Auerbach v. Bennett

In Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979), the New York Court of Appeals held that the business judgment rule shielded from judicial scrutiny the decision of a special litigation committee to terminate a shareholder derivative action. That decision varies significantly from the Delaware approach in its rejection of judicial authority to apply its own business judgment to the committee'ssubstantive recommendations. "To permit judicial probing of such issues," the Auerbach court reasoned, "would be to emasculate the business judgment doctrine ..." 419 N.Y.S.2d at 928, 393 N.E.2d at 1002. The court concluded that the committee's "substantive evaluation of the problems posed and its judgment in their resolution are beyond our reach." Id. The Auerbach Court, in fashioning its deferential view, was careful to state that The business judgment rule does not foreclose inquiry by the courts into the disinterested independence of those members of the board chosen by it to make the corporate decision on its behalf.... Indeed the rule shields the deliberations and conclusions of the chosen representatives of the board only if they possess a disinterested independence and do not stand in a dual relation which prevents an unprejudicial exercise of judgment., 419 N.Y.S.2d at 927, 393 N.E.2d at 1001. In Auerbach, the court concluded: As to the methodologies and procedures best suited to the conduct of an investigation of facts and the determination of legal liability, the courts are well equipped by long and continuing experience and practice to make determinations. In fact they are better qualified in this regard than are corporate directors in general. 419 N.Y.S.2d at 929, 393 N.E.2d at 1003. In Auerbach, the court "examined" the defendants' proof and found that none of the three "disinterested directors" who comprised the special litigation committee had "any prior affiliation with the corporation." 419 N.Y.S.2d at 922, 927, 393 N.E.2d at 997, 1001. The Court further concluded that the defendants "followed prudent practice" in excluding from the decision-making process those individuals who had "personal interests which may conflict with the interests of the corporation." 419 N.Y.S.2d at 928, 393 N.E.2d at 1001. New York's Court of Appeals held that the substantive merits of an independent director committee's decision to terminate derivative litigation against defendant corporate directors are beyond judicial scrutiny and that a court's role in such cases is limited to determining whether the committee acted independently, thoroughly and in good faith. In so holding, the Auerbach court recognized and applied the business judgment doctrine which it stated "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Id. at 629, 419 N.Y.S.2d 920, 393 N.E.2d 994. The Court held: The substantive aspects of a decision to terminate a shareholders' derivative action against defendant corporate directors made by a committee of disinterested directors appointed by the corporation's board of directors are beyond judicial inquiry under the business judgment doctrine, . . .47 N.Y.2d at 623, 419 N.Y.S.2d at 922, 393 N.E.2d at 996. The court appropriately noted that the fact that the independent committee members were appointed by interested directors is an "inescapable" aspect of "the corporation's predicament." Although the situation presents problems, there is no alternative: To assign responsibility of the dimension here involved to individuals wholly separate and apart from the board of directors would, except in the most extraordinary circumstances, itself be an act of default and breach of the nondelegable fiduciary duty owed by the members of the board to the corporation and to its shareholders, employees and creditors. For the courts to preside over such determinations would similarly work an ouster of the board's fundamental responsibility and authority for corporate management. 47 N.Y.2d at 633, 419 N.Y.S.2d at 928, 393 N.E.2d at 1002.