Cuker v. Mikalauskas

Brief Fact Summary.

The board of directors of PECO Energy Corporation (Defendant) sought to quash two derivative actions initiated by its minority shareholders (Plaintiff).  The minority shareholders of PECO Energy Corporation (Plaintiff) initiated two derivative actions against the board of directors of PECO Energy Corporation (Defendant),which they sought to quash.

Synopsis of Rule of Law.

A corporation’s board of directors, under Pennsylvania law, is permitted to apply the business judgment rule to terminate a derivative suit initiated by the corporation’s minority shareholders.

Facts.

PECO Energy Company (PECO) (Defendant), a publicly regulated utility company, underwent an audit in accordance with state regulations.  The audit resulted in a report that recommended changes in PECO’s (Defendant) credit and collection policies.  A suit was initiated by a group of minority shareholders charging mismanagement of funds by PECO’s officers (Defendant) and directors (Defendant).  In order to recover damages done to PECO (Defendant) because of the mismanagement, the shareholders demanded that PECO (Defendant) permit them to bring suit on its behalf.  The board of directors established a committee to investigate the claims.  Prior to the establishment of the special committee, a second group of shareholders (Plaintiff) led by Cuker (Plaintiff) brought suit against the officers (Defendant) and directors (Defendant) on the same basis.  The committee investigated both complaints.  After many months of investigation, and with the assistance of outside counsel and an outside auditor, the committee concluded thee was not any evidence of a breach of duty of loyalty on the part of the officers (Defendant) or directors (defendant).  Instead, they determined that the officers (Defendant) and directors (Defendant) used proper business judgment and acted in PECO’s (Defendant) best interests.  In addition, the committee decided that a derivative suit would be contrary to PECO’s (Defendant) interests.  The disinterested members of the board voted unanimously to terminate the derivative suits of the shareholders (Defendant).  The court of common please denied PECO’s (Defendant) motion for summary judgment, and PECO (Defendant) petitioned for extraordinary relief.

Issue.

Is a corporation’s board of directors, under Pennsylvania law, permitted to apply the business judgment rule to terminate a derivative suit initiated by the corporation’s minority shareholders?

Held.

(Flaherty, C.J.)  Yes.  A corporation’s board of directors, under Pennsylvania law, is permitted to apply the business judgment rule to terminate a derivative suit initiated by the corporation’s minority shareholders.  The court may dismiss the action on summary judgment, if the court is satisfied that the board of directors’ decision was valid.  The court is required to examine the surrounding circumstances to determine whether the business judgment rule applies, and not the results of the directors’ decision.  The court must consider various factors such as whether the board or committee was made up of disinterested members, whether it was advised by counsel, the comprehensiveness of the investigation, and whether or not the board acted under the reasonable belief that its decision was in the best interests of the company.  If these requirements are met, then the court should dismiss the action whether or not the decision ultimately resulted in harm to the corporation.  For the purpose of providing procedural guidelines for judicial review of such business decisions, the court adopts the American Law Institute’s Principles. Reversed and remanded.

Discussion.

When managing the corporation’s business, the business judgment rule shields directors from personal liability.  The rule creates a rebuttable presumption that favors the defendant directors having made an informed decision, which they believed to be in the corporation’s best interests.  Without contrary evidence, the court will not review the business decision of the directors on the rationale that directors are not insurers of the corporation’s success.