Auerbach v. Bennett case brief summary

Auerbach v. Bennett case brief summary (New York)

 

Issue: Whether the decision of a specially appointed committee of disinterested directors acting on behalf of the board to terminate a shareholder derivative action is a proper application of the business judgment rule.

Rule: The decision of a Litigation Committee is presumed to be sufficient under the Business Judgment Rule unless exceptions apply.

Corollary: If the procedures of the Special Litigation Committee are good, then the court will not evaluate the substance of the decision.

Exceptions:

1.         The court may inquire into the disinterested independence of the members of the board chosen (SLC) to make the decision and/or into whether there exists a dual relation which prevents the un-prejudicial exercise of business judgment.

2.         The court may inquire as to the adequacy and propriety of investigative procedures and methodologies employed by the SLC, but may not “trespass in the domain of business judgment.”

3.         Proof that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by the doctrine.