Where a disgruntled shareholder finds a willing attorney (or vice versa in some cases), the result is often a demand upon the company to file a lawsuit against certain officers and directors. Many times this demand is made only to satisfy a legal requirement before filing a Shareholder Derivative Lawsuit. A Company need not cede to the shareholder’s demand, but such a demand should not be ignored.
The company and the directors and officers targeted by the demand have several options. One powerful option is to appoint a special litigation committee ("SLC"). A SLC, typically made up of two or more disinterested or independent directors, is tasked with investigating the allegations made by the shareholders against the targeted officers and directors. Upon completing the investigation, the SLC must determine if it is in the best interest of the company to pursue the claims against the officers and directors. If the investigation is conducted properly, and the SLC concludes that it is not in the best interest of the company to pursue the lawsuit, the decision can operate as a complete defense to the pending Shareholder Derivative Lawsuit.
However, due to the powerful effect of a determination by a SLC not to pursue litigation, it is nearly inevitable that the validity of a SLC investigation will be challenged by the shareholder initiating the demand. Thus, it is of the utmost importance for a SLC to conduct its investigation properly. A single misstep, from the time of formation to the final report, may render the SLC’s investigation useless - both eliminating the powerful effect of a SLC determination and wasting time, money, and insurance reserves, not to mention creating new claims against directors for failing to adequately investigate shareholder allegations.
Knowledgeable legal counsel will make all the difference in determining whether a SLC produces a report resulting in the dismissal of a shareholder claim or merely runs up costs and aggravates the shareholder claims. The first step that any SLC must take is to retain its own counsel to guide it through the process from start to finish. Competent SLC attorneys will analyze the make-up of the SLC to determine that each of its members will stand up to judicial scrutiny as being independent and reliable to make the proper conclusions. From that point, counsel for the SLC will ensure the SLC is taking all necessary steps to adequately investigate the shareholder's claims and produce a binding final report and recommendation.
The bottom line: knowledgeable attorneys are essential to making sure the SLC does what it takes to take the reigns of the corporation back from a demanding shareholder
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