Auerbach v. Bennett
393 N.E.2d 994 (1979)



Facts:General Telephone & Electronics (GTE) performed an internal investigation to determine whether bribes had been paid to foreign public officials or political parties. Based on the report, matters were brought to the attention of GTE's board, which referred the matter to its audit committee. With the assistance of a Washington, D.C., law firm that acted as special counsel and Arthur Andersen & Co., the committee investigated whether bribes had been paid. Several months later, the audit group released and filed with the SEC a report stating that GTE and its subsidiaries had made foreign payments of more than $11 million and that some of the transactions were handled by GTE's directors. Based on the report, Auerbach (P), a GTE shareholder, filed a derivative suit seeking to have those corporate officials and members of Arthur Andersen reimburse GTE for the bribes. The board later established a special litigation committee, which was to be a liaison between the board and the general counsel addressing GTE's position on the shareholder derivative claims. The committee was comprised of three of GTE's newest directors, who were elected after the scandal. The committee reported that Arthur Anderson had performed its audit in good faith. It found that none of the individual defendants gained personally from the money paid to foreign officials, and concluded that absent any valid claims against these individuals, the derivative suits would simply pose a drain on management's time and resources. Auerbach (P), the initial plaintiff, decided against appeal, but Wallenstein (P), another shareholder, proceeded with the action.

Issue: May the court inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee?

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.

Holding: The Supreme Court, Appellate Division,held that intervening stockholder was aggrieved party who could appeal and that business judgment doctrine could not properly be invoked to permit summary dismissal of suit, and appeal was taken by permission. The Court of Appeals, held that no basis was shown to warrant judicial inquiry as to disinterested independence of members of special litigation committee, who were appointed by corporation's board of directors after shareholder's derivative action was filed against certain corporate directors, or as to appropriateness and sufficiency of investigative procedures chosen and pursued by committee, and thus business judgment rule shielded from judicial scrutiny decision of committee not to prosecute shareholder's derivative action.

Analysis: A specially appointed committee of disinterested directors acting on behalf of defendant, a board of directors of a corporation made a decision to terminate a shareholders' derivative action. The plaintiff shareholders filed suit to challenge the decision, and defendant filed motions for summary judgment and to dismiss. The trial court granted defendant's motions, and the intermediate court reversed. The court found that the decision of defendant's committee was beyond judicial inquiry under the business judgment doctrine.