We previously discussed what a Special Litigation Committee was and what the SLC does.  The benefits on whether to appoint an SLC depends on which side of the derivative claim you find yourself.  From the company’s perspective, the SLC can save the company significant time and expense in investigating the derivative claim before protracted litigation.  From the disgruntled owner’s perspective, the SLC’s determination/recommendation will either give credence to the derivative claim or may be the demise of the claim.  Either way, the SLC’s determination/recommendation early in the derivative action may save the derivative plaintiff and individual defendant significant sums in litigation expenses.

Whatever side of the conflict you find yourself, it is imperative to demand the independence of the SLC.  Factors regarding the independence of the SLC include, but are not limited to:

  • whether the members of the SLC are defendants in the litigation;
  • whether the members of the SLC are exposed to direct and substantial liability;
  • whether the members of the SLC are outside, non-management members;
  • whether the members were managers when the alleged wrongdoing occurred;
  • whether the members of the SLC participated in the alleged wrongdoing;
  • whether the members of the SLC approved conduct involving the alleged wrongdoing;
  • whether the members of the SLC had business dealings with the company other than as members or managers; whether the members of the SLC had business or social relationships with one or more of the defendants; whether the SLC received advice from an independent counsel or other independent advisors;
  • the severity of the alleged wrongdoing; and the size of the SLC and whether the manager retains the right to change the number of SLC members during the SLC’s investigation.

Following the appointment of the SLC, if there are questions surrounding the independence of the SLC, it is best to raise these questions immediately.  Because of the costs involved in retaining an SLC, most often a lawyer or retired judge experienced in this area of law, and the costs of the SLC investigation, no party benefits from a protracted investigation followed by a challenge to the independence of the SLC.  It is best to ensure that the SLC is independent from the start rather than having to restart the process if the SLC is later found to be biased.  Moreover, you run the risk of simply looking like a disgruntled participant if you challenge the independence of the SLC after their determination.  During this equitable process, perception in the eyes of the court is important.

Following their appointment, the truly independent SLC will request information from all sides of the dispute during their investigation.  Most often, the SLC will meet with the parties and their respective attorneys to discuss the factual basis surrounding the derivative claim early in the investigation.  As applicable in most areas, you do not get a second chance to make a good first impression.  Thus, it is important to have the factual support, or factual defense, for the derivative claim before meeting with the SLC.  Evidentiary support for the respective positions should come via financial statements, witness statements, emails, etc.  Do not mistakenly be unprepared for a meeting with the SLC.  Instead, look at the meeting with the SLC as a trial; you must convince the SLC that your respective position has evidentiary support on which the SLC can base their determination.    

Following the initial meeting, the parties will often have additional opportunities to provide the SLC with further evidentiary support.  Do not make the SLC do unnecessary researching or digging to support your view of the derivative claim.  If you have the evidentiary support, or come across additional evidentiary support, provide it as soon as possible to the SLC.  The SLC investigation should not be a game of hide-and-seek between you and the SLC.  If you believe the other side of the claim has more information which is not in your possession, inform the SLC as such and request that the SLC obtain such information.  Unlike the unfortunate trend in litigation of simply objecting for the sake of objecting to discovery requests in hopes of ‘hiding the ball’, if the SLC asks for information from you, it is best to provide it.  It would be disingenuous to later object to the adequacy of the SLC’s investigation if you refuse to provide relevant information to the SLC.

If you believe that the SLC has conducted an improper or inadequate investigation, it is best to raise this complaint as soon as possible.  Again, because perception is important during this equitable process, questioning the SLC’s investigation following their determination against you raises the question on whether you are simply raising this issue because the SLC recommended against you or if there really was an issue with the adequacy of the investigation.

Following the SLC’s investigation, the SLC will issue its determination/recommendation.  As discussed above, the truly independent and well investigated determination by the SLC is entitled to significant deference.  Challenging the determination of the independent and well investigated SLC may be fruitless and a waste of you resources.  If, however, the SLC missed something in their investigation or it was later determined that the SLC was not independent, again, it is important to immediately raise these issues with the court. 

The SLC can either be your best friend or your worst enemy.  Knowing the role of the SLC and being properly prepared in dealing with the SLC will help in ensuring the appointment of an independent SLC and the adequacy of the SLC’s investigation.  Knowing the role of the SLC and being properly prepared in dealing with the SLC will also, hopefully, result in a SLC determination favorable to you.  

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney. All information contained in links are the property of the linked site.