Zapata Corp. v. Maldonado
Citation: 430 A.2d 779 (Delaware Supreme Court, 1981)
Facts
Maldonado, a Zapata shareholder, filed a derivative suit against Zapata’s directors alleging breaches of fiduciary duty in connection with stock option grants. He did not make a pre-suit demand on the board, claiming demand was excused as futile because a majority of the board was implicated. Zapata’s board then created a Special Litigation Committee (SLC) — composed of directors appointed after the suit was filed — which investigated the claims and concluded the suit was contrary to the corporation’s best interests. The SLC moved to dismiss.
Issue
What standard governs a corporation’s motion to dismiss a derivative suit based on the recommendation of a Special Litigation Committee, and may a court independently review the SLC’s business judgment?
Holding
A two-step framework governs SLC motions to dismiss: (1) the court must inquire into the independence and good faith of the SLC and the adequacy of its investigation; and (2) the court may apply its own independent business judgment to determine whether the case should proceed, even if the SLC satisfies step one.
Rule
An SLC motion to dismiss a derivative suit is not automatically protected by the business judgment rule, even if the SLC is composed of independent directors. Courts retain discretion at step two to deny dismissal if they believe, in their independent business judgment, that the suit should continue in the corporation’s best interests. This framework reflects a compromise between the demand requirement’s deference to the board and the recognition that an SLC appointed by an interested board may have structural bias.
Significance
Zapata is the leading Delaware case on Special Litigation Committees and the derivative suit mechanism, and reflects deep tension between corporate law’s deference to board authority and courts’ concern that directors will use SLCs to protect each other. The two-step Zapata test is contrasted with the more deferential approach in Auerbach v. Bennett (New York), which applies the business judgment rule to SLC decisions after verifying independence and process. The case is essential for understanding derivative suit procedure, demand requirements, and the role of courts in policing self-dealing by boards.