Court Opinion

ID: 9525050
Source: CourtListenerOpinion
Date Created: 2023-08-07 02:59:30.304476+00
Date Added: 2024-06-11T13:12:38.348213
License: Public Domain

WOLLE, Justice
(dissenting).
Because I disagree with division III of the majority opinion, I dissent.
In divisions I and II, the majority correctly states that Iowa Code chapter 491 and the relevant provisions of the articles of incorporation and by-laws of the defendant corporation ordinarily confer upon directors of the company the authority to delegate to a special litigation committee the powers of investigation and decision making necessary for defensive use of the business judgment rule. I believe that statement of Iowa law adequately answers the question which Chief Judge Stuart certified to this court. In division III, however, the majority adopts an exceptional “prophylactic rule”, holding that when directors are named as defendants in a derivative action that power to delegate is taken away. The majority suggests appointment by the court of a “special panel” to replace the traditional special litigation committee whenever directors are defendants. I believe that exceptional division III holding unnecessarily rejects sound common-law precedents while proposing as a substitute an untried, untested, and potentially unsound system for court appointment of corporate committees.
I. The defendants contend, and plaintiff concedes, that every court that has considered this issue has upheld the authority of defendant directors to appoint special litigation committees with authority to bind the corporation. Whether the bias of defendant directors has contaminated the committee’s investigation, business judgment, or eventual recommendation to the court is decided by the court if and when a report is presented for court action. See, e.g., Abbey v. Control Data Corp., 603 F.2d 724, 730 (8th Cir.1979); cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980); Maldonado v. Flynn, 485 F.Supp. 274, 285-86 (S.D.N.Y.1980), rev’d in part, 671 F.2d 729 (2d Cir.1982); Gall v. Exxon Corp., 418 F.Supp. 509, 519-20 (S.D.N.Y.1976); Zapata Corp. v. Maldonado, 430 A.2d 779, 788-89 (Del.1981). These courts have been fully aware of the potential for corporate-committee bias; the cases insist on judicial scrutiny of committee actions to ensure that recommendations reflect disinterested and independent as well as prudent business judgment. For example, in Zapata Corp. v. Maldonado, 430 A.2d at 788-89, the Delaware Supreme Court articulated the following prophylactic two-step test to be applied to summary judgment motions hinged on a litigation committee recommendation:
First, the Court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. Limited discovery may be ordered to facilitate such inquiries. The corporation should have the burden of proving independence, rather than presuming independence, good faith and reasonableness. If the Court determines either that the committee is not independent or has not shown reasonable bases for its conclusions, or, if the Court is not satisfied for other reasons relating to the process, including but not limited to the *720good faith of the committee, the Court shall deny the corporation’s motion. If, however, the Court is satisfied under Rule 56 standards that the committee was independent and showed reasonable bases for good faith findings and recommendations, the Court may proceed, in its discretion, to the next step.
The second step provides, we believe, the essential key in striking the balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporation’s best interests as expressed by an independent investigating committee. The Court should determine applying its own independent business judgment whether the motion should be granted. This means, of course, that instances could arise where a committee can establish its independence and sound bases for its good faith decisions and still have the corporation’s motion denied. The second step is intended to thwart instances where corporate actions meet the criteria of step one, but the result does not appear to satisfy its spirit, or where corporate actions would simply prematurely terminate a stockholder grievance deserving of further consideration in the corporation’s interest. The Court of Chancery of course must carefully consider and weigh how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit. The Court of Chancery should, when appropriate, give special consideration to matters of law and public policy in addition to the corporation’s best interests.
We need not be concerned about the care with which the federal judge who certified this question to us would scrutinize the independence and integrity of the special litigation committee appointed in this case. Watts v. Des Moines Register and Tribune, 525 F.Supp. 1311 (S.D.Iowa 1981) is a case very similar to this one, reported less than two years ago. There Chief Judge Stuart first held that Iowa courts would apply the business judgment rule and preclude judicial interference with the decision of an independent disinterested corporate committee even though the defendant directors who appointed the committee were themselves alleged to have committed fraud and various breaches of fiduciary duty. 525 F.Supp. at 1314, 1325. Judge Stuart then articulated and applied the tough Zapata Corp. balancing test, specifically providing that proof was on the defendants to demonstrate that the committee had acted independently, in good faith, and with sufficient investigation and reasonable bases for its conclusions. 525 F.Supp. at 1326. Consistent with that cautious approach, Judge Stuart held that plaintiff would be permitted to undertake further discovery concerning objective factors underlying the recommendation of the members of the special committee. 525 F.Supp. at 1329. I believe this court should adopt essentially the same rationale as did Judge Stuart and conclude that, with proper safeguards, special litigation committees can perform important functions in stockholder derivative actions even though the directors who appoint their members are themselves named as defendants.
II. Though the concept of a court-appointed panel may suggest fairness and equity, I am concerned with several theoretical and practical difficulties inherent in this new approach. Judicial review of the recommendations of a court-appointed panel may itself raise questions of bias. Perhaps more than one judge would become involved, a potential drain on our judicial resources. In different contexts, but for sound reasons, this court has stated that a court ought not interfere with the internal management of a private corporation, nor substitute its judgment for that of the board of directors. See, e.g., Natale v. Sisters of Mercy of Council Bluffs, 243 Iowa 582, 596, 52 N.W.2d 701, 709 (1952); Wolf v. Lutheran Mut. Life Ins. Co., 236 Iowa 334, 343, 18 N.W.2d 804, 809 (1945).
I also doubt the practical utility of court-appointed special corporate panels. I am troubled by the absence of precedent. By what guidelines should the trial judge determine whether to grant such an application, whom to appoint, and how to decide such matters as who pays the panel and *721how much? What access will the panel have to internal corporate records? Such practical problems as these may simply erase the use of the business judgment rule in stockholder derivative actions in this jurisdiction.
We can reasonably expect that dissident stockholders seeking to avoid the defensive use of the traditional business judgment rule may now seek to bring derivative actions in this forum. By joining corporate directors as defendants, such plaintiffs can effectively avoid corporate appointment of special litigation committees and the application of principles developed in other jurisdictions for expeditious disposition of merit-less strike suits.
I therefore dissent from division III of the court’s opinion and would answer yes to the question certified to us by Judge Stuart based upon the correct statement of law set forth in divisions I and II.