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(Code 1981, §14-2-744, enacted by Ga. L. 1988, p. 1070, § 1.)
- For annual survey of law of business associations, see 43 Mercer L. Rev. 85 (1991). For survey article on business associations, see 60 Mercer L. Rev. 35 (2008). For article, "2013 Georgia Corporation and Business Organization Case Law Developments," see 19 Ga. St. B. J. 28 (April 2014). For comment, "Deciding Who Should Decide to Dismiss Derivative Suits," see 39 Emory L.J. 937 (1990).
Source: Model Act, § 7.44 (under consideration, 1987). There was no counterpart in former Georgia law.
Neither the prior version of the Model Act nor former Georgia law expressly provided what happens when a board of directors properly rejects a demand to bring an action. Judicial decisions indicate that a derivative action should be dismissed under these circumstances. See Aronson v. Lewis, 473 A.2d 805 (Del. Supr. 1984).
Subsection (a) specifically provides that the proceeding may be dismissed if there is a proper determination that the maintenance of the proceeding is not in the best interests of the corporation. Where the Model Act provided that the court "shall dismiss" the suit, the Code substitutes "may dismiss." This reflects the ultimate power of the court to make determinations about the independence and good faith of the persons making the decision to dismiss. It apparently gives the court discretion in refusing to dismiss an action, regardless of whether the corporation has shown that the determination to dismiss was made in full compliance with subsection (a). This represents a change from the language recommended by the Revision Committee.
Subsection (a) requires, before dismissal, that the court find that the determination has been made by the appropriate persons in good faith after conducting a reasonable investigation upon which their conclusions are based. The burden is on the corporation to prove the good faith and reasonableness of the investigation as well as the independence of the persons making the determination if the determination is made by independent directors.
This provision represents a compromise between the two principal lines of cases in this area. In the first line of cases represented by Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979), the court held that judicial review should be limited to an analysis of the independence and good faith of the committee and the thoroughness of its investigation and that the burden of proof was on the plaintiff to show facts sufficient to require a trial on any material issue of fact. The second line, represented by Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. Supr. 1981), differed from the Auerbach test in three respects: (1) it is made clear that the burden is on the corporation to prove the independence, good faith, and reasonable investigation of the committee; (2) the court may examine not only the procedures followed but also the reasonableness of the bases for the committee's conclusions; and (3) the court may take a second step and determine, applying its own business judgment, whether the motion should be granted.
The Code does not clarify what grounds, beyond a determination made in good faith, after reasonable investigation, by a disinterested body, will be considered by a court. Consideration of whether the conclusion to dismiss was reasonably based would represent a middle ground between deference to the investigators and total displacement of their function. A subsequent Delaware decision has confirmed that the second step, exercising the court's own business judgment, is discretionary with the trial court. Kaplan v. Wyatt, 499 A.2d 1184 (Del. Supr. 1985).
Subsection (b) prescribes the manner in which the determination in subsection (a) is to be made. The subsection provides that the determination may be made by a majority vote of a quorum of independent directors if there is a quorum of independent directors, or by a committee of independent directors. These provisions parallel the mechanics for determining entitlement to indemnification in Section 14-2-855 of the Code except that clause (2) provides that the committee of independent directors shall be appointed by a vote of the independent directors only, rather than the entire board. In this respect this clause differs from Section 14-2-824 of the Code which requires the approval of at least a majority of a quorum of the entire board to take action. This approach has been taken to ameliorate to some degree the criticism in some cases that special litigation committees suffer from a structural bias because of their appointment by vote of non-independent directors. See Hasan v. CleveTrust Realty Investors, 729 F.2d 372, 376-77 (6th Cir. 1984).
The decisions that have examined the qualifications of members of special litigation committees have required that they be both "disinterested" in the sense of not having a personal interest in the transaction being challenged as opposed to a benefit which devolves upon the corporation or all shareholders generally, and "independent" in the sense of not being influenced in favor of the defendants by reason of personal or other relationships. See Aronson v. Lewis, 473 A.2d 805, 812-16 (Del Supr. 1984). Only the word "independent" has been used in subsection (b) because this word necessarily also includes the requirement that a person have no interest in the transaction. The concept of an independent director is not intended to be limited to non-officer or "outside" directors but may in appropriate circumstances include directors who are also officers.
Subsection (b)(3) also provides for a determination by a panel of one or more independent persons appointed by the court, a procedure which has been adopted in Virginia. Stock Corporation Act Section 13.1-672D. The subsection provides for the appointment only upon motion by the corporation. This would not, however, prevent the court on its own initiative from appointing a special master pursuant to applicable rules of civil practice.
Although subsection (b)(2) requires a committee of at least two directors, subsection (b)(3) permits the appointment of only one person in recognition of the potentially increased costs to the corporation for the fees and expenses of an outside person.
Many of the special litigation committees involved in the reported cases consisted of independent directors who were elected after the alleged wrongful acts by the directors who were named as defendants in the action. Subsection (c)(1) makes it clear that the participation of non-independent directors or shareholders in the nomination or election of a new director shall not prevent the new director from being considered independent. Clauses (2) and (3) also confirm the decisions by a number of courts that the mere fact that a director has been named as a defendant or approved the action being challenged does not cause the director to be considered not independent.
Cross-References "Derivative proceeding" defined, see § 14-2-740.
- Under Georgia law, both before and after the adoption of the new Business Corporation Code effective July 1, 1989, special litigation committees were authorized, and committees had properly delegated authority to act to a board of directors. Hence, the court did not err in dismissing a derivative proceeding based on a determination made by that committee. Millsap v. American Family Corp., 208 Ga. App. 230, 430 S.E.2d 385 (1993).
- Trial court did not err in dismissing the shareholder derivative action filed by the shareholder, as it was within the trial court's discretion to dismiss the action once the shareholder failed to initiate discovery to determine whether the report filed by the special litigation committee that responded to the shareholder's claims of corporate improprieties and which concluded that the shareholder's claims were meritless was made in good faith and properly concluded that pursuing a lawsuit against the corporation was not in the corporation's best interests. Thompson v. Scientific Atlanta, Inc., 275 Ga. App. 680, 621 S.E.2d 796 (2005).
- In a derivative action suit, the trial court abused its discretion when it approved a settlement and dismissed the action since the $2.54 million that was part of the settlement agreement was to be paid directly to the suing shareholder, with no real gain being obtained on behalf of the corporation. Stephens v. McGarrity, 290 Ga. App. 755, 660 S.E.2d 770 (2008).
- Trial court did not abuse the court's discretion in dismissing a shareholder's derivative action suit because the challenging shareholder failed to provide evidence to refute the evidence of the board and executives that the demand review committee members were independent. Benfield v. Wells, 324 Ga. App. 85, 749 S.E.2d 384 (2013).
- 19 Am. Jur. 2d, Corporations, § 2105 et seq.
- Propriety of termination of properly initiated derivative action by "independent committee" appointed by board of directors whose actions (or inaction) are under attack, 22 A.L.R.4th 1206.
Total Results: 1
Court: Supreme Court of Georgia | Date Filed: 1993-09-13
Citation: 434 S.E.2d 455, 263 Ga. 412, 93 Fulton County D. Rep. 3300, 1993 Ga. LEXIS 627
Snippet: (directors-and-officers liability insurance); and OCGA § 14-2-744 (termination of derivative proceedings by board