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Keywords

plaintiffdefendantlitigationpleamotiongood faithmotion to dismiss
defendantlitigationappealtrialmotioncorporationgood faith

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In re PSE & G Shareholder Litigation, 173 N.J. 258, 801 A.2d 295

Facts

This case involves derivative actions brought by shareholders of Public Service Enterprise Group, Incorporated and its subsidiary, Public Service Electric & Gas Company, against certain directors and officers for alleged mismanagement of nuclear power facilities. The plaintiffs claimed that the directors recklessly mismanaged the Salem and Hope Creek nuclear plants, leading to significant safety violations and financial losses. A series of malfunctions and regulatory fines prompted the shareholders to demand legal action against the board, which was ultimately rejected, leading to the litigation.

This appeal stems from four derivative actions brought by shareholders of Public Service Enterprise Group, Incorporated (Enterprise), a public utility holding company, and its wholly-owned subsidiary, Public Service Electric & Gas Company (PSE & G) (collectively, the company). Defendants are certain directors of both entities, and include current and former PSE & G officers.

Issue

The main legal issues were whether the shareholders adequately pleaded demand futility and whether the board's rejection of the demand was protected under the business judgment rule.

The principal issue concerns the proper standard of review to be applied when evaluating whether a corporation's board of directors has responded properly in rejecting a shareholder's demand to commence legal action on the corporation's behalf.

Rule

The court established that for shareholder plaintiffs to withstand a motion to dismiss for failure to make a demand, they must plead with particularity facts creating a reasonable doubt about the directors' disinterest and independence, or that the challenged transaction was a valid exercise of business judgment. A modified business judgment rule applies to a board's decision to reject a demand.

We hold that a modified version of the business judgment rule is the appropriate legal standard in such circumstances. Unlike the traditional approach, the modified business judgment rule places an initial burden on directors to demonstrate that they acted reasonably, in good faith, and in a disinterested fashion in arriving at their decision to reject a shareholder's demand or to terminate existing litigation.

Analysis

The court applied the modified business judgment rule, which requires the board to demonstrate that it acted reasonably, in good faith, and in a disinterested manner when rejecting the shareholder's demand. The court found that the board had taken steps to address the issues at the nuclear facilities and had established an information network to ensure that material issues were brought to their attention. The findings from the Kasowitz firm's investigation supported the board's actions, leading the court to conclude that the directors satisfied the modified business judgment rule.

The court adopted a modified version of the business judgment rule that places an initial burden on a corporation to establish the independence, good faith, and reasonableness of directors in rejecting a shareholder's complaint.

Conclusion

The court affirmed the lower court's decision, concluding that the directors acted within their rights under the modified business judgment rule and that the shareholders failed to establish grounds for their derivative action.

Affirmed.

Who won?

Defendants (the board of directors) prevailed because they demonstrated that their actions were reasonable and in good faith, satisfying the modified business judgment rule.

Defendants moved to dismiss all four actions. The trial court denied that motion in December 1996. Specifically, the court excused Fink and Datz from the demand requirement, determining that the shareholders had alleged sufficient facts to create a reasonable doubt that the directors were disinterested or independent.

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