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Discovery in a shareholders' derivative action may be ordered to facilitate inquiries into independence, good faith, and the reasonableness of an investigation. That discovery is not by right, but by order of the court, with the type and extent of discovery left totally to the discretion of the court.
Appellee corporation ‘s stock price dropped as numerous business analysts expressed concern about the apparent declining demand for its product. Thereafter, the corporation received a "derivative demand" letter from the shareholder alleging corporate improprieties. The Board of Directors then appointed three board members to serve as a Special Litigation Committee (SLC) to investigate the shareholder's claims. The SLC retained independent legal counsel and a special accounting advisor. The SLC interviewed many witnesses and reviewed voluminous documents. It then issued its report, in which it determined that the shareholder's claims were meritless. In the meantime, the shareholder had filed a lawsuit based on his claims of corporate impropriety. The corporation filed a motion to dismiss. The shareholder did not respond, but his counsel admitted that the shareholder had not filed requests for discovery. The trial court then dismissed his lawsuit. The shareholder appealed.
Was the dismissal of the shareholder’s lawsuit proper under the circumstances?
On appeal, the appellate court found that dismissal was proper pursuant to O.C.G.A. § 14-2-744 since the shareholder had not initiated any discovery to determine whether the SLC acted in good faith in concluding that his lawsuit was meritless. According to the court, it should have been apparent that, upon defendant corporation's coming forward with a motion to dismiss, supported by a voluminous and detailed report, it was incumbent upon the shareholder to come forward with evidence to support his claim of lack of independence of Special Litigation Committee members. The shareholder failed to demonstrate any abuse of discretion in the trial court's denial of his belated oral request to conduct discovery made for the first time at a hearing.