Opinion ID: 1955244
Heading Depth: 1
Heading Rank: 5

Heading: Special Litigation Committee

Text: Alternatively, Spiegel argues that even though demand was made, the Board admitted that demand was excused by referring his demand to a special litigation committee, and by delegating to that committee the complete power to determine the Board's litigation posture. [18] Therefore, Spiegel argues that the Board's rejection of his demand was subject to judicial review according to the special procedures set forth in Zapata, and not the traditional business judgment rule. [19] In support of that position, Spiegel cites Abbey v. Computer & Comm. Tech. Corp., Del.Ch., 457 A.2d 368 (1983). The Court of Chancery found Abbey to be distinguishable and rejected Spiegel's argument. We agree with the Court of Chancery. The facts upon which the Abbey decision was based are different from the facts of this case. In Abbey, the plaintiff made demand on the corporation's board of directors and then filed suit alleging that demand was excused. The board responded to the complaint in Abbey by appointing a new board member to serve as a one-man special litigation committee, and delegated full authority to him to handle the derivative action. The board in Abbey never made any attempt to address the derivative litigation itself. The Court of Chancery concluded, in Abbey, that the board had, in effect, conceded its disqualification, and... thereby conceded [that demand was excused and that] the plaintiff [was entitled] to bring the [derivative] suit without awaiting word from it.... 457 A.2d at 374. This case is the procedural reverse of Abbey. Spiegel filed his derivative suit without first making demand. The Board immediately took charge of the litigation and filed a motion to dismiss Spiegel's complaint for his failure to make a demand in accordance with Rule 23.1. Spiegel responded to the Board's motion by making a demand. In response to Spiegel's demand, the Board created a special litigation committee. The significance of this procedural distinction was recognized by the Court of Chancery in Richardson v. Graves, Del. Ch., C.A. No. 6617, Longobardi, V.C. (June 17, 1983). The plaintiff in Richardson, like Spiegel, relying on Abbey, argued that the board of directors had conceded that demand was excused as futile by the appointment of a special litigation committee. In Richardson, the Court of Chancery distinguished Abbey on the grounds that the board in Abbey did not file a motion to dismiss pursuant to Rule 23.1 until after it had surrendered exclusive control of the derivative action to a special litigation committee. Richardson v. Graves, slip op. at 10-11. By contrast, the Richardson board, like the Waste Management board, first filed a motion to dismiss Spiegel's complaint due to his failure to make a demand and later, after Spiegel did make a demand, appointed a special litigation committee to respond to that demand. In Richardson, the court held: [T]he facts here do not support a finding of concession on the part of the Defendants [, the board of directors,] or divestment of their power at the time they moved to dismiss. The Defendants here filed a proper motion to dismiss and consistent with the policy of [Rule] 23.1 must in the first instance be afforded the opportunity to control the litigation. Richardson v. Graves, slip op. at 11. In this case, we find that the Court of Chancery properly rejected Spiegel's argument that Abbey stands for the proposition that a board of directors, ipso facto, waives its right to challenge a shareholder plaintiff's allegation that demand is excused by the act of appointing a special litigation committee and delegating to that committee the authority to act on the demand. Not only are the facts in Abbey procedurally different from those of the present case, but Abbey itself specifically recognizes the right of a board of directors to appoint committees to address derivative litigation, without automatically subjecting the committee's decision to the two-tier level of judicial scrutiny established in Zapata. In Abbey, the Court of Chancery properly concluded that the special review procedure which this Court set up in Zapata applies: only in a situation where, because of some alleged self-interest, the board of directors is disqualified from acting itself. Otherwise, but for the disqualifying self-interest factor, the board could make its decision for itself, whether it chose to do so through a committee or not, and cause an appropriate motion to be made on behalf of the corporation just as in any normal suit in which the corporation was named as a party defendant. Abbey v. Computer & Comm. Tech. Corp., 457 A.2d at 373. In this case, the Court of Chancery held that the decision of a board of directors to appoint a special litigation committee, with a delegation of complete authority to act on a demand, is not, in all instances, an acknowledgement that demand was excused and ergo that a shareholder's lawsuit was properly initiated as a derivative action. We affirm that holding.