Special Litigation Committee California Case Law
The only California decision concerning the special litigation committee is Will v. Engebretson & Co. (1989) 213 Cal. App. 3d 1033 261 Cal. Rptr. 868.
In Will, a stockholder's derivative action, the corporation filed a motion for summary judgment, asserting the special litigation committee defense. (Id., at p. 1037.)
The trial court ruled that there were triable issues of fact " 'as to the adequacy of the investigation and as to the good faith and the independence of the committee.' " (Ibid.)
It proceeded, however, to treat the motion as a " 'hybrid dismissal' motion"; it held a" 'good faith' hearing," determined that the committee was independent and acted in good faith, and dismissed the action. ( Id., at p. 1038.)
The appellate court began by noting:
"The business judgment rule has been held, among other things, to permit a corporation to appoint a special litigation committee to decide whether the maintenance of a shareholder's derivative suit is in the corporation's best interests.
The committee may decide that the suit should be dismissed and, if it does, the corporation may make a motion in the trial court to dismiss the suit. It may demur, move for judgment on the pleadings, or seek summary judgment." ( Will v. Engebretson & Co., supra, 213 Cal. App. 3d at pp. 1040-1041, fn. omitted, citing Lewis v. Anderson, supra, 615 F.2d at p. 783.)
"However, courts which have considered the issue have concluded that judicial review of the independence, good faith, and investigative techniques of a special litigation committee is governed by traditional summary judgment standards." (Will, supra, at p. 1041.)
The court concluded the trial court erred by holding a good faith hearing. Once the trial court denied the motion for summary judgment, the plaintiff was entitled to "a trial on the merits as opposed to a 'limited review' of the merits regarding the issue of the good faith and independence of the committee." (Id., at p. 1043.)
The plaintiff had argued the trial court should have used the modified version of the defense, under which the trial court is required to apply its own "independent business judgment." (Will v. Engebretson & Co., supra, 213 Cal. App. 3d at p. 1042, fn. 5, citing Zapata Corp. v. Maldonado, supra, 430 A.2d 779.)
Because the appellate court reversed on procedural grounds, it specifically declined to decide whether it should follow the "two-step approach in Zapata." ( Will, supra, at pp. 1039, 1042, fn. 5.)