Kaplan v. Wyatt

• Decision Date: 06 July 1984
• Citation: 484 A.2d 501
• Parties: Jerome KAPLAN, Plaintiff, v. Oscar S. WYATT, Jr., WJS Shipping Associates, Inc., a Delaware corporation, and the Coastal Corporation, a Delaware corporation, Defendants. . Submitted:
• Court: Court of Chancery of Delaware

Page 501

484 A.2d 501

Jerome KAPLAN, Plaintiff, v. Oscar S. WYATT, Jr., WJS Shipping Associates, Inc., a Delaware corporation, and the Coastal Corporation a Delaware corporation, Defendants.

Court of Chancery of Delaware New Castle County.

Submitted: July 6, 1984.

Decided: Nov. 5, 1984.

Irving Morris, of Morris & Rosenthal, Wilmington, and Melvyn Weiss, of Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, for plaintiff.

Louis J. Finger, of Richards, Layton & Finger, Wilmington, and Michael Lesch, of Shea & Gould, New York City, for defendant Oscar S. Wyatt, Jr.

A. Gilchrist Sparks, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendant WJS Shipping Associates, Inc.

Roderick R. McKelvie, of Ashby, McKelvie & Geddes, Wilmington, and Robert E. Walls, Houston, Tex., for defendant The Coastal Corp.

Henry N. Herndon, Jr., of Morris, James, Hitchens & Williams, Wilmington, and Brown, Wood, Ivey, Mitchell & Petty, New York, N.Y., for Special Litigation Committee of The Coastal Corp.

BROWN, Chancellor.

On February 4, 1981 Jerome Kaplan, a shareholder of the defendant, The Coastal Corporation (hereafter "Coastal"), filed this derivative action on behalf of Coastal. Named as defendants in addition to the corporation itself are Oscar S. Wyatt, Jr. and WJS Shipping Associates, Inc. (hereafter "WJS"). Both Coastal and WJS are Delaware corporations. The defendant Wyatt is chairman of the board and chief executive officer of Coastal. The primary business of Coastal, a large publicly held company, is trading in oil and petroleum products.

Kaplan's complaint, as subsequently amended, is directed against the defendant Wyatt. Specifically, it alleges that Wyatt engaged in three seperate areas of wrongful conduct, namely, (1) that he "interpositioned" himself in the "Rotterdam spot market" and thereby participated in and profited personally from oil trading activities which rightfully belonged to Coastal; (2) that he wrongfully caused Coastal to enter on unfair terms into a sale and leaseback transaction for a transoceanic tanker with WJS, a corporation in which his son, Carl Wyatt, is alleged to have had a substantial interest; and (3) that by various means he exacted excessive compensation from Coastal, including excessive amounts for the lease of his personal airplane to the corporation. The amended complaint does not make reference to any specific transactions or oil trading activities in which Mr. Wyatt is alleged to have participated and profited personally at the expense of Coastal, and to my knowledge no specific indication as to any such transactions has yet appeared in the record of the case.

The case has nonetheless been filled with activity. This is directly attributable to the fact that on May 13, 1981 the Delaware Supreme Court rendered its decision in Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779 (1981). In that case our Supreme Court gave its blessing to the creation of a new creature, namely, the Special Litigation Committee. In the context of our corporate law a Special Litigation Committee is a committee of one or more directors appointed by the board of directors of a Delaware corporation as a whole to evaluate the desirability of maintaining a derivative suit which has been brought on the corporation's behalf by a shareholder without a demand having first been made on the board to take such action. Such a committee, once appointed, is empowered thereafter to seek a dismissal of the derivative action should it deem the situation to warrant it.

In this case, Coastal proceeded to appoint a Special Litigation Committee to investigate and make a recommendation as to Kaplan's complaint and its allegations of injury to the corporation. The Special Litigation Committee has since made its investigation and has submitted a lengthy report in which it recommends that it is in the best interests of the corporation to have the suit dismissed. Pursuant to this report, and under the guidelines established by Zapata Corp. v. Maldonado, supra, the Special Litigation Committee has gone further and has caused a motion to be filed on behalf of the defendant Coastal seeking dismissal of Kaplan's derivative action. This represents the Court's decision on that motion.

