Last month, Vice Chancellor Glasscock dismissed shareholder claims in Teamsters Local 443 Health Services & Insurance Plan v. John C. Chou (Del. Ch. Nov. 17, 2023) (“Teamsters II”) after finding that a single-member special litigation committee (“SLC”) had sufficiently investigated the stockholder’s allegations before recommending dismissal. Vice Chancellor Glasscock’s decision is not the first time that the Court of Chancery approved a single-member SLC’s motion to dismiss a derivative suit. For example, in April 2023, Vice Chancellor Lori W. Will granted a single-member SLC’s motion to terminate a shareholder action In re Baker Hughes Derivative Litig., 2023 WL 2967780 (Del. Ch. Apr. 17, 2023).
Although the Baker Hughes decision acknowledged that an inquiry into the decision-making of a single-member SLC should be “broad and nuanced” given that the member should, like “Caesar’s wife, be above reproach,” it nonetheless demonstrated that Delaware courts will credit the conclusions of a single-member SLC where the facts demonstrate an independent and thorough investigation that arrives at a reasonable conclusion. Teamsters II offers a careful analysis that provides insights as to how a single-member SLC might proceed when conducting its investigation and forming conclusions regarding stockholder allegations.
Three years before Teamsters II, Vice Chancellor Glasscock decided Teamsters I. There, stockholders of AmerisourceBergen Corporation (the “Company”) alleged that some of the Company’s directors and officers breached their fiduciary duties for failing to adequately oversee the operations of a Company subsidiary. The court found that the plaintiffs sufficiently stated a claim and showed that demand should be excused due to the likelihood of a majority of the board (the “Board”) potentially facing liability.
Following Teamsters I, the Company appointed a single independent director to serve on an SLC to investigate the allegations and theories raised in the action, and determine whether the action should be prosecuted, dismissed, or settled.
After the SLC’s investigation, it authored a report (the “Report”) concluding that (1) there had not been a breach of duty by the Board, (2) litigation would not be in the best interests of the Company, and (3) the litigation should be dismissed. The SLC then moved to dismiss the action and the stockholders opposed, alleging that the single-member SLC failed under the two-part test articulated in Zapata because the SLC failed to conduct a good faith and reasonable investigation, and did not have a reasonable basis for its conclusions.
Under the first part of Zapata, a Delaware court considers “the independence and good faith of the committee and the bases supporting its conclusions.” This is a mandatory analysis. The court has the discretion to move to the second part of the test and “determine, applying its own independent business judgment, whether the [SLC’s] motion should be granted.” Here, despite the plaintiffs’ argument that a one-member SLC was “inherently suspect,” the Court found that there was no basis to challenge the SLC member’s independence or its good faith investigation of the shareholders’ allegations.
LESSONS FROM THE COURT’S ANALYSIS
The Court’s review of the SLC’s Report and its conclusions offers some helpful lessons for how a single-member SLC can be structured to satisfy Zapata.
First, regardless of the composition of the SLC, it must “thoroughly investigate all causes of action and theories of recovery contain[ed] in a plaintiff’s complaint, rather than merely ‘accept defendants’ version of disputed facts without consulting independent sources to verify defendants’ assertions.” This is important to a finding that the SLC conducted a reasonable and good faith investigation: “[i]f the SLC totally fails ‘to explore the less serious allegations in the plaintiff’s complaint,’ doubt may be cast on the reasonableness of the SLC’s investigation if exploring those allegations ‘would have helped the SLC gain a full understanding of the more serious allegations in plaintiffs’ complaint.’” A failure to “thoroughly investigate issues as they arise in the ordinary course of the SLC’s investigation of the claims contained in a derivative action complaint would cause the court to invoke Zapata’s second prong.” Thus, an SLC investigating stockholder allegations should consider the entirety of the stockholders’ complaint, even if certain allegations seem less tethered to the underlying causes of actions.
Second, a board should carefully consider the independence of any single-member SLC, particularly any facts suggesting that a past or current director could exercise authority or control over the SLC’s conclusions. This includes the member’s personal interest in the disputed transaction, as well as the nature of the member’s relationship with any interested directors. After undertaking this review, Vice Chancellor Glasscock rejected the stockholders’ efforts to challenge the SLC’s independence by showing that its member had a relationship with someone who had been a director during the relevant time period, finding that the former director was not a named defendant and that the alleged relationship did not reveal that the former director had any power or authority over the SLC.
Teamsters II demonstrates how a Delaware court will scrutinize the appointment, investigation, and decision-making of a single-member SLC. But it also shows that a carefully-conducted and thorough investigation by a single-member SLC will likely result in a Delaware court granting the litigation outcome the SLC believes appropriate. In other words, although a heavy lift, an SLC can be a one-person job.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.