Tuesday, February 26, 2013

Sutherland v. Sutherland case brief

Sutherland v. Sutherland case brief summary
958 A.2d 235

-Plaintiff stockholder filed a derivative and double derivative action against defendants, board of directors, a timber company, and a lumber company, alleging breach of fiduciary duty and waste. The directors and companies filed a motion to dismiss the complaint.

-The Sutherland family owned all the stock of Dardanelle Timber Company, a Delaware corporation which was itself the sole shareholder of Sutherland Lumber-Southwest, Inc. (Southwest).
-In addition to being the controlling shareholders of Dardanelle, Perry and Todd Sutherland (defendants) were directors and officers of both corporations.
-Mark Sutherland (defendant) held no equity interest but is the third director of both corporations. -Martha Sutherland (plaintiff) was a minority shareholder of Dardanelle and was a director of Southwest before being ousted in 2004.
-The certificates of incorporation for both Dardanelle and Southwest included an exculpatory provision: which purported to permit directors to engage in self-interested transactions with the corporation, provided they disclose their interest to the other directors and the board as a whole approves.
-The provision further stated that the self-interested directors may vote in favor of the transaction as with any other matter.
-In 2006, Martha Sutherland filed a derivative complaint on behalf of Dardanelle and Southwest against Perry, Todd, and Mark Sutherland for waste and breach of fiduciary duty.
-The complaint alleged that Perry and Todd, with Mark’s acquiescence, caused the companies to provide them with a number of personal benefits, including personal flights, tax and accounting services, and excessive compensation. 
-The directors of both companies appointed an investigator as a member of the board and formed a special litigation committee (SLC), which consisted solely of the investigator.
-After the SLC concluded that it was not in the best interests of the companies to pursue the litigation, the companies moved to dismiss.

The trial court held that the SLC did not prove the reasonableness of its investigation into the stockholder's claims that the companies paid the directors' personal expenses.

-Significant errors existed in the SLC's report, which undermined the trial court's confidence in the entire investigation.
-The explanation as to why the timber company paid for improvements made to the house of one of the directors was insufficient.
-The SLC's decision not to conduct an analysis of the payments and to omit any mention of them gave rise to substantial questions concerning the reasonableness and good faith of the investigation. -Several of the most important interview summaries failed to record the witnesses' answers.
-The desultory investigation that was undertaken into the companies' general ledgers also raised questions about the reasonableness and good faith of that investigation.

OUTCOME: The trial court denied the motion to dismiss.

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