In Sutherland v. Sutherland, 2008 WL 2221770 (Del. Ch., May 29, 2008), read opinion here, the Delaware Chancery Court denied a motion to reargue its May 5 decision, pursuant to Chancery Rule 59(f), in which it rejected the report of a one-person Special Litigation Committee (SLC). The prior decision sought to be reargued was summarized on this blog here. In addition to the foregoing decisions, several other prior Chancery decisions involving these parties, which provide more background on this case, have been summarized on this blog and are linked here.

In the course of repelling the request by the nominal defendant company that the court second-guess its opinion, the Chancery Court recited well-settled law regarding the standard of review used by the court to evaluate the SLC’s conclusions and investigations as articulated in the seminal decision of Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), and the court provided examples of what an SLC should NOT do as well as reiterating precatory practices.

Initially the court quoted from its prior decision to emphasize that the SLC seeking to dismiss derivative litigation has the burden of proof, akin to a motion for summary judgment under Rule 56, as follows:

The SLC is not entitled to any presumptions of independence, good faith, or reasonableness. Rather, the corporation has the burden of proof under Rule 56 standards, which require the corporation to establish the absence of any material issue of fact and its entitlement to relief as a matter of law. In addition, as the court in Kaplan v. Wyatt noted, the motion must be supported by a thorough record. It seems … that what the Committee did or did not do, and the actual existence of the documents and the persons purportedly examined by it, should constitute the factual record on which the decision as to the independence and good faith of the Committee, and the adequacy of its investigation in light of the derivative charges made, must be based. Each side has the opportunity to make a record on the motion. If the court is satisfied with the SLC’s independence and good faith, and the reasonableness of its inquiry, the court may nonetheless exercise its own business judgment and deny the motion to dismiss. FN6

FN6. Sutherland v. Sutherland, 2008 WL 1932374, at *3 (Del. Ch. May 5, 2008) (citations omitted)[emphasis added].

Citing to prior cases (FN 7) comparing the need for a one-person SLC to be "above reproach, like Caesar’s wife",  the court noted that this rubric also applied to the evaluation of the SLC’s independence as well as its good faith and the reasonableness of its investigation and conclusions.

It did not help the SLC’s argument that the one-person SLC apparently "destroyed its original interview notes, after using them to prepare cursory and incomplete summaries of the interviews it conducted, which undermined the court’s confidence in the good faith and reasonableness of the SLC’s investigation."

NOTE TO FUTURE SLCs: Consider carefully, in light of this opinion, whether it is a good idea to destroy notes of interviews.

ANOTHER SUGGESTION: Don’t be too quick to omit reference to information about claims even if the SLC thinks the company has good defenses to assert against those claims.

The foregoing "suggestion" comes directly from the court’s criticism of the SLC’s omission from its report  of payments that related to the claims that the executives were using company assets for their personal benefit–inappropriately. The court reasoned that even if the SLC thought that there was a good statute of limitations defense to claims relating to that information: " a good faith effort to deal with the King payments issue necessarily required that the report both disclose the facts relating to the payments and present analysis of  Perry’s [the executive involved] defense".

LAST NOTE: Provide documentation to support the most important factual conclusions of the SLC’s investigation.  The court was not impressed, to say the least, with the lack of documentary support for key representations by the SLC that certain disputed benefits for the company executives were included in their W-2s. Compounding the inability of the company to satisfy its burden of proof was an incomplete review of the company ledger that admittedly failed to capture two large payments at issue in the case. [In the court’s prior opinion, the court noted that on the one day that the company’s record’s were reviewed, the review started late in the day, was interrupted by a leisurely lunch, and ended before the normal end of normal business hours.]