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CALIFORNIA CORPORATE & SECURITIES LAW

Does California Side With Delaware Or New York On Special Litigation Committee Reviews?

As discussed in the two preceding posts, Nevada’s Supreme Court last week decided to adopt New York’s standard of review of special litigation committee recommendations to dismiss stockholder derivative suits.  In re Dish Network Derivative Litigation, 133 Nev. Adv. Op. 61 (2017).  The New York Court of Appeals described this standard 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.

Auerbach v. Bennett,  393 N.E.2d 994, 996 (1979).  Delaware adds a second step to Auerbach in which the court applies its own business judgment to the committee’s conclusion.   Zapata Corp. v. Maldonado 430 A.2d 779, 787–789 (Del. 1981).

Some readers may wonder whether the California courts side with New York or with Delaware.  In Desaigoudar v. Meyercord, 108 Cal. App. 4th 173 (2003), the Court of Appeal chose to apply Auerbach:

In our view, however, careful scrutiny of a committee’s independence and its decisionmaking process strikes an acceptable balance between legitimate shareholder claims and corporate directors’ judgment. There are several reasons why we find this to be so.

Id. at 188.

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