Court Opinion

ID: 7326796
Source: CourtListenerOpinion
Date Created: 2022-07-25 21:59:52.678263+00
Date Added: 2024-06-11T16:20:04.141147
License: Public Domain

STEIN, J.,
concurring.
I join in the Court’s thoughtful and well-reasoned disposition of this appeal. I especially endorse the Court’s determination that trial and appellate courts, in reviewing under the modified business judgment rule a Board of Directors’ decision not to maintain a directive shareholders’ suit, must conduct that review de novo on the record. Ante at 288, 801 A.2d at 313. That inquiry, as the Court emphasizes, requires a higher level of scrutiny than would be necessary under an “abuse of discretion” standard. Ibid. The de novo standard requires the reviewing court to satisfy itself, based on the record, that the members of the board were independent and disinterested, that they acted in good faith and with due care in their investigation, and that their decision to dismiss the suit was a reasonable one. Ante at 286 - 288, 801 A.2d at 312 -13.
Although I agree with the standard of review adopted by the Court, I consider it appropriate to remind trial and appellate courts that a heavy dose of pragmatism is indispensable in reviewing the reasonableness of a Board’s decision to terminate derivative shareholder litigation. Notwithstanding our prior conclusion, ante at 289-291, 801 A.2d at 313-15, that these directors satisfied the legal standard for independence in deciding to terminate the litigation, courts should fully appreciate the distinction between that tolerant legal standard and complete impartiality. As the Court observes, ante at 297, 801 A.2d at 320, “[djireetors understandably are not likely to be enthusiastic about approving the prosecution of a derivative stockholder’s suit against members of management with whom the Directors maintain an ongoing relationship,” especially when members of management initially may have recommended appointment of one or more members of the Board. As one commentator observed: “Structural bias is an attitude that attaches to a directorship and rests on cultural ties that antedate the director’s election or appointment, which com*299bine to draw the directors to the defendants’ side.” 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. 959,1010.
Moreover, we note that the recent disclosures of flagrant irregularities in corporate financial statements has focused renewed attention on the objectivity and responsibility of corporate directors. See Cleaning Up the Boardroom, N.Y. Times, Mar. 8, 2002, at A20 (“One of the most important lessons of Enron is the havoc that can result when oversight by corporate boards of directors breaks down.”) Accordingly, the exercise of de novo review by trial and appellate courts of the reasonableness of a corporate board’s decision to terminate stockholder derivative litigation should be conducted with a realistic awareness that only a scrupulous and painstaking examination of the record will be sufficient to assure the court that the board’s discretion has been exercised reasonably and responsibly.
I also must record my concern with the following observation by the Court: “We are aware of no facts that would lead us to conclude that the Kasowitz firm had a disabling conflict that would have tainted its investigation.” Ante at 292, 801 A.2d at 316. Although my concern does not lead me to a different result, I believe that the Court should not so readily excuse the overlapping and inconsistent roles exercised by the Kasowitz law firm, with the Board’s concurrence.
The record reveals that on October 17, 1995 the Board adopted a resolution authorizing the retention of the Kasowitz firm to investigate the allegations asserted in the Stricklin demand. The Stricklin complaint was filed on December 27, 1995. The Kasow-itz firm submitted its one hundred twenty-four page report to the Board on February 8,1996.
However, in January 1996, before its report was completed, an attorney at the Kasowitz firm determined that the firm would, on behalf of the Board, request an extension of time to respond to the complaint. One of the Board members testified to his understanding that the Kasowitz firm was authorized on January 16, 1996 to *300represent the Board in the ensuing litigation. On February 13, 1996, five days after the report was submitted, a stipulation was entered into extending defendants’ time to answer the complaint, and the Kasowitz firm was designated as counsel to the director defendants.
However short its duration, the conflict of interest between the role of the Kasowitz firm as the Board’s independent investigator, and its role as the Board’s litigation counsel in a suit that would implicate the reasonableness of the Boards’ decision to terminate the litigation, is too obvious for debate. Whatever redundancy or expense might have resulted, the Board clearly was obligated to retain independent litigation counsel that was not involved in the investigation. In another context, the Eleventh Circuit Court of Appeals in Stepak v. Addison, 20 F.3d 398, 405 (1994), highlighted the potential conflict at issue here:
[W]hen a board chooses to entrust its investigation to a law firm — and it is unquestionably the board’s prerogative to do so — the directors must ensure that counsel is capable of independently evaluating the corporation’s interests. Selection of a law firm that has actually represented the alleged wrongdoers in proceedings related to the very subject matter that the law firm is now asked to neutrally investigate reaches, in our opinion, the level of gross negligence and is incompatible with a board’s fiduciary duty to inform itself “of all material information reasonably available” prior to making a business decision.
Because the briefly overlapping roles of the Kasowitz firm did not necessarily render unreasonable the Board’s reliance on the investigative report, I would not disturb the Court’s affirmance of the conclusion below that the Board acted in good faith and with due care. Nevertheless, in my view the Board’s authorization of the dual role of the Kasowitz firm clearly was inappropriate.
For affirming — Chief Justice PORITZ and Justices STEIN, COLEMAN, LONG, VERNIERO, and LaVECCHIA — 6.
Opposed — None.
Justice STEIN filed a separate concurring opinion.