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Zapata Corp. v. Maldonado - 430 A.2d 779 (Del. 1981)

Rule:

The court should apply a two-step test to the motion an independent committee files to dismiss a derivative suit. 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, good faith and a reasonable investigation, 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 good faith of the committee, the court shall deny the corporation's motion. If, however, the court is satisfied under Del. R. Civ. P. 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 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.

Facts:

In June 1975, William Maldonado, a stockholder of Zapata Corporation, instituted a derivative action in the Court of Chancery on behalf of Zapata against ten officers and/or directors of Zapata, alleging breaches of fiduciary duty. Maldonado did not first demand that the board bring this action, stating instead such demand's futility because all directors were named as defendants and allegedly participated in the acts specified.  After replacement of some board members, the new board created an investigation committee. The committee determined that each action against the corporation should be dismissed. The chancery court denied the corporation's motion for summary judgment or dismissal, holding that the "business judgment" rule was not appropriate for dismissal of a stockholder's derivative suit. The corporation thereafter brought an interlocutory appeal.

Issue:

Did the chancery court properly deny the corporation’s motions for dismissal and/or summary judgment?

Answer:

No.

Conclusion:

The Court reversed and remanded the decision of the chancery court, holding that a court should inquire into the independence and good faith of an independent committee and the bases supporting its conclusions. The chancery court was then directed to determine, applying its own independent business judgment, whether either motion should be granted.

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