In the context of derivative claims, a truly independent “Special Litigation Committee” (or “SLC”) has enormous power. The SLC can either approve a derivative claim, recommend it be pursued or settled, or recommend it be dismissed. The SLC is your friend or foe, depending on where you are on the decision. If an SLC is appointed to a matter that you are handling, you need to be prepared.
It is important to understand why preparation for the SLC is so important. First, understand the SLC’s role and how it was appointed. Second, understand the SLC’s deference. A practitioner should also be able to distinguish between a derivative and direct claim, as well as the trends in law that relate to SLC recommendations and determinations. Counsel can now understand the importance and how to prepare for the SLC.
Direct vs. Derivative Claims:
Minnesota courts “focus the inquiry on whether the claimed injury was a direct or derivative injury.” Wessin v. Archives Corp.. 592 N.W.2d 460., 464 (Minn. 1999). The courts do not focus on the theory under which the claim is made, but on the injury itself. ID. Id. Id. Minnesota has “long held to the general principle” that an individual shareholder cannot directly assert a cause-of-action that belongs to the corporation. Id. “A shareholder derivative suit, which is a creation equity, allows a shareholder to step into the shoes of the corporation and seek the restitution that he cannot demand on his own, Blohm, 765 N.W.2d at 147, 153 (Minn. Courts App. 2009) (quotation omitted).
Nomination of an SLC
If a shareholder alleges a derivative claim, the board can form an SLC. Id. A corporation, limited liability company or nonprofit company may appoint an SLC. Minn. Stat. SS 302A.241, Subd. 1 (corporations); Minn. Stat. SS 322C.0905 Limited Liability Companies; Minn. Stat. SS 317A.241 (nonprofit companies); Minn. Stat. SS 308B.451 for cooperative associations. An appropriately appointed SLC should include one or more independent people to review the legal rights and remedies of the corporation, and determine whether these rights and remedies should continue to be pursued. In re UnitedHealth Group Shareholder Derivative Litig., 754 N.W.2d 544, 550 (Minn. 2008); Minn. Stat. SS 322C.0905 subd. 2. Each member of a properly designated SLC must be an independent individual. UnitedHealth Group. 754 N.W.2d at 554. The board does not have control over the SLC after the appointment. UnitedHealth Group at 550.
It depends on which side you are on in a derivative claim, what the benefits of appointing an SLC. The company can save significant time and money by having an SLC investigate the derivative claim before it becomes a lengthy legal battle. From the shareholder’s perspective, the SLC’s determination/recommendation will either give credence to the derivative claim or maybe the demise of the claim. Either way, the SLC’s determination/recommendation early in the derivative action may also save the derivative plaintiff and individual defendant significant sums in litigation expenses.
It is important to stress the independence of SLC members if you are advising them on the appointment. The independence of SLC is affected by several factors, including whether members are defendants in litigation, whether they are subject to substantial and direct liability, whether members are outside directors, whether members are involved in the wrongdoing, whether members are approved to conduct the wrongdoing, whether members are business partners with the company, whether members are independent counsel, whether members are allowed to alter the SLC’s size, and whether or not the board has the right to modify the number of SLC members. UnitedHealth Group. 754 N.W.2d 560 n. 11.
If there are any questions about the independence of an SLC after their appointment, it is best that they be raised immediately. Due to the cost of retaining an SLC (most commonly a retired judge or lawyer with experience in this area) and the costs of the SLC investigation no party is able to benefit from a prolonged investigation that results in a challenge of the SLC’s independence. If the SLC later proves to be biased, it is better to have the SLC independent from the beginning. If you question the independence of SLC, you risk looking disgruntled and disrespectful. It is crucial to perceive the court’s perception during this equitable process.
SLC’s Investigation:
The board should delegate the power of controlling the derivative action to the independent SLC. It should not be limited in its scope. Janssen v. Best & Flanagan, 662 N.W.2d 876, 888 (Minn. 2003). An independent evaluation of a derivative case is possible through the SLC. The SLC allows for independent evaluation of a derivative action. 2002, aff’d. 662 N.W.2d 866 (Minn. 2003). (internal quotation omitted).
The business judgement rule protects an SLC and any investigation that follows its appointment. UnitedHealth Group. 754 N.W.2d at 551-51. The business judgment rule protects a company’s board against derivative claims that it made a poor business decision. Id. Id. A director will not be held liable for company losses if he or she is not interested in the company, makes an informed business decision and acts in good faith according to the business judgment rule. Janssen, 662 N.W.2d at 884. Judges cannot second-guess a board’s well-intentioned decision under the business judgment rule. UnitedHealth Group at 551.
