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:

Maldonado brought the derivative suit against ten officers and directors of Defendant, asserting that they breached their fiduciary duties. Plaintiff did not demand that the defendant officers bring the action because all the directors at the time were named in the suit. After the suit, defendant corporation appointed an “Independent Investigation Committee” comprised of two directors who were not part of the initial suit. The committee decided that the derivative suits would be harmful to the company and therefore moved to dismiss the litigation.

ISSUE:

Whether after an objective and thorough investigation of a derivative suit, may an independent board committee cause its corporation to file a pretrial motion to dismiss the derivative suit? 

ANSWER:

Yes.

CONCLUSION:

The court reversed the trial court's denial of the committee's alternative motions to dismiss or for summary judgment and remanded the case. The court applied a two-step test to determine if the committee should be permitted to seek dismissal of the litigation. First, defendant corporation has the burden to prove that the committee is independent and is exercising good faith and reasonable investigation. Second, the court should apply its independent business judgment. The court’s two-step test shifts the burden to the corporation to prove the independence, which limits the advantage to a company of appointing an independent group to determine the merits of a derivative suit.

Click here to view the full text case and earn your Daily Research Points.