors themselves from making an impartial litigation decision.
Clearly, there are fundamental differences between a litigation decision made by a board of directors free of implication in wrongdoing and by a special litigation committee appointed to make a litigation decision because charges of misconduct have been lodged against a majority of the board. In the former case, it is only the interests of the corporation which are involved. The integrity of the board's decision-making process is intact. The decision of a special litigation committee, on the other hand, involves not only legitimate business judgments concerning the propriety of the suit as it pertains to the best interests of the corporation, but also exposure of board members to potential liability should the committee determine that derivative action is appropriate. As a result, a number of courts have questioned, with varying degrees of suspicion, the ability of special litigation committees to render dispassionate, unbiased decisions. See Abramowitz v. Posner, 513 F. Supp. 120 (S.D.N.Y. 1981), aff'd, 672 F. 2d 1025 (2d Cir. 1982); Genzer v. Cunningham, 498 F. Supp. 682; Zapata Corp. v. Maldonado, 430 A. 2d 779.
The assumption is that the taint of self-interest which disqualifies directors in the first instance from rendering an impartial litigation decision should act to disqualify the same defendant directors from participating in the selection of a committee authorized to make the decision. That is, personal, financial and moral influences —peer or "structural" bias —will permeate the committee's decision-making process and ultimately compromise its integrity.
This potential for "structural bias" was evidently of sufficient concern to the Court of Appeals in this case to justify the adoption of a prophylactic rule effectively prohibiting the power of a "tainted" board to delegate a litigation decision to a special litigation committee. Alford v. Shaw, 72 N.C. App. at 544-45, 324 S.E. 2d at 884. In so holding, the Court of Appeals has, as defendants point out, virtually emasculated the corporation's power to terminate derivative litigation where all or a majority of directors are named as defendants. We do not believe that the prophylactic rule adopted by the Court of Appeals, as enunciated in Miller v. Register And Tribune Syndicate, Inc., 336 N.W. 2d 709, will serve the best interests of all segments of the corporate community in North Carolina, including minority stockholders, majority stockholders, officers, directors and the corporate entity.
In rejecting the per se rule prohibiting disqualified directors from delegating litigation decisions to a special litigation committee, we must determine the amount of judicial deference to be accorded to the decision of the committee.
The following observations, made by one commentator, offer perhaps the most thoughtful perspective on the dilemma of shareholder derivative litigation as evidence in this case:
The quintessential characteristic of corporate governance is private decision-making by directors as the appointed delegates of shareholders. Shareholders commit themselves to having their commercial affairs controlled by a board of directors when they make the decision to put their investment capital at risk in a corporation. In instituting derivative actions, shareholders seek to be released from this commitment which they have made to rule by directors. Shareholders are attempting to substitute their litigation decisions for those of their directors. This is the dilemma which shareholders derivative litigation presents to the courts. By entertaining such litigation, courts are required to sanction a fundamental change in the most basic of intra-corporate relationships. Derivative litigation is predicated upon the willingness of the court to reverse the roles of the directors and shareholders in corporate decision-making. Many of the problems encountered by the courts in dealing with special litigation committees arise from the irreconcilability of this concept of shareholder derivative litigation and the traditional concept of autonomous corporate governance by the board of directors. The courts wish to accommodate meritorious derivative litigation while at the same time preserving, to the greatest extent possible, the traditional intracorporate relationship between shareholders and directors.
When the full board is disabled from acting because of majority member disqualification, the special litigation committee makes use of outside directors as the only viable group within the corporate entity potentially capable of performing the board's traditional role of corporate decision-maker. The very willingness of the courts to listen to a special committee is a judicial acknowledgment of the proven value of traditional corporate norms which recognize private decision-making by directors as the most effective method of corporate governance. The private corporation has been the primary instrument for this country's development of a business infrastructure which, at least in comparison with the systems of other countries, has been remarkably successful in producing an economy of abundance.
