Auerbach v. Bennett

Brief Fact Summary. Plaintiffs, Elias Auerbach and Stanley Wallenstein, brought a shareholder’s derivative suit against Defendants, William Bennett et al., on behalf of General Telephone & Electronics Corporation (GTEC) after a corporate audit found that current and former members of the Board of Directors were involved in the payment of bribes and kickbacks to foreign officials. A special committee of disinterested members appointed by the Board refused to support the action.

Synopsis of Rule of Law. A party may challenge the independence of a special committee, but once a committee is deemed to be independent then their decisions are protected under the business judgment rule.

Facts. In 1975, after reports of several multinational companies offering bribes and kickbacks to foreign officials, GTEC appointed outside counsel and auditors to determine if anyone at GTEC was involved in similar conduct. After the outside consultants found wrongdoing by former and current members of GTEC’s Board, Auerbach brought a shareholder’s derivative suit against the Defendant Board. Defendants appointed a three-person special committee comprised of members who were not on the board at the time of the wrongdoing. The committee reviewed the auditor findings and decided that in the best interests of the company that they should not pursue an action against the Board members. Wallenstein continued the suit after Auerbach declined, arguing that any committee appointed by the corrupted directors should be considered interested parties.

Issue. The issue is whether the special committee correctly and justifiably refused to continue the derivative action.

Held. Once the special committee was deemed to be impartial and disinterested in the issue at hand, their decision is entitled to deference by the court under the business judgment rule. Therefore, it is acceptable to inquire into the special committee’s independence, but the court will not interfere with their business judgments.

Dissent. The dissent only found fault in allowing a summary judgment motion before the intervening party, Wallenstein, had an opportunity to get full disclosure of the facts.

Discussion. The court was not convinced that the special committee was not independent simply because the interested directors appointed them.