In re PSE & G Shareholder Litigation
| Citation | 173 N.J. 258,801 A.2d 295 |
| Court | United States State Supreme Court (New Jersey) |
| Decision Date | 23 July 2002 |
| Parties | In re PSE & G SHAREHOLDER LITIGATION. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan, derivatively on behalf of and for the benefit of Public Service Enterprise Group, Incorporated and Public Service Electric & Gas Company, Plaintiffs-Appellants, v. Lawrence R. Codey; E. James Ferland; Leon R. Eliason; Steven E. Miltenberger; Joseph J. Hagan; and Stanley LaBruna, Defendants-Respondents, and Public Service Enterprise Group Incorporated and Public Service Electric & Gas Company, Nominal Defendants-Respondents. A. Harold Datz Pension and Profit Sharing Plan, Plaintiff-Appellant, and Gail Dorff, derivatively on behalf of and for the benefit of Public Service Enterprise Group, Incorporated and Public Service Electric & Gas Company, Plaintiff, v. Lawrence R. Codey; E. James Ferland; Leon R. Eliason; Steven E. Miltenberger; Joseph J. Hagan; and Stanley LaBruna, Defendants-Respondents, and Public Service Enterprise Group Incorporated and Public Service Electric & Gas Company, Nominal Defendants-Respondents. Public Service Enterprise Group Incorporated by G.E. Stricklin derivatively in her capacity as a shareholder, Plaintiff-Appellant, v. E. James Ferland; Irwin Lerner; Marilyn M. Pfaltz; Richard J. Swift; Lawrence R. Codey; Ernest H. Drew; James C. Pitney; T.J. Dermot Dunphy; Raymond V. Gilmartin; Josh S. Weston and Steven E. Miltenberger, Defendants-Respondents, and Shirley A. Jackson, Defendant, and Public Service Enterprise Group Incorporated, Nominal Defendant-Respondent. |
Ruthann Gordon, a member of the Pennsylvania bar, Philadelphia, PA, argued the cause for appellants Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan and A. Harold Datz Pension and Profit Sharing Plan (Cohn Lifland Pearlman Herrmann & Knopf, attorneys, Saddle Brook; Ms. Gordon and Peter S. Pearlman, Saddle Brook, on the briefs).
Mark C. Rifkin, a member of the Pennsylvania, Paoli, PA and New Jersey bars, argued the cause for appellant G.E. Stricklin (Sherman, Silverstein, Kohl, Rose & Podolsky, attorneys, Pennsauken; Mr. Rifkin and Alan C. Milstein, Pennsauken, on the briefs).
Harold G. Levison, New York City, argued the cause for respondents Lawrence R. Codey, E. James Ferland, Irwin Lerner, Marilyn M. Pfaltz, Richard J. Swift, Ernest H. Drew, James C. Pitney, T.J. Dermot Dunphy, Raymond V. Gilmartin, Josh S. Weston; and Michael R. Griffinger, Newark, argued the cause for respondents Steven E. Miltenberger, Leon R. Eliason, Joseph J. Hagan and Stanley La-Bruna. (Kasowitz, Benson, Torres & Friedman and Zazzali, Fagella & Nowak, New York City, for Lawrence R. Codey and E. James Ferland; Connell, Foley & Geiser and William E. Frese, Newark, for Public Service Enterprise Group Incorporated and Public Service Electric & Gas Company; Gibbons, Del Deo, Dolan, Griffinger & Vecchione, Newark, for Leon R. Eliason, Steven E. Miltenberger, Joseph J. Hagan and Stanley LaBruna; Mr. Levison, Mr. Griffinger, Mr. Frese, Kenneth I. Nowak, Newark and Kevin R. Gardner, Roseland, on the briefs).
Jason S. Feinstein, Trenton, submitted a letter in lieu of brief on behalf of amicus curiae, New Jersey Chamber of Commerce (Sterns & Weinroth, attorneys).
We are called on to address certain questions of first impression regarding the law of business organizations in New Jersey. The principal issue concerns the proper standard of review to be applied when evaluating whether a corporation's board of directors has responded properly in rejecting a shareholder's demand to commence legal action on the corporation's behalf. We hold that a modified version of the business judgment rule is the appropriate legal standard in such circumstances. Unlike the traditional approach, the modified business judgment rule places an initial burden on directors to demonstrate that they acted reasonably, in good faith, and in a disinterested fashion in arriving at their decision to reject a shareholder's demand or to terminate existing litigation. We further hold that the lower courts correctly applied that standard when dismissing the derivative litigation in this case.