Brown, 43 U. Pitt. L. Rev. at 644.
With this in mind, we also take judicial notice of the fact that North Carolina has grown in recent years to become one of the most populous states in the nation. Commerce and industry have enjoyed a concomitant growth in the state and depend for their strength and vitality on laws designed to encourage and protect that growth. See, e.g., A.E.P. Industries v. McClure, 308 N.C. 393, 302 S.E. 2d 754 (1983); North Carolina Economic Development Report, North Carolina Department of Commerce (1985). A favorable business climate can be fostered in part by recognizing the importance of traditional intra-corporate relationships, and by providing a measure of protection against "strike suits" (nuisance suits brought to extort settlement).
We are not unmindful of the criticisms advanced by commentators and courts respecting the full breadth of judicial deference accorded special litigation committee decisions under the business judgment doctrine. See Cox, Searching for the Corporation's Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project, 1982 Duke L.J. 959; Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and Proposal for Legislative Reform, 81 Colum. L. Rev. 261; Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U. Pitt. L. Rev. 601; Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit, 75 Nw. U.L. Rev. 96.
Of particular interest to us is the view expressed in Zapata Corp. v. Maldonado, 430 A. 2d 779, which purports to represent a compromise position between the judicial deference advocates and the prophylactic rule advocates. We find, however, that the Zapata court, in advancing the two-tiered analysis, provides only "an illusory improvement," Cox, 1982 Duke L.J. 975; potentially raises more problems than it offers solutions, see Joy v. North, 692 F. 2d 880 (Cardamone, J. dissenting); and in the absence of standards or guidelines for the rendering of a court's own independent judgment, offers no assurance that decisions will be consistent. See Brown, 43 U. Pitt. L. Rev. at 642-43. Thus "[i]n the absence of well-articulated standards, any power to decide may quickly degenerate into the power to decide arbitrarily." Id. at 643-44. More important, however, is our rejection of the predisposed prejudice on the part of some courts that a special litigation committee is, due to the potential of some inherent structural bias, incapable of acting independently. Finally, we fail to find authority in our Rules of Civil Procedure or elsewhere for a trial judge in North Carolina to substitute his own judgment for that of the factfinder in determining whether the decision to terminate litigation is appropriate if the circumstances do not justify deference to the decision of duly elected corporate directors.
C.
We have chosen to adopt the business judgment rule position enunciated in Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994, 419 N.Y.S. 2d 920, which limits judicial inquiry into a special litigation committee's judgment regarding whether it is in the best interests of a corporation to pursue litigation to whether the committee was composed of disinterested, independent directors who acted in good faith, following appropriate investigative procedures, but we modify the traditional Auerbach approach regarding the allocation of the burden of proof. We believe that careful application of this modified Auerbach rule to determine the disinterested independence and good faith of the committee members and the appropriateness and sufficiency of the investigative procedures provides sufficient judicial safeguards. With that inquiry satisfied, our courts should recognize that the substantive decision of the committee not to pursue the claims advanced in the shareholder's derivative action "falls squarely within the embrace of the business judgment doctrine, involving as it [does] the weighing and balancing of legal, ethical, commercial, promotional, public relations, fiscal and other factors familiar to the resolution of many if not most corporate problems." Auerbach, 47 N.Y. 2d at 633, 393 N.E. 2d at 1002, 419 N.Y.S. 2d at 928.
In adopting the Auerbach rule, we first note, as did the Court of Appeals, that it is within the power of boards of directors of North Carolina corporations to appoint committees from among their members to exercise full board authority. The committee must be approved by a majority of the board of directors then in office and must consist of two or more directors. N.C.G.S. § 55-31. The fact that the appointing members of a board of directors are acting under the "disability" of potential liability as a result of shareholder allegations does not per se extend to disable them from delegating managerial authority over the litigation to a special litigation committee.
