Opinion ID: 1288403
Heading Depth: 3
Heading Rank: 1

Heading: Auerbach and Zapata

Text: Other jurisdictions have fallen largely in line with the opposing views adopted by the New York and Delaware courts regarding the deference to be afforded an SLC's decision to settle a derivative action. These two competing approaches underlie the dispute between the parties that have filed briefs with this court. In Auerbach v. Bennett , the New York Court of Appeals articulated the deference due an SLC's decision as follows: While the substantive aspects of a decision to terminate a shareholders' derivative action against defendant corporate directors made by a committee of disinterested directors appointed by the corporation's board of directors are beyond judicial inquiry under the business judgment doctrine, the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee. 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994, 996 (1979). The court in Auerbach stated that the business judgment rule shields the deliberations and conclusions of the [SLC] only if [the SLC's members] possess a disinterested independence and do not stand in a dual relation which prevents an unprejudicial exercise of judgment. Id. at 1001. Furthermore, the court explained that judicial review of the adequacy and appropriateness of the committee's investigative procedures and methodologies is permissible. Id. at 1002. According to the court, those responsible for the procedures by which the business judgment is reached may reasonably be required to show that they have pursued their chosen investigative methods in good faith. Id. at 1002-03. The New York Court of Appeals stated that it would be improper to review an SLC's substantive decision, which involves 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. Id. at 1002. Because courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments made in the operation of a business, id. at 1000, the court forbade any inquiry into which factors were considered by [the SLC] or the relative weight accorded them in reaching that substantive decision, id. at 1002. [B]y definition, the court explained, the responsibility for business judgments must rest with the corporate directors; their individual capabilities and experience peculiarly qualify them for the discharge of that responsibility. Id. at 1000. In sum, the business judgment rule adopted in Auerbach requires a court to defer to the decision of an SLC if (1) the SLC is independent from the board of directors and (2) the SLC utilized appropriate investigative procedures and methodologies and pursued its investigation in good faith. A number of jurisdictions follow the Auerbach approach. See, e.g., Roberts v. Ala. Power Co., 404 So.2d 629, 632 (Ala.1981); Desaigoudar v. Meyercord, 108 Cal.App.4th 173, 133 Cal.Rptr.2d 408, 418-19 (2003); Hirsch v. Jones Intercable, Inc., 984 P.2d 629, 637-38 (Colo.1999); Miller v. Bargaheiser, 70 Ohio App.3d 702, 591 N.E.2d 1339, 1343 (1990); see also Atkins v. Hibernia Corp., 182 F.3d 320, 325 (5th Cir.1999) (making best Erie guess that Louisiana courts would apply Auerbach ). In Zapata Corp. v. Maldonado , the Delaware Supreme Court rejected the approach adopted by the New York Court of Appeals in Auerbach, emphasizing that there is sufficient risk ... to justify caution beyond adherence to the theory of business judgment. 430 A.2d 779, 787 (Del.1981). The court set forth a two-step process for reviewing the decision of an SLC. Id. at 788-89. The first step, similar to the Auerbach standard, requires evaluation of the independence and good faith of the [SLC] and the bases supporting its conclusions. Id. at 788. If the corporation demonstrates independence and good faith, then a court may proceed, in its discretion, to the second step, in which the court appl[ies] its own independent business judgment. Id. at 789. In applying its own business judgment, a court considers how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit and gives special consideration to matters of law and public policy. Id. A reviewing court may approve of the dismissal of a derivative suit subject ... to any equitable terms or conditions [it] finds necessary or desirable. Id. The Zapata court provided the following rationale for allowing courts to apply their own business judgment to an SLC's decision: [W]e must be mindful that directors are passing judgment on fellow directors in the same corporation and fellow directors, in the same instance, who designated them to serve both as directors and committee members. The question naturally arises whether a there but for the grace of God go I empathy might not play a role. And the further question arises whether inquiry as to independence, good faith and reasonable investigation is sufficient safeguard against abuse, perhaps subconscious abuse. Id. at 787. A number of jurisdictions have adopted some form of the Zapata framework. See, e.g., Joy v. North, 692 F.2d 880, 891 (2d Cir.1982) (applying Connecticut law); Abella v. Universal Leaf Tobacco Co., 546 F.Supp. 795, 799 (E.D.Va.1982); Houle v. Low, 407 Mass. 810, 556 N.E.2d 51, 59 (1990); Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323, 326 (1987); House v. Estate of Edmondson, 245 S.W.3d 372, 382 (Tenn.2008).