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Keywords

defendantlitigationmotioncorporationgood faithmotion to dismiss
defendantlitigationmotioncorporationmotion to dismiss

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Lewis v. Fuqua, 502 A.2d 962, 54 USLW 2355, 11 Del. J. Corp. L. 928

Facts

Harry Lewis, a shareholder of Fuqua Industries, Inc., filed a derivative action alleging that J.B. Fuqua and other directors usurped a corporate opportunity to purchase Triton Common Stock. The Board of Fuqua Industries formed a Special Litigation Committee, consisting of Terry Sanford, to investigate the claims. The Committee concluded that the corporation had no interest in the stock purchase, but the court found issues regarding the independence of the Committee and the reasonableness of its investigation.

The Complaint alleged that J.B. Fuqua diverted an opportunity to purchase stock in the Triton Group Limited (“Triton”) from Fuqua Industries, Inc. to himself and fourteen other individual defendants—thirteen of whom are present or former directors or officers of the corporation, or both.

Issue

Did the Special Litigation Committee act independently and establish a reasonable basis for its recommendation to dismiss the derivative action?

Did the Special Litigation Committee act independently and establish a reasonable basis for its recommendation to dismiss the derivative action?

Rule

The court applied the two-step test from Zapata v. Maldonado, which requires the moving party to prove the independence and good faith of the Special Litigation Committee and the reasonableness of its conclusions.

The Delaware Supreme Court in Zapata v. Maldonado, Del.Supr., 430 A.2d 779 (1981) set forth a procedure for Court review of a report of a Special Litigation Committee appointed to review a stockholder's derivative suit where the committee recommends that a motion to dismiss suit be filed.

Analysis

The court found that the Special Litigation Committee, comprised of a single member, Terry Sanford, raised questions of independence due to his connections with J.B. Fuqua and his status as a defendant. Additionally, the Committee's conclusions regarding the corporate opportunity theory lacked a reasonable basis, as they failed to adequately consider the facts surrounding the Board's decision not to pursue the stock purchase.

Unlike in Kaplan v. Wyatt, Del.Ch., 484 A.2d 501 (1984), aff'd., Del.Supr., 51 A.2d 572 (1985), where the Special Litigation Committee consisted of two members, the Committee here consisted of but one person—Terry Sanford. Although Mr. Sanford is well renowned, there are circumstances which must lead the Court to have questions as to his independence.

Conclusion

The court denied the motion to dismiss, allowing the derivative action to proceed, as the Special Litigation Committee did not meet the required standards of independence and reasonableness.

The motion to dismiss is therefore dismissed.

Who won?

Harry Lewis prevailed in the case because the court found that the Special Litigation Committee did not demonstrate independence or a reasonable basis for its conclusions, allowing the derivative action to continue.

The court found that the Special Litigation Committee did not meet the required standards of independence and reasonableness, allowing the derivative action to continue.

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