Although rejecting a rule that the mere potential for structural bias conclusively prevents the application of the business judgment doctrine to a litigation decision made by a special litigation committee when a majority of the members of the board of directors of the corporation are accused in a derivative action of misconduct, we nevertheless recognize the legitimate concern regarding the true independence of such a committee. Under these circumstances we believe that at a hearing on a motion for summary judgment, the burden of establishing that the committee was composed of directors who were disinterested and independent and who conducted an appropriately thorough investigation should be upon the defendants to the derivative action. The de fendants may not rely on the absence of evidence of a lack of independence and reasonable investigation; they must come forward with positive, uncontradicted and credible evidence that those prerequisites to reliance on the committee's decision are met. If the defendants fail to satisfy the trial judge that there is no genuine issue of material fact as to the satisfaction of those prerequisites, summary judgment may not be entered for the defendants. As we said in Kidd v. Early, 289 N.C. 343, 370, 222 S.E. 2d 392, 410 (1976) regarding the authority of the courts to enter summary judgment in favor of the party with the burden of proof:
To be entitled to summary judgment the movant must still succeed on the basis of his own materials. He must show that there are no genuine issues of fact; that there are no gaps in his proof; that no inferences inconsistent with his recovery arise from his evidence; and that there is no standard that must be applied to the facts by the jury. Further, if the affidavits seem inherently incredible; if the circumstances themselves are suspect; or if the need for cross-examination appears, the court is free to deny the summary judgment motion.
If, however, the independence of the directors and the reasonableness of their investigation is established, the directors' good faith in carrying out their duties will be presumed in the absence of evidence to the contrary.
D.
With this standard in mind, we hold that the trial court properly granted defendants' motions for summary judgment.
The record discloses that the Board of Directors of AAA made every effort to insure that outside counsel and the two outside directors comprising the Committee met the requisite qualifications of independence and disinterestedness. The selection procedures and qualifications of the special litigation committee members shown by the evidence presented in the present case are typical of an emerging pattern of common criteria designed to ensure independence and good faith and to engender confidence in the committee's ability to render sophisticated and impartial decisions in matters of legal and corporate business complexity. In this case, the Board began with its 10 June 1982 resolution to appoint Mr. Walter F. Brinkley as special counsel. Mr. Brinkley has served as President of the North Carolina Bar Association; is a member of the American College of Trial Lawyers; has experience in corporate, insurance and litigation matters; had previous experience as special counsel; and had never represented AAA or any of its affiliates. None of these facts is contested.
Mr. Brinkley was requested to contact and recommend two persons of "unquestioned reputation, experience, independence, ability and who [had] never been associated in any way with the Company or any of its affiliates" to serve as members of the board of directors and to act as a special litigation committee.
On 9 July 1982, Mr. Brinkley advised the Board by letter that he recommended Marion G. Follín, who was experienced as an executive in the operation of a life insurance company, and Frank M. Parker, who had judicial experience, to serve as the special litigation committee. Mr. Follín retired in 1970 from Pilot Life Insurance Company as Vice Chairman of the Board of Directors and Senior Vice President, as well as Vice President of three subsidiaries. Mr. Follín had been involved in the life insurance business for 40 years and had served with the U.S. Bankruptcy Court as an advisor and trustee. Judge Parker was a practicing attorney in North Carolina for thirty-two years during which time he also served as a member of the Board of Trustees for the University of North Carolina and was a member of the North Carolina Senate. Judge Parker served as an Associate Judge on the North Carolina Court of Appeals for twelve years and at the time of his appointment to the special litigation committee was serving of counsel to the law firm in which he was a partner prior to his judicial appointment. Again, none of these facts is contested. Plaintiffs have not challenged the independence of the committee except through general, broad allegations of structural bias.
