Gall v. Exxon Corp.

Brief Fact Summary.

Exxon (Defendant) motioned for summary judgment during trial of Gall’s (Plaintiff) shareholder derivative suit against Defendant claiming illegal bribes by the corporation, claiming it was in the corporation’s sound business judgment to refuse to sue on Plaintiff’s complaint.

Synopsis of Rule of Law.

The decision of corporate directors rests within the sound business judgment of management regarding whether or not to assert a corporation’s cause of action. ion’s sound business judgment to refuse to sue on Plaintiff’s complaint.

Facts.

Gall’s (Plaintiff) derivative suit arose out of the alleged payment by Exxon Corp. (Defendant) of corporate funds as bribes or political payments, which were contributed improperly to Italian political parties to secure favors.  Plaintiff inter alia, alleged a violation of Securities and Exchange Commission (SEC) rules 13(a) and 14(a), misuse of corporate assets, and the officers’ breach of fiduciary duties.  Defendant had formed a Special Committee on Litigation to study Plaintiff’s complaint, and the committee refused to bring suit against the corporation’s officers connected to the bribes.  At Plaintiff’s derivative suit, Defendant motioned for summary judgment, asserting the committee’s decision was proper as it was within the sound business judgment rule.

Issue.

Does the decision of corporate directors rest within the sound business judgment of management regarding whether or not to assert a corporation’s cause of action? 

Held.

(Carter, J.)  Yes.  The decision of corporate directors rests within the sound business judgment of management regarding whether or not to assert a corporation’s cause of action.  Clearly the rights sought to be vindicated in the lawsuit are those of the corporation and not those of the plaintiff suing derivatively on behalf of the corporation.  The interests of the corporation are at stake, therefore, it is the responsibility of the corporation’s directors to determine, in the first instance, whether an action should be brought on behalf of the corporation.  Rarely do Courts interfere to control discretion of the board of directors to decide whether or not the corporation shall seek to enforce a cause of action in courts, except when directors are guilty of misconduct equivalent to a breach of trust or where they stand in a dual relationship which prevents an unprejudiced exercise of judgment.  In this case, the issue for decision is not whether the payments made by Esso Italiana to Italian political parties were proper or improper.  Instead, the issue in this case is whether the Special Committee, acting as Defendant’s board of directors and in the sound exercise of their business judgment, may determine that a suit against any present or former director or officer would be contrary to the corporation’s best interests.  However, Plaintiff must be given an opportunity to test the bona fides and independence of the special Committee through discovery and, if necessary, at a special hearing.  Issues of intent, motivation, and good faith are particularly inappropriate for summary disposition.  Motion denied without prejudice.

Discussion.

According to Hen, Law of Corporations, 2nd edition (1970), “The ‘business judgment’ rule sustains corporate transactions and immunizes management from liability where the transaction is within the powers of the corporation (intra vires) and the authority of management, and involves the exercise of due care and compliance with applicable fiduciary duties. . . . If in the course of management, directors arrive at a decision, within the corporation’s powers and their authority, for which there is a reasonable basis, and the act in good faith, as a result of their independent discretion and judgment, and uninfluenced by any consideration other than what they honestly believe to be the best interests of the corporation, a court will not interfere with internal management and substitute its judgment for that of the directors to enjoin or set aside the transaction or to surcharge the directors for any resulting loss.†nts an unprejudiced exercise of judgment.  In this case, the issue for decision is not whether the payments made by Esso Italiana to Italian political parties were proper or improper.  Instead, the issue in this case is whether the Special Committee, acting as Defendant’s board of directors and in the sound exercise of their business judgment, may determine that a suit against any present or former director or officer would be contrary to the corporation’s best interests.  However, Plaintiff must be given an opportunity to test the bona fides and independence of the special Committee through discovery and, if necessary, at a special hearing.  Issues of intent, motivation, and good faith are particularly inappropriate for summary disposition.  Motion denied without prejudice.