Special Litigation Committees: Are They Appropriate?

Sometimes litigation is inevitable for corporations. There are many ways to prepare and combat any possible allegations. One such way is appointing a special litigation committee. These committees are most appropriate when facing allegations by individuals, mostly shareholders, within a corporation accuse the corporation of wrongdoing. In a typical scenario, a shareholder represents the interests of the corporation in a shareholder derivative action. By statute, the shareholder must first go to the board of directors, explain their claim, and seek out directors to commence a lawsuit. Because it is all too common that a director is unable to acknowledge wrongdoing on his owner part, the directors may then set up special litigation committees. So when are special litigation committees appropriate and how should they be set up?

Special litigation committees will most likely be sought out when a director is accused of wrongdoing, as explained above. Corporations are often accused of wrongdoing, whether it is by undertaking actions that are improper or even illegal. Directors are often at the heart of the accusations with questionable decisions. Because directors often will not admit wrongdoing, it may be in the best interests of the corporation to analyze the actions of the corporation and decide whether or not a lawsuit to prevent such actions is in the best interests of the corporation. Because directors must prove they are truly independent, special litigation committees will help prove true independence and show that directors are acting within the duty of loyalty.

Simply setting up a special litigation committee is not sufficient. The directors who appoint such committees must also prove they are independent and disinterested. The directors carry this burden. There is often a two-step process to evaluate whether a special litigation committee is independent. The court will first look to the independence of the members of the committee. The court will then use its own business judgment to determine whether it was in the best interests of the corporation to pursue a lawsuit or have it terminated. Many factors play into whether or not the committee will be deemed independent, including fees, business relationships, personal relationships, and the role of charities (such as in whether promises for donations were made).

Special litigation committees can be costly, but also worthwhile in defending a corporation to its shareholders. Such a committee must be independent and disinterested. Not all internal conflicts or accusations require special litigation committees. Consulting the right legal team with experience handling special litigation committees could help determine whether such a committee is right for your corporation. Call the Trembly Law Firm at (305) 431-5678 today to schedule your consultation.