2023 Pennsylvania Consolidated & Unconsolidated Statutes › Title 15 - CORPORATIONS AND UNINCORPORATED ASSOCIATIONS › Chapter 17 - Officers, Directors and Shareholders › Section 1783 - Special litigation committee

§ 1783. Special litigation committee.
(a) General rule.--
If a business corporation or the board of directors receives a demand to bring an action to enforce a right of the corporation, or if a derivative action is commenced before demand has been made on the corporation or the board, the board may appoint a special litigation committee to investigate the claims asserted in the demand or action and to determine on behalf of the corporation or recommend to the board whether pursuing any of the claims asserted is in the best interests of the corporation. The corporation must deliver a notice in record form to the person making the demand, or to the plaintiff if a derivative action has been commenced, promptly after the appointment of a committee under this section notifying the person making the demand or the plaintiff that a committee has been appointed and identifying by name the members of the committee. A committee may not be appointed under this section if every shareholder of the corporation is also a director of the corporation.
(b) Discovery stay.--
If the board of directors appoints a special litigation committee and an action is commenced before a determination has been made under subsection (e):
(1) On motion by the business corporation, or the committee made in the name of the corporation, the court shall stay discovery for the time reasonably necessary to permit the committee to complete its investigation, except for good cause shown.
(2) The time for the defendants to plead shall be tolled until the process provided for under subsection (f) has been completed.
(c) Composition of committee.--
A special litigation committee shall be composed of two or more individuals who:
(1) are not interested in the claims asserted in the demand or action;
(2) are capable as a group of objective judgment in the circumstances; and
(3) may, but need not, be shareholders or directors.
(c.1) Committee members who are not directors.--
A member of a special litigation committee who is not a director is subject, when acting as a member of the committee, to the liabilities imposed, and entitled to the rights and immunities conferred, under Subchapters B (relating to fiduciary duty) and D (relating to indemnification) and other provisions of law upon directors of a corporation.
(d) Appointment of committee.--
A special litigation committee may be appointed:
(1) by a majority of the directors not named as actual or potential parties in the demand or action; or
(2) if all the directors are named as actual or potential parties in the demand or action, by a majority of the directors so named.
(e) Determination.--
After appropriate investigation by a special litigation committee, the committee may determine, or the committee may recommend to the board of directors that the board determine, that it is in the best interests of the business corporation that:
(1) an action based on some or all of the claims asserted in the demand not be brought by the corporation but that the corporation not object to an action being brought by the party that made the demand;
(2) an action based on some or all of the claims asserted in the demand be brought by the corporation;
(3) some or all of the claims asserted in the demand be settled on terms determined or recommended by the committee;
(4) an action not be brought based on any of the claims asserted in the demand;
(5) an action already commenced continue under the control of:
(i) the plaintiff;
(ii) the corporation; or
(iii) the committee;
(6) some or all the claims asserted in an action already commenced be settled on terms determined or recommended by the committee; or
(7) an action already commenced be dismissed.
(f) Court review and action.--
If a special litigation committee is appointed and a derivative action is commenced either before or after the committee makes a determination under subsection (e) or the board of directors determines under subsection (e) to accept the recommendation of the committee:
(1) The business corporation or the committee shall file with the court after a determination is made under subsection (e) a statement of the determination and a report of the committee supporting the determination. The corporation or the committee shall serve each party with a copy of the determination and report. If the corporation or the committee moves to file the report under seal, the report shall be served on the parties subject to an appropriate stipulation agreed to by the parties or a protective order issued by the court.
(2) The corporation or the committee shall file with the court a motion, pleading or notice consistent with the determination under subsection (e).
(3) If the determination is one described in subsection (e)(2), (3), (4), (5)(ii), (6) or (7), the court shall determine whether the members of the committee met the qualifications required under subsection (c)(1) and (2) and whether the committee conducted its investigation and made its determination or recommendation in good faith, independently and with reasonable care. The plaintiff has the burden of proving that the committee did not meet those qualifications or act in the required manner. If the court finds that the members of the committee met the qualifications required under subsection (c)(1) and (2) and that the committee acted in good faith, independently and with reasonable care, the court shall enforce the determination of the committee or the board. Otherwise, the court shall:
(i) dissolve any stay of discovery entered under subsection (b);
(ii) allow the action to continue under the control of the plaintiff; and
(iii) permit the defendants to file preliminary objections, other appropriate pleadings and motions.
(g) Certain provisions of articles ineffective.--
The provisions of this section may not be varied by the articles.
(h) Interest of a defendant.--
The fact that a person is named as a defendant does not make the person interested in the claims asserted in a demand or action for purposes of subsection (c)(1) if the claims against the person:
(1) are based only on an allegation that the person approved of or acquiesced in the transaction or conduct that is the subject of the claims; and
(2) do not otherwise allege with particularity facts that, if true, raise a significant prospect that the person would be adjudged liable.
(Nov. 21, 2016, P.L.1328, No.170, eff. 90 days; Nov. 3, 2022, P.L.1791, No.122, eff. 60 days)
Cross References.
Section 1783 is referred to in section 1781 of this title.