Auerbach v. Bennett
Citation and Court
Auerbach v. Bennett, 393 N.E.2d 994 (N.Y. 1979)
Facts
Shareholders of General Telephone & Electronics (GTE) filed a derivative suit alleging that officers and directors made improper payments to foreign government officials. The GTE board formed a Special Litigation Committee (SLC) composed of three disinterested directors who had joined the board after the alleged misconduct. After investigation, the SLC concluded that the suit was not in the corporation’s best interests and moved to dismiss.
Issue
What level of judicial deference is owed to a Special Litigation Committee’s recommendation to dismiss a shareholder derivative suit?
Holding
The New York Court of Appeals held that the business judgment rule applies to the SLC’s decision to dismiss the derivative suit, and courts should defer to the committee’s recommendation as long as the committee was independent and followed proper procedures in reaching its decision.
Rule / Doctrine
When a Special Litigation Committee composed of disinterested directors investigates a derivative claim and recommends dismissal, courts apply the business judgment rule to that recommendation. Courts review the independence of the committee members and the procedural integrity of the investigation, but do not independently evaluate the substantive merits of the committee’s conclusion. If the committee was independent and its process was adequate, the court should defer to its business judgment.
Significance
Auerbach represents the New York approach to SLC dismissals, which is notably more deferential than either Delaware’s Zapata two-step test or the Second Circuit’s Joy v. North independent cost-benefit analysis. The case is frequently compared to those alternatives to illustrate the spectrum of judicial deference to SLC recommendations. Under Auerbach, structural independence and procedural propriety are sufficient for deference; courts do not second-guess the committee’s ultimate judgment.