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A properly constituted Special Litigation Committee of disinterested and independent directors (SLC) empowered by the board to investigate and determine whether the prosecution of derivative claims is in the best interests of the company can be a powerful aspect of a board’s management authority. The SLC procedure is of greatest utility in a pending suit in which pre-suit demand on the board has been excused as futile by a court on a motion to dismiss under Rule 23.1. Even where a shareholder plaintiff has survived a motion to dismiss for failure to make pre-suit demand by showing reasonable doubt concerning the disinterest or independence of a majority of board members, that board can properly delegate its authority concerning litigation decisions on behalf of the corporation to an SLC consisting of disinterested and independent directors.

An SLC must be formed with the utmost care to ensure that its members and advisers can, in appearance and fact, objectively evaluate the merits of a demand-excused suit and the best interests of the corporation when a disabled board cannot. It is frequently said that an SLC must be above suspicion—like Caesar’s wife Pompeia, whom he divorced on mere suspicion of indiscretion.1 Memorable, but as a standard it lacks the particularity needed to provide predictable guidance to practitioners. Last month, the Delaware Court of Chancery issued a lengthy decision in London v. Tyrrell,2 providing detailed guidance on how (i) a court examines the independence of the SLC and the process followed by the SLC in reaching its determination, and (ii) investigative lapses will undermine the court’s confidence in the SLC’s conclusion. The decision admonishes directors that “if the SLC process is to remain a legitimate mechanism,” SLCs must foreclose any reasonable basis to question whether non-merits factors operated in the SLC’s ultimate judgment.

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