Zapata Corp. v. Maldonado: Restricting the Power of Special Litigation Committees to Terminate Derivative Suits

When the majority of a board of directors is unable to halt a shareholder's derivative suit due to conflicts of interest, they can delegate power over litigation decisions to Special Litigation Committees (SLCs). Disinterested directors on the SLCs then typically terminate the suit under the bu...

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Bibliographic Details
Published in:Virginia law review 1982-05, Vol.68 (5), p.1197-1215
Main Author: Matejka, Rickey L
Format: Article
Language:English
Subjects:
Boards of directors
Case dismissal
Chancery courts
Comment
Committees
Corporate regulation
Corporations
Directors
Legal judgments
Litigation
Plaintiffs
Shareholder derivative suits
Shareholders
Sole proprietorships
Special
State court decisions
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Summary:When the majority of a board of directors is unable to halt a shareholder's derivative suit due to conflicts of interest, they can delegate power over litigation decisions to Special Litigation Committees (SLCs). Disinterested directors on the SLCs then typically terminate the suit under the business judgment rule. This was condoned in Auerbach v. Bennett. In Zapata Corp. v. Maldonado, the Delaware Supreme Court affirmed the use of SLCs under a 2-tiered test: 1. The board must prove the SLC is independent and has reasons for terminating the suit. 2. The Court may exercise an independent business judgment and permit the suit to proceed to trial. The plaintiff in Zapata initiated suit, was excused from demanding that the board pursue the claim, and litigated for 4 years before an SLC was established and attempted to terminate the suit. Zapata may be restricted to its facts in the future. Other problems with Zapata include an undefined burden of proof.
ISSN:0042-6601
1942-9967
DOI:10.2307/1072891