At the 21 July 1982 meeting of the board of directors of AAA, Mr. Follín and Judge Parker were duly elected to the Board. At that meeting, Judge Parker made the following statement which he requested be incorporated into the minutes:
Speaking for Mr. Follín and myself, should you decide to elect us to the Board of Directors and to name us as the members of a Special Investigative Committee, we will accept the appointment provided that it is clearly understood that in undertaking our duties:
(1) We have no preconceived ideas concerning the merits of any claims which may have been asserted or may in the future be asserted against All American Assurance Company or any of its present or former officers or directors;
(2) We will conduct as thorough investigation [sic] as we possibly can make of all matters pertinent to such claims;
(3) Based on the information developed as a result of our investigation and the facts as we find them to be, we will make our own independent determination as to what actions, if any, should be undertaken with respect to these claims in the best interest of all shareholders of All American Assurance Company; and
(4) If after our investigation we determine, in our independent judgment, that some legal action or actions should, to protect the best interest of all shareholders, be undertaken against any person or entity, we will see that such actions are initiated and prosecuted vigorously to a conclusion.
In short, we want it clearly understood that in carrying out our duties as members of the Board of Directors and as members of the Special Investigative Committee, we intend to exercise our own independent judgments and to let the chips fall where they may.
Neither the federal class action suit nor the derivative suit had been filed at the time of the appointments.
With respect to the investigative procedures, the committee interviewed sixteen people, reviewed approximately 3,750 documents, submitted interrogatories to each person who served as a director of AAA during the relevant period, and prepared a 409 page report in addition to an appendix which included twenty-five exhibits.
We note that in plaintiffs' Objection to AAA's Motion for Partial Summary Judgment and Approval of Proposed Settlement, plaintiffs' counsel alleges that the findings and conclusions of the Committee report were based on "many misrepresentations of facts and law made by defendants." In support of this allegation, plaintiffs included the affidavit of Buist M. Anderson, an attorney and fifty-year veteran in the life insurance industry. Mr. Anderson states that he examined the Committee report. Based only upon his review of the report, he concluded that "it appears that the Committee did not fully examine and evaluate all available information pertinent to plaintiffs' claims and that the Committee relied in large part upon misleading and false information provided by defendants." However, Mr. Anderson does not identify any information that was available and not examined or any lead that was not followed. Nowhere in the affidavit does Mr. Anderson specify any facts which he identifies as false; instead he states that the Committee relied upon certain "contentions" or "representations" made by the defendants which were erroneous or questionable. In short, Mr. Anderson challenges, on their merits, the propriety of the business transactions claimed by plaintiffs to be wrongful, unlawful and fraudulent, and questions the analysis of the special litigation committee which concluded that the transactions were based on legitimate business and tax consequences. Because Mr. Anderson's affidavit contains a challenge to the Committee's judgment, not to its independence or good faith, and does not suggest any available information which the Committee did not consider, it raises no question regarding issues which we have said are appropriate for determination of the ruling on the motion for summary judgment. It is also evident that plaintiffs' counsel, Mr. Lockhart, was afforded every opportunity to provide the Committee with information which might have been helpful in assessing the merits of the claims. This Mr. Lockhart declined to do. The facts concerning what the Committee did in the process of its investigation are not in dispute. We hold that, when there is no factual dispute, the question of whether those facts establish that the investigation has been sufficiently thorough is a question to be determined as a matter of law by the courts. The Report of the Special Committee of All American Assurance Company, July 1983, leaves no doubt that the investigation was exhaustive and undertaken seriously and in good faith, following procedures sufficiently broad in scope and conscientious in execution to insure a thorough review of all allegations and related matters. The Report supports a conclusion that the members were fully apprised of the facts which could support their decision to terminate the derivative action with respect to the majority of the claims.
In the present case we agree with the trial judge that the Auerbach test has been met with regard to the disinterested independence and good faith of the special litigation committee's membership and the nature and scope of its investigations and that the entry of partial summary judgment and approval of settlement on behalf of AAA, and entry of summary judgment on behalf of defendants Wiley, Campisi, Hurst, Broussard, Black and Cox was proper.
Reversed and remanded.
. The individual defendants were at the time members of the board of directors of AAA and constituted a majority of the Board.
