Opinion ID: 1288403
Heading Depth: 3
Heading Rank: 2

Heading: Auerbach is more compelling

Text: The reasons for adopting a test modeled on the Auerbach standard are numerous and compelling. First, the New York Court of Appeals properly recognized that courts are not qualified to evaluate the business judgment of an SLC, explaining that the business judgment doctrine, at least in part, is grounded in the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments. 419 N.Y.S.2d 920, 393 N.E.2d at 1000. Indeed, judges really are not equipped either by training or experience to make business judgments because such judgments are intuitive, geared to risk-taking and often reliant on shifting competitive and market criteria.... Whether to pursue litigation is not a judicial decision, rather, it is a business choice. Joy, 692 F.2d at 898 (Cardamone, J., concurring in part, dissenting in part). Second, even if courts were qualified to make business judgments, it is unclear how a court's business judgment should be defined for purposes of reviewing an SLC's decision. By its very nature, an individual's business judgment is a unique amalgamation of many factors, including but not limited to personal experience, education, and general business philosophy. The adoption of a nebulous business judgment standard allowing for unpredictable results would endorse a standard that is, in fact, no standard at all. Regardless of the good faith and independence of an SLC, the Zapata rule allows a court to set aside an SLC's decision based on little more than a disagreement concerning matters of business administration. Third, the very nature of a shareholder derivative suit is that the cause of action, although brought by a shareholder, belongs to the corporation. See Janssen, 662 N.W.2d at 882. Accordingly, the corporation should have the prerogative of weighing the benefits and detriments of bringing a lawsuit. Even where egregious harm has been caused by bad faith conduct on the part of directors or officers, the corporation may conclude that a lawsuit is not in the corporation's best interests for reasons such as adverse publicity, cost of litigation, or disruption of the work force. See Joy, 692 F.2d at 899 (Cardamone, J., concurring in part, dissenting in part). As explained by the Alabama Supreme Court, When an [SLC] decides not to bring an action on behalf of the corporation, the directors are not authorizing or condoning the alleged wrongful acts but are merely saying that given the fact that the events did occur, it is not in the best interest of the corporation to pursue a legal remedy. Roberts, 404 So.2d at 632. Fourth, the Auerbach standard avoids the lengthy and complicated proceedings that characterize business judgment determinations under Zapata. Dennis J. Block & H. Adam Prussin, The Business Judgment Rule and Shareholder Derivative Actions: Viva Zapata?, 37 Bus. Law. 27, 58 (1981). Indeed, the Zapata test ... is so open-ended, so complicated, and so subject to judicial whimsywhich it seems to encouragethat ... motions can never be the simple, inexpensive and straightforward proceedings which a corporation needs if it is going to eliminate detrimental derivative litigations in a rational way. Id. at 62. The exercise of a court's business judgment requires significant discovery into the corporation's operations and lengthy hearings at which the evidence is presented to the court. Franklin A. Gevurtz, Who Represents the Corporation? In Search of a Better Method for Determining the Corporate Interest in Derivative Suits, 46 U. Pitt. L.Rev. 265, 301-02 (1985). As a result, derivative litigation, rather than providing a timely resolution of the conflict between the shareholders and management, will become bog[ged] down in protracted disputes over peripheral issues. Id. at 305. To spend months or years litigating over whether it is a good idea to litigate not only results in a waste of judicial resources, it also inevitably fuels disrespect for the courts. Id. Fifth, allowing courts to second-guess the decision of an SLC undermines the SLC process itself, denying corporations a vital means of avoiding strike suits and other abusive derivative litigation. Prior to Zapata, a corporation could assume that it could dismiss a derivative suit if the suit was contrary to the shareholders' best interests. Daniel R. Fischel, The Race to the Bottom Revisited: Reflections on Recent Developments in Delaware's Corporation Law, 76 Nw. U.L.Rev. 913, 942 (1982). But [a]fter Zapata, the same corporation must face the prospect that a court exercising `independent business judgment' and considering questions of `public policy' will allow the suit to go forward. Id. If SLCs are unable to structure their investigations in a manner that can withstand judicial scrutiny, corporations have considerably less reason to go through the substantial trouble and expense of constituting an SLC in the first place, particularly if it is uncertain whether the SLC's decision will stave off costly derivative litigation. Sixth, a court applying its business judgment is prone to act on its own biases and predilections. Ironically, then, Zapata simply replaces the danger of bias on the part of the corporate directors and the SLC with the danger of bias on the part of the court. The business judgment rule should eliminate bias to the greatest extent possible, not simply reallocate it from one professional to another. As one commentator has observed, any danger of bias in the SLC process is likely to be corrected by natural market forces. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L.Rev. 83, 122 (2004). Competition between firms provides even the most self-interested directors with a strong incentive to make good (i.e., profitable) decisions; directors who prove themselves incapable of making profitable decisions will inevitably be replaced by others who are more capable. Whereas [m]arket forces work an imperfect Darwinian selection on corporate decision makers, ... no such forces constrain erring judges. Id. As a result of the relative inability of the market to rectify a court's erroneous business decision, rational shareholders will prefer the risk of director error to that of judicial error. Id. Finally, the Zapata court's notion that a court may countermand the business judgment of an SLC based on matters of ... public policy is indefensible. 430 A.2d at 789. [P]resumably the Zapata court meant that even though the costs of the suit outweigh its probable gains to the company, the action may be allowed to continue if the suit serves some overriding public purpose in deterring corporate wrongdoing. Gevurtz, supra, at 300. It is a troubling rule of law that compels a party to proceed with litigation because some greater public good, as determined by a court that will not have to live with the consequences of the decision, might result. We recognize that the standard we adopt has been subject to criticism as well, but we consider this criticism to be largely unfounded. Some argue, for example, that Auerbach sets forth a rule that, if adopted wholesale by this nation's courts, could presage the demise of the derivative suit. George W. Dent, Jr., The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit?, 75 Nw. U.L.Rev. 96, 109 (1980). While such concerns may have been legitimate in the early days of the Auerbach standard, they have simply failed to play out over the last 29 yearsas should be apparent from the sizeable settlement presently before us. We also reject the argument of Auerbach 's critics that structural bias is a phenomenon that requires an extraordinary level of judicial intervention. See Zapata, 430 A.2d at 787; Miller v. Register & Tribune Syndicate, Inc., 336 N.W.2d 709, 716 (Iowa 1983) (explaining that the structural bias argument suggests that it is unrealistic to assume that the members of independent committees are free from personal, financial or moral influences which flow from the directors who appoint them). As a general matter, it seems unlikely that a member of an SLC will reach a decision that could harm the company merely because he or she feels some empathy for the individuals under investigation. The members of an SLC will almost certainly be professionals, individuals who have dedicated their careers to building reputations in the business community and who would be particularly loath to risk those reputations simply for the sake of empathy. More specifically, we note that the UnitedHealth SLC was composed not of independent board members, but of two former members of the judiciary who, until their appointment to the SLC, had no discernible connection to the UnitedHealth board. Even if independent directors are at risk of acting on their strong empathy for their fellow directors, we cannot see how that empathy would factor into the decision of an SLC composed of individuals drawn from so far outside the corporate ranks. We believe that careful scrutiny of an SLC's independence and investigative procedures is a sufficient protection against any structural bias. Finally, some critics might argue that an SLC's decision to dismiss or settle  rather than pursuewhat appears to be a meritorious claim is itself a sign that the derivative process has been undermined. See James D. Cox, Searching for the Corporation's Voice in Derivative Suit Litigation: A Critique of Zapata and the ALI Project, 1982 Duke L.J. 959, 963 (1982) (noting concern that SLCs almost uniformly recommend against maintaining derivative litigation). As to the dismissal of a meritorious claim, we find little cause for concern under the rule we set forth today, which ensures a robust review of the SLC and its investigative procedures. Further, it must be remembered that the dismissal of meritorious litigation may be justifiable, such as when pursuit of the claim will prove more costly than beneficial. As to the settlement of a meritorious claim, it is a fact of modern legal practice that settlements are commonplace and the rule rather than the exception; moreover, it is broadly acknowledged that settlements are favored because they conserve[ ] judicial resources and minimize[ ] litigation expenses, Austin v. Pa. Dep't of Corr., 876 F.Supp. 1437, 1455 (E.D.Pa.1995). It seems to us of little concern that, under the standard we set forth today, a substantial number of cases may end in settlement rather than adversarial litigation.