Opinion ID: 4360929
Heading Depth: 3
Heading Rank: 1

Heading: Cuker and the ALI Principles

Text: Prior to addressing the questions in this case, we first review our decision in Cuker and the ALI Principles adopted therein addressing derivative litigation. In Cuker, a group of shareholders made a demand on the company to pursue litigation against some of the company’s directors and officers, claiming mismanagement. As in the case at bar, the company created a special litigation committee to consider the demand. While the committee was investigating, a second group of shareholders filed suit against the company’s officers and directors raising similar issues to those of the original shareholders’ demand. Subsequently, the special litigation committee concluded that pursuing the derivative litigation was not in the corporation’s best interest, a decision later adopted by the board. The board’s denial precipitated a second action filed by the first group of shareholders. Both groups of shareholders litigated the claims on separate tracks resulting in inconsistent verdicts, which this Court addressed under our King’s Bench powers. First, the Court in Cuker clarified that, while no Pennsylvania court had overtly adopted the business judgment rule, it had been applied by our courts for over a century. The Court summarized the doctrine: “[T]he business judgment rule reflects a policy of judicial noninterference with business decisions of corporate managers, presuming that they pursue the best interests of their corporations, insulating such managers from second-guessing or liability for their business decisions in the absence of fraud or selfdealing or other misconduct or malfeasance.” Id. at 1046. Next, the Court held that the business judgment rule applied to management decisions related to derivative litigation, [J-26A&B-2018] - 29 concluding that such decisions are “business decisions as much as any other financial decisions.” Id. at 1048. The Court acknowledged confusion in Pennsylvania law caused by the absence of a “procedural mechanism for implementation and judicial review of the board’s decision” to terminate the derivative litigation. Id. Accordingly, the Court provided the following structure: “Without considering the merits of the action, a court should determine the validity of the board's decision to terminate the litigation; if that decision was made in accordance with the appropriate standards, then the court should dismiss the derivative action prior to litigation on the merits.” Id. The Court noted that the judicial intervention should be minimized and instructed that only limited discovery should be permitted in such cases. It provided six factors for trial courts to consider in evaluating a board’s decision to terminate derivative litigation.18 If the factors are met, then “the business judgment rule applies and the court should dismiss the action.” Id. 18 The Court set forth the following six considerations: [1] whether the board or its special litigation committee was disinterested, [2] whether it was assisted by counsel, [3] whether it prepared a written report, [4] whether it was independent, [5] whether it conducted an adequate investigation, and [6] whether it rationally believed its decision was in the best interests of the corporation (i.e., acted in good faith). Id. at 1048. [J-26A&B-2018] - 30 To implement this broad framework, the Court specifically adopted ALI Principles Sections 7.02-7.10 and 7.13,19 which it found relevant to the case before it, concluding that those “sections set forth guidance which is consistent with Pennsylvania law and precedent, which furthers the policies inherent in the business judgment rule, and which provides an appropriate degree of specificity to guide the trial court in controlling the proceedings.” Id. at 1049. In so doing, the Court noted that it had previously relied upon the scholarship of the ALI and that the ALI Principles are “generally consistent with Pennsylvania precedent.” Id. While Cuker addressed the general process of derivative litigation in Pennsylvania through the application of the business judgment rule and the adoption of the relevant ALI Principles, we now consider in detail one of the adopted sections, specifically Section 7.13, as we grapple with the role of attorney-client privilege in derivative litigation. We recognize the conceptual difficulties of the attorney-client privilege in derivative litigation where both sides profess to represent the corporation, which is the true client and holder of the privilege but which cannot act on its own. Nevertheless, we also observe that Pennsylvania courts have utilized the presumption set forth in Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 348-49 (1985), that current management of a solvent corporation has the authority to act on behalf of the corporation, including in regard to the attorney-client privilege. See Maleski by Chronister v. Corporate Life Ins. Co., 641 A.2d 1, 3 (Pa. Cmwlth. 1994) (citing 15 Pa.C.S. § 1721 (providing that all powers . . . vested by law in a business corporation shall be exercised by or under the authority of . . . a board of directors”); see also Red Vision Systems, Inc. v. National Real 19 The Court summarized the relevant provisions: “Sections 7.02 (standing), 7.03 (the demand rule), 7.04 (procedure in derivative action), 7.05 (board authority in derivative action), 7.06 (judicial stay of derivative action), 7.07, 7.08, and 7.09 (dismissal of derivative action), 7.10 (standard of judicial review), and 7.13 (judicial procedures).” Id. at 1049. [J-26A&B-2018] - 31 Estate Information Services, L.P., 108 A.3d 54, 60-61 (Pa. Super. 2015) (discussing Weintraub, 471 U.S. 343). Section 7.13, which has been adopted in Pennsylvania, broadly addresses judicial procedures for adjudicating motions to dismiss the derivative litigation following management’s decision to adopt an independent committee’s recommendation to decline to pursue the derivative claims demanded by plaintiffs. Subsection 7.13(a) mandates that the corporation “file with the court a report or other written submission setting forth the procedures and determinations of the board or committee” in support of the motion to dismiss. ALI Principles § 7.13(a). It further requires that “[a] copy of the report or other written submission, including any supporting documentation filed by the corporation, shall be given to the plaintiff's counsel.” Id. Under subsection (c), discovery is permissible only “if the plaintiff has demonstrated that a substantial issue exists whether the applicable standards of § 7.08, § 7.09, § 7.10, § 7.11, or § 7.12 have been satisfied and if the plaintiff is unable without undue hardship to obtain the information by other means.”20 Id. at § 7.13(c). The subsection also cautions trial courts to grant only limited discovery “in the absence of special circumstances” and to allow it only in regard to what the court views as relevant to the applicable standards of the listed sections and “consistent with an expedited resolution of the motion” to dismiss the derivative litigation. Id. As noted, Section 7.13 addresses the attorney-client privilege in subsection (e) in regard to motions to dismiss derivative litigation based upon the recommendation of the independent committee, providing in full as follows: § 7.13 Judicial Procedures on Motions to Dismiss a Derivative Action Under § 7.08 or § 7.11