. The Committee investigated the original claims and the allegations in the complaint. Also considered were allegations in a class action suit brought in the United States District Court for the Western District of North Carolina on behalf of certain minority shareholders seeking to recover damages from defendants Shaw, Great Commonwealth Life, and American Commonwealth Financial Corporation. The federal lawsuit was filed after the special litigation committee had begun its investigations but prior to the filing of the shareholder's derivative suit.
. As of this date, it appears that the courts of only four states, Alabama, Delaware, Iowa and New York, have addressed the question presented here. New York and Alabama have adopted the rule known as the Auerbach rule, Auerbach v. Bennett, 47 N.Y. 2d 619, 393 N.E. 2d 994, 419 N.Y.S. 2d 920; Roberts v. Alabama Power Co., 404 So. 2d 629 (Ala. 1981), Delaware adopted the rule as stated in Zapata Corp. v. Maldonado, 430 A. 2d 779, and Iowa adopted the rule of Miller v. Register And Tribune Syndicate, Inc., 336 N.W. 2d 709. Most of the opinions which have considered application of the business judgment rule to decisions of special litigation committees have been by federal courts applying law which they predict would be applied by the state whose law governs the litigation. Auerbach has been applied as the law of California, Gaines v. Haughton, 645 F. 2d 761 (9th Cir. 1981), cert. denied, 454 U.S. 1145, 71 L.Ed. 2d 297 (1982), relying on Lewis v. Anderson, 615 F. 2d 778 (9th Cir. 1979), cert. denied, 449 U.S. 869, 66 L.Ed. 2d 89 (1980), and of Michigan, Genzer v. Cunningham, 498 F. Supp. 682 (E.D. Mich. 1980). Federal courts have applied Zapata as the projected law of Maryland, Rosengarten v. Buckley, 613 F. Supp. 1493 (D.C. Md. 1985), Virginia, Abella v. Universal Leaf Tobacco Co., Inc., 546 F. Supp. 795 (E.D. Va. 1982) and Connecticut, Joy v. North, 692 F. 2d 880 (2d Cir. 1982), cert. denied sub nom. Citytrust v. Joy, 460 U.S. 1051, 75 L.Ed. 2d 930 (1983).
In two additional cases, the federal courts found it unnecessary to choose between Auerbach and Zapata: In re General Tire & Rubber Co. Sec. Litigation, 726 F. 2d 1075 (6th Cir.) (concluding that under either Auerbach or Zapata, the settlement decision of the committee would be affirmed; thus, no need to decide which Ohio would apply), modified on other grounds, Fed. Sec. L. Rep. (CCH) 3 91, 468, cert. denied sub nom. Schreiber v. Gencorp, Inc., 469 U.S. 858, 83 L.Ed. 2d 120 (1984); Hasan v. CleveTrust Realty Investors, 729 F. 2d 372 (6th Cir. 1984) (under either Auerbach or Zapata, the thoroughness of the one-man committee's investigation as well as his disinterestedness would prevent entry of summary judgment; thus no need to decide which rule Massachusetts would apply).