I

While it is generally undesirable to unduly lengthen a decision on the merits of an application with an extensive examination of the law that governs the determination to be made, I find it judicially appropriate to do so in this case. This is because, to my knowledge, this is the first case in this Court to reach the point of decision on a motion generated by a Special Litigation Committee to dismiss a derivative suit under the authority of Zapata. Thus, it seems only fair that I should set forth the basis on which I approach the decision to be made which, in turn, derives solely from my subjective interpretation of Zapata. In so doing, I make no effort to deal with the policy or legal rationale of the Special Litigation Committee approach. That has been ably done by our Supreme Court in Zapata itself and by other courts as well. See, for example, Joy v. North, 692 F.2d 880 (2d Cir.1982), cert. denied, 460 U.S. 1051, 103 S.Ct. 1498, 75 L.Ed.2d 930 (1983); Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979). I deal only with the mechanics of addressing a motion to dismiss initiated by a Special Litigation Committee as they may be gleaned from a reading of Zapata.

II

The Zapata decision establishes a unique procedure to be followed by the Court of Chancery in cases in which a motion to dismiss is made at the behest of a Special Litigation Committee. The guidelines for this new procedure are found within the following language of the Supreme Court in Zapata Corp. v. Maldonado, supra, at 430 A.2d 788-789:

"After an objective and thorough investigation of a derivative suit, an independent committee may cause its corporation to file a pretrial motion to dismiss in the Court of Chancery. The basis of the motion is the best interests of the corporation, as determined by the committee. The motion should include a thorough written record of the investigation and its findings and recommendations. Under appropriate Court supervision, akin to proceedings on summary judgment, each side should have an opportunity to make a record on the motion. As to the limited issues presented by the motion noted below, the moving party should be prepared to meet the normal burden under Rule 56 that there is no genuine issue as to any material fact and that the moving party is entitled to dismiss as a matter of law. The Court should apply a two-step test to the motion.

"First, the Court should inquire into the independence and good faith of the committee and the bases supporting its conclusions. Limited discovery may be ordered to facilitate such inquiries. The corporation should have the burden of proving independence, good faith and a reasonable investigation, rather than presuming independence, good faith and reasonableness. If the Court determines either that the committee is not independent or has not shown reasonable bases for its conclusions, or, if the Court is not satisfied for other reasons relating to the process, including but not limited to the good faith of the committee, the Court shall deny the corporation's motion. If however, the Court is satisfied under Rule 56 standards that the committee was independent and showed reasonable bases for good faith findings and recommendations, the Court may proceed, in its discretion, to the next step.

"The second step provides, we believe, the essential key in striking the balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporation's best interests as expressed by an independent investigating committee. The Court should determine, applying its own independent business judgment, whether the motion should be granted. This means, of course, that instances could arise where a committee can establish its independence and sound bases for its good faith decisions and still have the corporation's motion denied. The second step is intended to thwart instances where corporate actions meet the criteria of step one, but the result does not appear to satisfy its spirit, or where corporate actions would simply prematurely terminate a stockholder grievance deserving of further consideration in the corporation's interest. The Court of Chancery of course must carefully consider and weigh how compelling the corporate interest in dismissal is when faced with a non-frivolous lawsuit. The Court of Chancery should, when appropriate, give special consideration to matters of law and public policy in addition to the corporation's best interests.

"If the Court's independent business judgment is satisfied, the Court may proceed to grant the motion, subject, of course, to any equitable terms or conditions the Court finds necessary or desirable."

By taking these general guidelines and reducing them to the step-by-step procedure which flows either directly or by necessary implication from the Supreme Court's reasoning and directive, it would appear that the following analysis is warranted for the purpose of this proceeding.

To begin with, where a derivative action is brought pursuant to Rule 23.1 without a demand first being made upon the board of directors because of reasons set forth in the complaint, the board, if it so desires, may appoint an independent committee to investigate the allegations of wrongdoing against the corporation as contained in the complaint.

After a thorough and objective investigation, the independent committee appointed by the board of directors--otherwise referred to herein as the Special Litigation Committee--may cause the corporation to file a pretrial motion to dismiss a derivative suit brought on the corporation's behalf.

The basis for the motion is the best interests of the corporation, as determined by the...