Auerbach v. Bennett

393 N.E.2d 994 (1979).

Facts:

  • The audit committee of General Telephone & Electronics Corporation reported evidence of bribes and other kickbacks related to dealings with overseas officials.
  • Thereafter, these findings were reported to the SEC
  • After this was made public, P (a shareholder) filed suit against the board derivatively.
  • The board then adopted a special litigation committee to handle the derivative lawsuit.
  • The SLC determined that it wouldn’t be in the company’s best interest (company’s interest because the P is suing derivatively).  The SLC argued that none of the board members benefited from the bribes and that the lawsuit would be a waste of company resources.
    • A DC law firm helped the audit committee with the investigation.
    • The findings were not only that bribes had occurred, but that certain board members had participated directly in the bribes and that total foreign illicit payments were around $11M.
    • The committee was comprised of three new GTE directors who were uninvolved in the bribes and entirely new to the company.

Issue:

  • Whether the Board’s SLC was a violation of the business judgment rule?
    • More precisely, can a court inquire into the sufficiency of the investigation under BJR analysis in a derivative suit?

Holding:

  • Yes.

Reasoning:

  • The review of the SLC is in two parts overall:

(1) The procedural aspect of the SLC, including the selection of committee members and investigative thoroughness.

(2) The final decision of the SLC

  • From the above (1) is permitted for judicial review and within the court’s area of expertise.
  • Part (2) is subject to deference under the Business Judgment Rule.
  • “When a board of directors delegates its authority to a committee of disinterested members, the official determination of those members will be accorded due deference under the business judgment rule.”
  • The SLC’s decision is afforded deference in this case and the ultimate decision was adequate.
    • The court found that the selection of SLC members and the investigative procedures were adequate in the instant case.

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