The nature of the investigation and the SLC’s methods and procedures will determine whether the SLC investigated in good faith. Drilling v. Berman, 589 N.W.2d 503, 507 (Minn. Ct. App. 1999). All factors that contribute to the quality of the SLC investigation are important. These include the length and scope of their investigation, whether they used independent counsel or experts, whether the defendant or corporation was involved in the investigation, as well as the reliability and adequacy the information provided to them. Id.
How to prepare for the SLC
The independent SLC will ask for information from all parties to the dispute after they have been appointed. Often, the SLC will meet the parties and their lawyers to discuss the facts surrounding the derivative claim. You don’t get another chance to make a good first impression, as is the case in most cases. Before meeting with the SLC, it is crucial to have factual support or defense for the derivative claim. Financial statements, witness statements and emails should all be used to provide evidentiary support. Don’t make the mistake to be unprepared for the meeting with the SLC. Instead, view the meeting with SLC as a trial. You must convince SLC that you have evidence-based support to back up your position.
Parties often have additional opportunities after the initial meeting to provide further evidence support to the SLC. Don’t make the SLC do unnecessary digging or research to support your view on the derivative claim. You should provide the SLC with any additional evidence or documentation that you have. You and the SLC should not play hide-and-seek during an SLC investigation. If you believe that the other side has additional information, notify the SLC and ask for it to be provided. Contrary to the unfortunate trend of litigation whereby one side simply objects to discovery requests to hide the ball, if the SLC asks you for information from your client it is best to give it. If you or your client refuse to give relevant information to SLC, it will be disingenuous.
It is important to file a complaint if you feel that the SLC conducted an inept or inadequate investigation. Because perception is crucial in this equitable process, it is important to question the SLC’s investigation after it has determined against you. This will allow you to determine if you are raising the issue simply because your client was recommended by the SLC or if there were any issues with the investigation.
The SLC is the power of the SLC
After its investigation is complete, the SLC will decide if it is in the company’s best interest to pursue the derivative claim, settle the derivative claim or dismiss the derivative claim. Janssen, 662 N.W.2d at 883. This decision “requires the weighing of legal, moral, commercial, promotional and fiscal factors that are familiar to resolve many, if not all, corporate problems.” The SLC should take into account the long-term as well as short-term interests of the company, its members, employees, customers, suppliers, creditors, and other stakeholders.
These factors, including litigation costs, are sometimes considered to be “not worth pursuing” when the likelihood to win is compared to the effort, time, money and hostility required to win. Janssen 662 N.W.2d 883 The decision of whether the company should pursue a cause d’action is up to the SLC. Black v. NuAire, Inc., 426 N.W.2d 203, 210 (Minn. Ct. App. 1988 (internal quotations and citations omitted).
It is important to remember that dismissal of meritorious lawsuits may be justified when the pursuit of the claim proves more expensive than beneficial. Settlement of meritorious claims is commonplace in modern law practice. It is generally accepted that settlements are preferred because they preserve judicial resources and minimize litigation costs. We are not concerned that a significant number of cases will end up in settlement, rather than adversarial litigation, according to the standards we have set.
UnitedHealth Group at 559.
The SLC will decide whether to pursue, dismiss, or settle the derivative claim. They must then follow that decision. Let’s say the derivative plaintiff disagrees to the SLC decision. The board of directors must prove that the SLC was independent, that the investigation was appropriate and adequate, and that it was conducted in good faith. Id. Id. at 561. Both criteria must be met by the board. The court must then follow the SLC’s lead and issue an order. Id. Id. at 559; Minn. Stat. SS 322C.0905; subd. 5. The court does not have to defer to the SLC decision if the board fails to meet either of these criteria. In this case, the derivative claims may be filed by the plaintiff on their merits without any opportunity to correct the SLC’s shortcomings. Janssen, 662 N.W.2d at 889.
Recent Minnesota cases reveal a tendency by SLCs not to pursue or dismiss derivative claims. SLCs often recommended that the derivative claims are dismissed or not pursued. There were many factors that led to dismissal or denial of the claims. These included frivolous derivative claims and the lack of benefit for the company.
You can choose to make the SLC your friend or enemy. Being aware of the role of SLCs and being prepared to deal with them will ensure that an independent SLC is appointed and that the investigation is thorough. Your client will be pleased with the outcome of an SLC investigation if they are able to understand the role of the SLC.
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