Brief Fact Summary. Plaintiff, William Maldonado, brought a derivative action against officers and directors of Defendant, Zapata Corporation. Defendant appointed a special committee that decided not to pursue the litigation proposed by Plaintiff.
Synopsis of Rule of Law. The court should first determine if a defendant corporation proves that the appointed committee is independent, and then determine, when applying their business judgment standard, whether the motion to dismiss the derivative suit should be granted.
A stockholder may sue in equity in his derivative right to assert a cause of action in behalf of the corporation, without prior demand upon the directors to sue, when it is apparent that a demand would be futile, that the officers are under an influence that sterilizes discretion and could not be proper persons to conduct the litigation.View Full Point of Law
Issue. The issue is whether the authorized committee should be permitted to dismiss pending derivative suit litigation.
Held. The court applied a two-step test to determine if the Committee should be permitted to dismiss the litigation. First, Defendant corporation has the burden to prove that the Committee is independent and is exercising good faith and reasonable investigation. Second, the court should apply their independent business judgment.
Discussion. The court’s two-step test shifts the burden to the corporation to prove the independence, which limits the advantage to a company of appointing an independent group to determine the merits of a derivative suit.