Mark Richardson is a Partner at Labaton Keller Sucharow LLP and Joel Fleming is a Partner at Equity Litigation Group LLP. This post is based on their recent working paper, and is part of the Delaware law series; links to other posts in the series are available here.
For many years, the special litigation committee (“SLC”) was a nearly forgotten device in derivative litigation in the Delaware Court of Chancery. Chastened by a string of decisions rejecting SLCs’ motions to terminate,[1] boards facing derivative litigation in Delaware almost always chose to litigate on the merits. During that same period, the Delaware plaintiffs’ bar became a serious threat to wayward fiduciaries, extracting billions of dollars in settlements in high-value derivative actions.
Recently, however, the SLC has experienced a dramatic revival. After an eighteen-year drought—from 2003 to 2021—in which there was not a single written opinion granting an SLC’s motion to dismiss, SLCs are now routinely being formed in strong derivative cases, they are routinely moving to dismiss, and their motions are often granted.[2]
The SLC’s newfound popularity has bred deep cynicism and skepticism amongst shareholder advocates. As attorneys who typically represent public stockholders, we are far from alone in observing an increasingly common phenomenon: seemingly results-driven SLC investigations that appear designed to terminate meritorious claims. These “investigations” generally downplay contemporaneous evidence in favor of unsworn, after-the-fact witnesses’ explanations that are neither recorded nor transcribed. They then culminate in a report in support of a motion to terminate that reads more like standard defense-side advocacy than an objective assessment of all relevant evidence.
