Chancery Grants Special Litigation Committee’s Zapata Motion, Finds Committee Was Sufficiently Independent and Reasonable

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Diep v. Sather, C.A. No. 12760-CM (Del. Ch. July 30, 2021)

Under Zapata, when analyzing a motion to dismiss by a special litigation committee, the court evaluates whether the committee was independent, acted in good faith, and had a reasonable basis for its conclusions. The court then applies its own independent business judgment to determine whether dismissal is in the best interest of the corporation. Here, the plaintiff challenged the independence of the special litigation committee and the reasonableness of its investigation and findings.

Under Zapata, when analyzing a motion to dismiss by a special litigation committee, the court evaluates whether the committee was independent, acted in good faith, and had a reasonable basis for its conclusions. The court then applies its own independent business judgment to determine whether dismissal is in the best interest of the corporation. Here, the plaintiff challenged the independence of the special litigation committee and the reasonableness of its investigation and findings.

In regard to independence, the Court rejected the plaintiff’s arguments that the committee members had prejudged the action, purportedly because they were on the board when the corporation moved to dismiss, reasoning that the plaintiff failed to factually support this allegation. Furthermore, the Court found that the committee was independent despite social interactions and social relationships between committee members and other interested parties, including overlapping tenures on a board of a nursing school by one director and social interactions focused on their children for another director. In doing so, the Court found that these interactions were not significant enough to allow for a finding that the committee members were not independent.

The Court also concluded that the committee’s investigation was reasonable. Contrary to the plaintiff’s characterization, the committee had properly investigated a prior settlement agreement related to the current litigation and had properly investigated all theories of recovery as asserted in the plaintiff’s complaint. It was not required to investigate theories not asserted in the complaint. The Court also found that the committee’s conclusions had “reasonable bases” and were arrived at in good faith. The fact that it drew “less nefarious” inferences from the facts than the plaintiff did not undermine the committee’s investigation. With respect to Zapata’s second step – whether dismissal would be in the corporation’s best interests – the Court found that a decision that dismissal was in the corporation’s best interests was within the range of reasonable outcomes that a disinterested and independent decision-maker could reasonably accept. 

Therefore, the Court upheld the committee’s findings and granted its motion to dismiss.

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