. Underlying these claims and the allegations in the derivative action is the fact that defendants Shaw, Rice, ICH, ACFC and GCL (the "Shaw Group") repre sent the majority and controlling shareholders of AAA and that the transactions complained of allegedly amounted to a "pattern of self-dealing and negligent acquiescence" resulting in the "looting" of assets of AAA. The transactions for the most part can be traced to the corporate history of AAA:
AAA, a North Carolina corporation, was originally organized in 1929 as Pyramid Life Insurance Company, with offices in Charlotte, North Carolina. In 1972, control of the company was acquired by investors who changed the name to All American Assurance Company and moved the offices to Baton Rouge, Louisiana. In 1975, the company was placed in rehabilitation by the North Carolina Department of Insurance after encountering financial difficulties. Mr. Lockhart brought a derivative action on behalf of the company in 1976, charging improper handling of the company's operations. See Swenson v. Thibaut, 39 N.C. App. 77, 250 S.E. 2d 279 (1978), disc. rev. denied and appeal dismissed, 296 N.C. 740, 254 S.E. 2d 181-83 (1979). At that time, approximately 65% of the company's stock was owned by American Bank & Trust Company of Baton Rouge. On 5 January 1979, ABTC sold this stock to ACFC, a defendant in this action. ACFC was controlled by defendant ICH which in turn was controlled by defendants Shaw and Rice. ACFC then sold this stock to defendant GCL, its wholly-owned subsidiary. The offices of AAA were moved to Dallas, Texas where AAA shares common facilities and personnel with GCL and other affiliated companies under a cost sharing plan. AAA then formed NALICO in 1981. NALICO Insurance Company, a wholly-owned subsidiary of AAA, acquired all of the shares of National American Life Insurance Company (NAL). NAL, a Louisiana company, had been in both receivership and rehabilitation. NALICO was dissolved in December 1982. NAL is wholly-owned by AAA. In November 1982, the minority shareholders of all of the companies controlled by ICH, including AAA, were eliminated through a series of mergers and these companies became wholly-owned subsidiaries of ICH. The question of the merger was raised in the present lawsuit. Plaintiffs' motion for a preliminary injunction to stop the merger was denied on 17 November 1982 upon stipulation of defendants ICH, ACFC and GCL that they are subject to the jurisdiction of the court in this action; that plaintiffs would not lose their standing by virtue of the merger; that defendants would maintain the special litigation committee; and that the court would retain jurisdiction of the cause and the parties. The Committee concluded that the fraudulent merger claim involves individual shareholder rights rather than rights of AAA.
. Numerous salutary policy reasons for the rule include the belief that "after-the-fact litigation is an imperfect device to evaluate corporate business decisions," particularly where "[t]he entrepreneur's function is to encounter risks and to confront uncertainty." Joy v. North, 692 F. 2d at 886. That is, there is a need to protect management "from unfair retrospective reviews of their mistakes," thus permitting "risk-taking, innovation and venturesome business activity." Russell M. Robinson, II, Recent Developments in the Business Judgment Rule, Commercial, Banking & Business Law Section Annual Meeting and CLE program, N.C. Bar Foundation Continuing Legal Education (1986). Other reasons advanced include the recognition that directors are managers, not insurers of the corporation's success; management decisions are more properly the province of directors selected by shareholders rather than of a judge; and as a matter of judicial economy, the rule relieves the courts from involvement in complicated business questions. See Dent, The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suitl, 75 Nw. U.L. Rev. 96 (1980); Brown, Shareholder Derivative Litigation and the Special Litigation Committee, 43 U. Pitt. L. Rev. 601 (1982).
. See generally Coffee and Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform, 81 Colum. L. Rev. 261 (1981). The authors question the relevance of the business judgment rule to decisions to terminate litigation given the policy of the rule to shield management from liability for decisions made in the context of the business environment. The pressures of time, the uncertainty of decisions where risk-taking is a factor, and the risk of liability inherent in business decisions do not accompany a decision not to sue.
. N.C.G.S. § 55-55(d) provides that: "If the action on behalf of the corporation is successful, in whole or part, whether by means of a compromise and settlement or by a judgment, the court may award the plaintiff the reasonable expenses of maintaining the action, including reasonable attorneys' fees, and shall direct the plaintiff to account to the corporation for the remainder of any proceeds of the action."
. The same standard adopted by the Iowa Court was earlier adopted by a Delaware Chancery Court in 1980 and was later rejected by the Supreme Court of Delaware in the Zapata case. See Maldonado v. Flynn, 413 A. 2d 1251 (Del. Ch. 1980), rev'd sub nom., Zapata Corp. v. Maldonado, 430 A. 2d 779 (Del. 1981).
