Auerbach v. Bennett

• Court: New York Court of Appeals
• Writing for the Court: JONES; COOKE; JASEN, WACHTLER, FUCHSBERG and MEYER, JJ., concur with JONES; COOKE; GABRIELLI
• Citation: 47 N.Y.2d 619,419 N.Y.S.2d 920
• Parties: , 393 N.E.2d 994 Elias AUERBACH, Plaintiff, and Stanley Wallenstein, as Executor of Ida S. Wallenstein, Deceased, Respondent, v. William F. BENNETT et al., Appellants.
• Decision Date: 09 July 1979

Page 920

419 N.Y.S.2d 920 47 N.Y.2d 619, 393 N.E.2d 994 Elias AUERBACH, Plaintiff, and Stanley Wallenstein, as
Executor of Ida S. Wallenstein, Deceased, Respondent,
v.
William F. BENNETT et al., Appellants. Court of Appeals of New York. July 9, 1979.

Page 922

Peter M. Fishbein, Steven J. Glassman, Myron Kirschbaum, Peter H. Morrison, Benjamin Zelermyer, Dean C. Rohrer and Samuel J. Wilson, New York City, for William F. Bennett and others, appellants.

Edward J. Ross, James D. Zirin and George F. Vary, New York City, for Arthur Andersen & Co., appellant.

Martin R. Gold, John M. Schwartz and Elliott J. Weiss, New York City, for respondent.

OPINION OF THE COURT

JONES, Judge.

While the substantive aspects of a decision to terminate a shareholders' derivative action against defendant corporate directors made by a committee of disinterested directors appointed by the corporation's board of directors are beyond judicial inquiry under the business judgment doctrine, the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee. In this instance, however, no basis is shown to warrant either inquiry by the court. Accordingly we hold that it was error to reverse the lower court's dismissal of the shareholders' derivative action.

In the summer of 1975 the management of General Telephone & Electronics Corporation, in response to reports that numerous other multinational companies had made questionable payments to public officials or political parties in foreign countries, directed that an internal preliminary investigation be made to ascertain whether that corporation had engaged in similar transactions. On the basis of the report of this survey, received in October, 1975, management brought the issue to the attention of the corporation's board of directors. At a meeting held on November 6 of that year the board referred the matter to the board's audit committee. The audit committee retained as its special counsel the Washington, D. C., law firm of Wilmer, Cutler & Pickering which had not previously acted as counsel to the corporation. With the assistance of such special counsel and Arthur Andersen & Co., the corporation's outside auditors, the audit committee engaged in an investigation into the corporation's worldwide operations, focusing on whether, in the period January 1, 1971 to December 31, 1975, corporate funds had been (1) paid directly or indirectly to any political party or person or to any officer, employee, shareholder

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or director of any governmental or private customer, or (2) used to reimburse any officer of the corporation or other person for such payments.

On March 4, 1976 the audit committee released its report which was filed with the Securities and Exchange Commission and disclosed to the corporation's shareholders in a proxy statement prior to the annual meeting of shareholders held in April, 1976. The audit committee reported that it had found evidence that in the period from 1971 to 1975 the corporation or its subsidiaries had made payments abroad and in the United States constituting bribes and kickbacks in amounts perhaps totaling more than 11 million dollars and that some of the individual defendant directors had been personally involved in certain of the transactions. ¹

Almost immediately Auerbach, a shareholder in the corporation, instituted the present shareholders' derivative action on behalf of the corporation against the corporation's directors, Arthur Andersen & Co. and the corporation. The complaint alleged that in connection with the transactions reported by the audit committee defendants, present and former members of the corporation's board of directors and Arthur Andersen & Co., are liable to the corporation for breach of their duties to the corporation and should be made to account for payments made in those transactions. ²

On April 21, 1976 the board of directors of the corporation adopted a resolution creating a special litigation committee "for the purpose of establishing a point of contract between the Board of Directors and the Corporation's General Counsel concerning the position to be taken by the Corporation in certain litigation involving shareholder derivative claims on behalf of the Corporation against certain of its directors and officers" and authorizing that committee "to take such steps from time to time as it deems necessary to pursue its objectives including the retention of special outside counsel." The special committee comprised three disinterested directors who had joined the board after the challenged transactions had occurred. The board subsequently additionally vested in the committee "all of the authority of the Board of Directors to determine, on behalf of the Board, the position that the Corporation shall take with respect to the derivative claims alleged on its behalf" in the present and similar shareholder derivative actions.