This appeal stems from four derivative actions brought by shareholders of Public Service Enterprise Group, Incorporated (Enterprise), a public utility holding company, and its wholly-owned subsidiary, Public Service Electric & Gas Company (PSE & G) (collectively, the company). Defendants are certain directors of both entities, and include current and former PSE & G officers. (For convenience, we do not distinguish between members of the Enterprise and PSE & G boards; unless otherwise indicated, we refer to them collectively as the Board.)
PSE & G operates the Salem and Hope Creek nuclear power plants located in southern New Jersey. During the relevant period, a series of malfunctions and safety violations plagued the Salem plant, causing federal regulators to assess significant fines against the company. Hope Creek also experienced problems, but not as frequently as those that had occurred at Salem. In a nutshell, plaintiffs allege that defendants recklessly mismanaged both facilities to the company's financial detriment.
We recount the most noteworthy events. In February 1983, the Salem plant's reactor protection systems failed to operate automatically, requiring employees to shut down the reactors manually. Later, in November 1991, one of the turbines at the Salem plant exceeded its normal speed, causing parts of several blades to fly off its shaft. In December 1992, nuclear department managers were accused of harassing two engineers who tried to file an incident report in response to a safety concern at the plant. In that same month, an employee inadvertently turned off the plant's overhead annunciator system, which alerts plant employees to alarm conditions. That misstep went undetected by management and operations personnel for ninety minutes.
In 1993, management and equipment failures continued to plague the Salem facility. In June of that year, PSE & G shut down Salem unit two due to a failure in the rod control system. One year later, PSE & G shut down Salem unit one and declared an alert when marsh grass clogged that unit's water coolant system. In 1995, PSE & G shut down both Salem units because of a failure of two different pieces of equipment.
In 1995, problems also arose at the Hope Creek plant. In April, a release of radioactive material occurred during maintenance operations. Three months later, a planned shutdown went awry when the plant's operators left a discharge valve open, causing an increase in the reactor coolant temperature. The United States Nuclear Regulatory Commission (NRC) took action in response to each event at the Salem and Hope Creek facilities. After the 1983 shutdown, the NRC revised the Salem license, requiring remedial actions to assure the safe operation of the plant. Following each of the 1991, 1992, and 1993 incidents, the NRC sent a special team to conduct immediate safety inspections of the Salem plant. Due to the severity of Salem's 1995 malfunctions, the NRC prohibited PSE & G from re-starting either unit at Salem without the agency's prior approval. The NRC placed the plant on the agency's "watch list" in 1997.
In January 1995, the NRC issued its Systematic Assessment of Licensee Performance (SALP) rating of the Salem plant for the period June 20, 1993, to November 5, 1994. The NRC gave the Salem plant a "3" rating, the lowest possible score, in the Operations and Maintenance categories. That resulted in a 2.25 overall rating for the plant, placing it in the bottom quartile nationally. In March 1995, representatives of the NRC, including its executive director of operations, met with members of the Board in response to those SALP ratings. One Board member explained that a meeting of that nature was a "rare event." By the end of 1995, the NRC had assessed over $2 million in fines against PSE & G in response to the ongoing violations at the Salem and Hope Creek facilities. The SALP rating of the Hope Creek Plant also was lowered. Finally, another nuclear-utility oversight organization, the Institute of Nuclear Power Operations (INPO), issued poor ratings for both the Salem and Hope Creek plants.
In response to the Salem and Hope Creek events, the Board took steps to gather information regarding the shortcomings of the facilities and the concerns raised by the NRC and INPO. Following the 1983 incident at the Salem plant, the Board created the Nuclear Oversight Committee (NOC) that was comprised of a Board liaison and outside experts in the nuclear energy field. The NOC was charged with receiving information regarding PSE & G's operations, preparing reports for the Board, and making recommendations based on that information. In 1995, the Board replaced the NOC, reconstituting it as a committee of the Enterprise board.
In 1994, PSE & G created its own Nuclear Review Board (NRB). Similar to the former NOC, the NRB is comprised of outside experts in the nuclear field and PSE & G senior nuclear personnel. The NRB's function is to review the nuclear operations of PSE & G and to provide counsel to both PSE & G's chief nuclear officer and the Enterprise board regarding the company's nuclear safety and operational performance. From 1983 to 1997, the Board also received information regarding nuclear operations from PSE & G's senior officers and other senior management personnel. Representatives of both the NRC and INPO attended Board meetings and advised that group directly regarding nuclear operations.
In 1989, the Board instituted a revitalization program at the Salem plant, in respect of which the company spent $300 million to upgrade equipment and facilities. The Board also intended the program to improve procedures and personnel. Those actions resulted in a favorable...
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