Shareholder Litigation Committees

A special litigation committee (“SLC”) is a committee appointed by the Board of Directors of a corporation that has been tasked with deciding whether to sue on a corporate claim or whether to continue an already commenced lawsuit against directors or officers of the corporation.

When appointing an SLC, the board of directors should be aware of certain requirements. Once an SLC is formed, it is to act independently, meaning it is not under the control of the board of directors despite the fact that the board appointed them. The SLC must be given full authority and control to make its decisions. The SLC’s procedures investigating claims must be “adequate, appropriate, and pursued in good faith.” Whether an SLC’s procedures are proper depends on the nature of the particular investigation and a other factors including

  • the length and scope of the investigation,
  • the SLC’s use of independent counsel or experts,
  • the corporation or defendant’s participation, if any in the investigation, and
  • the adequacy and reliability of the info supplied to the SLC.

Once an SLC has reached a decision as to the course of action for the corporation, it is not allowed to improve or amend their investigation in any way. Depending on the jurisdiction you are in, decisions made by an SLC—and the process used to reach those decisions—are usually granted significant deference by a reviewing court. This essentially means that SLC’s decisions are binding, under the business judgment rule, barring a finding by a reviewing court that the SLC acted unlawfully or was not disinterested.

Tantamount to an SLC is its independence from the Board members who appointed them. The SLC member(s) must not have a relationship with the individual defendant or the suit itself that would impair an SLC member’s judgment. If a court reviewing the decision of an SLC finds the SLC lacked independence, the court may vacate the SLC’s recommendation. For example, SLC members will not be deemed independent if they are a defendant in the suit at hand. Independence can also be challenged if the SLC member has a significant financial stake in the corporation they are advising. See Hasan v. CleveTrust Realty Investors, 729 F.2d 372 (6th Cir. 1984). SLC recommendations lack independence when the committee is simply advising an entire board of directors, most of whom are defendants in the suit at hand, instead of acting with full power delegated by the board of directors. See Par Pharmaceuitcal Inc. Derivative Litig.¸750 F. Supp. 641 (S.D.N.Y. 1990).

In Minnesota, Minnesota Statutes section 302A.241 governs some of the basic rules regarding SLCs. Members of the SLC must be natural persons (they may not be another corporation); committees must contain at least two or more members; the makeup of an SLC can only be approved by a majority vote of the directors present (unless the articles or bylaws say otherwise); and the SLC has the power to appoint subcommittees.

SLCs are permitted to hire attorneys to represent the SLC. The SLC’s attorney may advise the SLC on compliance with the law. The SLC’s attorney may also conduct due diligence and investigations for the SLC, including interviews with witnesses, such as employees or past employees of the business.