The special litigation committee reported under date of November 22, 1976. It found that defendant Arthur Andersen & Co. had conducted its examination of the corporation's affairs in accordance with generally accepted auditing standards and in good faith and concluded that no proper interest of the corporation or its shareholders would be served by the continued assertion of a claim against it. The committee also concluded that none of the individual defendants had violated the New York State statutory standard of care, that none had profited personally or gained in any way, that the claims asserted in the present action are without merit, that if the action were allowed to proceed the time and talents of the corporation's senior management would be wasted on lengthy pretrial and trial proceedings, that litigation costs would be inordinately high in view of the unlikelihood of success, and that the continuing publicity could be damaging to the corporation's business. The committee determined that it would not be in the best interests of the corporation for the present derivative action to proceed, and, exercising the authority delegated to it, directed the corporation's general counsel to take that position in the

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present litigation as well as in pending comparable shareholders' derivative actions.

On December 17, 1976 the corporation and the four individual defendants who had been served moved for an order pursuant to CPLR 3211 (subd. (a), pars. (3), (7)) dismissing the complaint or in the alternative for an order pursuant to CPLR 3211 (subd. (c)) for summary judgment. On January 7, 1977 Arthur Andersen & Co. made a similar motion. On May 13, 1977 Supreme Court, Special Term, granted the motions of all defendants and dismissed the complaint on the merits.

When it appeared that plaintiff Auerbach had no intention of appealing from the determination of Special Term, on June 13, 1977 Stanley Wallenstein, as executor of the estate of Ida S. Wallenstein, a stockholder of the corporation, filed and served a "Notice of Appeal" from the order and judgment of Special Term. On July 11, 1977 defendants moved in the Appellate Division to dismiss the purported Wallenstein appeal on the ground that he was not an aggrieved party. Thereupon Wallenstein cross-moved for an order pursuant to CPLR 1012 to intervene in the present action, Nunc pro tunc, for the purpose of appealing from the judgment of Special Term pursuant to his notice of appeal dated June 13, 1977. Wallenstein predicated his right to intervene and to appeal on the grounds that Ida S. Wallenstein had been a stockholder of the corporation continuously from 1959 until her death in 1976 and that her estate, of which Stanley Wallenstein is sole executor, had continuously owned the corporate shares since her death, that in January, 1977 Wallenstein had commenced a shareholders' derivative action against the corporation, and that on May 24, 1977 the defendants in the Wallenstein action had moved for dismissal of that action on the ground that the order and judgment of Special Term in the present action was Res judicata and resulted in collateral estoppel. On August 3, 1977 defendants' motion to dismiss the appeal and Wallenstein's cross motion for intervention were denied with leave to renew on argument of the appeal.

On August 7, 1978 the Appellate Division denied defendants' motion to dismiss the appeal, granted Wallenstein's cross motion for leave to intervene, and reversed the May 13, 1977 order of Special Term and denied defendants' motions for summary judgment. On October 12, 1978 that court granted defendants' motions for leave to appeal to our court. For the reasons stated below we now modify the order of the Appellate Division to the extent of reversing its reversal of the order of Special Term granting defendants summary judgment dismissing the complaint on the merits and reinstate the order of Special Term. We do not disturb those portions of the order at the Appellate Division which denied defendants' motion to dismiss the Wallenstein appeal and granted the cross motion for leave to intervene.

Appellant Arthur Andersen & Co. poses the threshold question whether an error of law was committed by the Appellate Division in permitting intervention by Wallenstein and entertaining the appeal taken by him from Special Term's dismissal of the complaint. Because Andersen's challenge to the Appellate Division's exercise of authority in Wallenstein's favor, if successful, would dispose of the present appeal without reaching the merits of the attack on defendants' conduct with respect to the derivative actions, we turn first to that aspect of the appeal and there find no error of law in the disposition by the court below.

As to the status of Wallenstein as an appellant and intervenor we agree with the analysis of Mr. Justice Hopkins and particularly his statements that in a stockholder's derivative...