Six Things to Know About Special Committees and Special Litigation Committees

Boards of directors form special committees (SCs) and special litigation committees (SLCs) to address discrete issues. SCs are formed for a wide variety of reasons, such as shareholder demands, whistleblower complaints, conflicts of interest, litigation threats, or crisis management. SLCs, by contrast, are formed in a narrow set of circumstances: to address shareholder derivative claims or demands when it appears that a majority of directors on the board may lack independence or disinterestedness in the matter at hand. Forming and operating SCs and SLCs requires careful consideration of various legal, practical, and strategic factors. Here are six key things general counsels should be aware of. Note that while many of the practices discussed are not jurisdiction-specific, this article generally assumes Delaware law applies.

1.    Know the appropriate type of committee. Both SCs and SLCs derive their authority from the boards of directors that form them. Both are frequently delegated the authority to hire advisors, conduct a thorough evaluation, and arrive at conclusions. However, a principal difference is in the scope of authority afforded to carry out the committee’s conclusions. Most often, an SC is formed to make recommendations to the full board, as opposed to itself having the authority to make ultimate decisions. For example, if an acquisition opportunity arises but some directors own shares in the target entity, the board may form an SC comprised of nonconflicted directors to investigate the opportunity and provide a recommendation to the full board, which will then vote on the matter (often with recusal of the potentially conflicted directors). In some situations, an SC may be formed as a practical tool to consider matters that merit special time and attention, or that do not require consideration by the full board. Such committees may be granted authority to make certain decisions on their own, or may simply serve in an advisory capacity to the full board.

SLCs, by contrast, are more than advisory and should have authority themselves to make binding decisions for the company. Under Delaware law, a properly constituted SLC acting in accordance with its fiduciary duties is afforded substantial deference. For instance, if certain requirements are met, a court may dismiss a shareholder derivative action at the recommendation of an SLC even following a finding of demand futility, i.e., that the board as a whole is not independent or disinterested in the matter at hand. When forming either an SC or an SLC, it is important that the committee’s charter or other governing document clearly spell out the scope of authority afforded to the committee and the authority, if any, retained by the full board.

2.    Know what to consider when determining who to appoint. Committee members should typically be selected based on their qualifications, experience, available time, and independence and disinterestedness, with independence and disinterestedness being key factors. To take a straightforward example, a director accused of wrongdoing generally should not be on a committee formed to investigate the wrongdoing (and likewise generally may be recused from board consideration of the wrongdoing). The composition of an SLC is particularly important given that a primary ground for challenging the SLC’s conclusions will be whether or not the member(s) of the SLC are independent and disinterested.

3.    Know when to bring in advisors. Frequently it is advisable to give committees authority to retain independent counsel or experts to aid in the committee’s efforts. For example, it often makes sense for the committee to retain independent counsel where doing so may bolster the committee’s credibility or to lend expertise and firepower to an investigation, even if the company’s general counsel is independent and disinterested. But independent counsel is not always necessary and can be costly in both time and money. At times, it may be appropriate for the committee to work with outside counsel who have worked with and know the company. So, while independent counsel frequently should be retained, for instance, for larger matters or matters with implications that are potentially particularly significant for the company, or where the involvement of the general counsel (as a member of management) may create the appearance of a conflict, the decision should not be automatic.

4.    Know the privilege considerations. The committee’s communications and documents may contain sensitive, confidential, or privileged information. Companies typically can provide information to committees formed by their boards without waiving protections, but the reverse is not always true. For example, one notable decision by the Delaware Court of Chancery held that when a special committee presented the full board with the final report of its investigation regarding whether to bring a lawsuit against certain directors, the committee waived privilege over the report by sharing it with the targets of the investigation. Accordingly, it is frequently advisable at the outset of a committee’s work to establish clear protocols for creating, maintaining, and disclosing communications and documents, and to consult with counsel before making any disclosure.

5.    Know how to keep records of the committee’s proceedings and findings. It is frequently advisable for committees to create records of their work, including minutes, reports, memoranda, and correspondence. These records serve as evidence of the committee’s mandate, process, and rationale, and may support the committee’s recommendation or decision. Accordingly, committees should consider promptly documenting their attention to significant matters reported to them (particularly if the matters are mission-critical, or relate to an activity that is highly regulated), as well as conclusions drawn and any remediation efforts taken to address such issues. Committees should also consider potential privilege and confidentiality issues, and adopt measures to protect them—for example, by labeling records as privileged and confidential, segregating privileged portions of committee records where appropriate, and ensuring that non-privileged materials can stand on their own in the event that the records are disclosed in response to shareholder demands, or in court or regulatory proceedings.