. In this regard it should be noted that N.C.G.S. § 55-55(c) provides that the derivative action, once brought, may not be dismissed, discontinued, compromised or settled without approval of the court, thereby substantially reducing the potential for extortion of settlement. N.C.G.S. § 55-55(c) provides that in the event the court determines that the derivative action was brought without reasonable cause, the court may require the plaintiff to pay defendant directors or officers the reasonable expenses of defending the action, including attorneys' fees. The provision offers additional protection against the bringing of nuisance suits.
. A decision not to pursue litigation is not necessarily a decision that the claim lacks merit. The costs to the corporation, both direct and indirect, of litigation may outweigh the benefit to the corporation of even successful litigation. See Rosengarten v. Intern. Tel & Tel Corp., 466 F. Supp. 817, 824 ("If the directors legitimately determine that such an action will not benefit the corporation, then, regardless of the illegality of the underlying transaction, the business judgment rule permits termination of the suit."); see also Gall v. Exxon Corp., 418 F. Supp. 508.
. It is also generally agreed that the burden of proof should be accorded to the party having better access to the relevant facts. See McCormick on Evidence § 337 (3d ed. 1984); 9 J. Wigmore, Evidence § 2486 (Chadbourn rev. 1981). In the present case, matters concerning the independence and investigative procedures of the special litigation committee clearly fall within the knowledge of the committee members and defendant directors who, additionally, possess the greater resources and are essentially contending that "the more unusual event has occurred." McCormick § 337 at 950.
. Although this presumption places upon the plaintiffs in the derivative action the burden of producing evidence or going forward on the question of good faith, it does not shift to them the burden of persuasion. See 2 Brandis on North Carolina Evidence § 218 (1982). Therefore, if credible evidence of a lack of good faith by members of the Committee is produced at the hearing on the summary judgment motion, ordinarily summary judgment would be inappropriate.
. Interviewed were members of the board of directors, three individuals from the North Carolina Department of Insurance, including the Insurance Commissioner; the Deputy Commissioner and Chief Examiner of the Louisiana Insurance Department; a representative from Coopers & Lybrand (auditors); a representative from Shearson/American Express; and attorneys, representing the minority shareholders.
. Documents included organizational documents and all minutes of AAA; annual statements filed with insurance departments; SEC reports; proxy and financial statements; copies of correspondence, notes and memoranda; and minutes of affiliated companies.
. In his affidavit Mr. Anderson states:
"Defendants' contention relied upon by AAA's Board and the Special Committee that AAA was not damaged in connection with the release of ABTC because AAA would have incurred a substantial capital gains tax upon sale of the building is erroneous .
"Defendants' representation that National American qualified as a 'dividend-paying' stock is clearly ludicrous .
"The representation by the Shaw group, relied on by AAA's Board and the Committee, that National American is a profitable investment for AAA is questionable . . .
. It was counsel's position that the Committee should "share" information concerning its activities or investigation, rather than act as "judge and jury" and only receive information. In response, the Committee informed counsel that they did not feel that it was appropriate for him to interrogate members of the Committee as to their findings "since it was felt that the committee's function [was] to develop evidence and make its conclusions based upon the evidence which is discovered and considered."
By approving the entry of summary judgment in this case, we do not suggest that a plaintiff is not entitled to discover information relevant to the determination of the appropriateness of summary judgment. However, civil discovery procedures are available for that purpose and, of course, are limited to and afford the usual protections relating to relevancy and protection of work product.
. Inasmuch as we have held that the decision of the special litigation committee with respect to plaintiffs' claims is governed by the business judgment rule, the proposed settlement of two claims, like the decision not to pursue litigation on the remaining claims, must be judged by the business judgment standard. Indeed, the fact that the Committee found sufficient merit in these two claims to recommend action speaks to its independence and the thoroughness of its investigation. Having determined that defendants met their burden under the Auerbach test, the judgment of the court extends to all recommendations made by the Committee, including recommendations to pursue or discontinue litigation or to settle claims.