Zapata Corp. v. Maldonado

430 A.2d 779 (1981)

  1. Facts:

i.      P brought a derivative suit against D corporation and its officers and board members. P gained his status derivatively, representing all shareholders, deriving his harm from being a shareholder.

ii.      Plaintiff did not institute a demand because each director was named in the suit.  He argued that the special litigation committee that the board would create would be futile because each and every board member had an interest in the suit itself, since they were named defendants.

iii.      The D corporation then instigated an independent investigative committee to look into the matter and determined that the derivative suits would be harmful to the company.

  1.  Issue:

i.      Whether the D’s investigative committee was permitted to review and excuse the derivative lawsuit.

  1. Holding:

i.      D must provide it met 1-3.

  1. The court asks whether the D acted: 1. Independently, 2. In good faith, 3. With a reasonable investigation.
  2. In this case, the court rules that the demand was futile, because all board members were part of the act which is the basis of the lawsuit.

ii.      Next, the court applies their independent business judgment.

  1. The court asks what they would have done if they were in the corp’s position.

iii.      This very rare, but the context of situation warrants this level of intrusion.  The demand in this case was excused because the board was disabled from acting as a result of their conflicted interest in totality.  The SLC here was appointed by a biased board, which presents the potential for structural bias.

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