Court Opinion

ID: 9847953
Source: CourtListenerOpinion
Date Created: 2023-09-24 04:10:30.813951+00
Date Added: 2024-06-11T09:17:50.481045
License: Public Domain

Justice Frye
concurring in part and dissenting in part.
I concur in that portion of the majority opinion which holds that a special litigation committee is an appropriate device under the facts of this case. I dissent from that portion which adopts a modified version of the Auerbach rule. I believe that adopting a version of the Zapata rule would be more consistent with existing North Carolina statutory and case law.
This case raises serious questions concerning the continued vitality of shareholders derivative actions in North Carolina where the essence of the claim is alleged fraud and self-dealing by a majority of the members of the Board of Directors. Since the use of the special litigation committee under these circumstances presents a question of first impression before this Court, I believe that a good starting point for analysis is N.C.G.S. § 55-55, enacted by our General Assembly in 1973. This statute authorizes the initiation of shareholders derivative actions and provides for certain *315control by the court and the award of reasonable expenses, including attorneys’ fees to the plaintiffs or the defendants under certain circumstances. Subsection (c) is of special significance. It provides:
(c) Such action shall not be discontinued, dismissed, compromised or settled without the approval of the court. If the court shall determine that the interest of the shareholders or any class or classes thereof, or of the creditors of the corporation, will be substantially affected by such discontinuance, dismissal, compromise or settlement, the court, in its discretion, may direct that notice, by publication or otherwise, shall be given to such shareholders or creditors whose interests it determines will be so affected. If notice is so directed to be given, the court may determine which one or more of the parties to the action shall bear the expense of giving the same, in such amount as the court shall determine and find to be reasonable in the circumstances, and the amount of such expense shall be awarded as costs of the action. (Emphasis added.)
The statute does not specifically say what test the court will apply in determining whether it will approve a discontinuance, dismissal, compromise or settlement of the action. However, it would be difficult for the court to make a determination as to whether the interests of the shareholders or the creditors would be substantially affected by such discontinuance, dismissal, compromise or settlement without at least looking at the proposed action substantively. One way would be to look at the plaintiffs claim to see if there is some forecast of evidence that would make it likely that the plaintiff could prevail on the merits. Even if there is a likelihood that the plaintiff could prevail but that the amount of the recovery would not be sufficient to outweigh the detriment to the corporation, the court could still allow discontinuance, dismissal, compromise or settlement. In making this determination, the court could rely heavily on the recommendation of the special litigation committee but without that recommendation being mandatory on the court.
Even in cases where the directors are not charged with fraud or self-dealing, and even if the plaintiff and the board agree to discontinue, dismiss, compromise or settle the lawsuit, they must *316still get court approval. Thus, if we allow a special litigation committee’s recommendation to be binding upon the- court where the majority of the board which appointed the committee has been charged with fraud and self-dealing, we are giving to the special committee’s recommendation a higher degree of sanctity than that which would be given to the combined recommendation of the plaintiffs and a board not charged with fraud or self-dealing. I do not believe that this was the intent of the legislature in enacting N.C.G.S. § 55-55.
Another expression of legislative intent may be found in N.C.G.S. § 55-30 relating to a director’s adverse interest. It provides, inter alia,
(b) No corporate transaction in which a director has an adverse interest is either void or voidable, if:
(3) The adversely interested party proves that the transaction was just and reasonable to the corporation at the time when entered into or approved. In the case of compensation paid or voted for services of a director as director or as officer or employee the standard of what is ‘just and reasonable’ is what would be paid for such services at arm’s length under competitive conditions.
In Smith v. Robinson, 343 F. 2d 793 (4th Cir. 1965), it was stated that a corporate officer acts in a fiduciary capacity and cannot profit at the expense of the corporation; and that while it is true that the North Carolina law and the general law do not prohibit corporate officers from dealing with the corporation, the adversely interested party must prove that the transaction was fair, just and reasonable when entered into.
In 1927, this Court decided that a transaction between a corporation and its directors or officers is presumed to be invalid unless those seeking to sustain it prove that it was just and reasonable. Highland Cotton Mills v. Ragan Knitting Co., 194 N.C. 80, 138 S.E. 428 (1927).
In Meiselman v. Meiselman, 309 N.C. 279, 307 S.E. 2d 551 (1983), this Court held that the common law rule as stated in Highland Cotton Mills is the same standard codified by the legis*317lature in N.C.G.S. § 55-30(b)(3). We said that under both standards the adversely interested party must demonstrate that the transaction at issue was “just and reasonable.”
When N.C.G.S. §§ 55-55 and 55-30(b)(3) are read in pari materia, it would seem that when a stockholder in a derivative action seeks to establish self-dealing on the part of a majority of the board, the burden should be upon those directors to establish that the transactions complained of were just and reasonable to the corporation at the time when entered into or approved. The fact that a special litigation committee appointed by those directors charged with self-dealing recommends that the action should not proceed, while carrying weight, should not be binding upon the trial court. Rather, the court must make a fair assessment of the report of the special committee at least to determine whether there is some reasonable probability that the defendants will be able to show that the transaction was just and reasonable to the corporation at the time. If this appears evident from the report, then summary judgment may be allowed in favor of the defendants. If not, the court could still examine the report further to determine whether, notwithstanding the ability of the defendants to prove that the transaction was just and reasonable, it would still not be in the best interest of the corporation to pursue the derivative action.
In the instant case, the trial court was
of the opinion that the business judgment rule controls the disposition of this case and, therefore, that the only issues before it are whether the Special Committee was composed of disinterested, independent directors who acted in good faith, and whether the scope of the investigation and the procedures adopted and followed were appropriate. (Emphasis added.)
Under Zapata, an additional requirement must be satisfied. The trial court must also exercise its independent discretion in determining whether it “will be persuaded by the exercise of a committee power resulting in a summary motion for dismissal . . . .” Zapata Corp. v. Maldonado, 430 A. 2d 779, 788 (Del. 1981). This the trial court clearly did not do. Thus, I would remand the case for the trial court to exercise its discretion in accordance with the Zapata rule.