Miller v. Register and Tribune Syndicate, Inc.

• Decision Date: 20 July 1983
• Docket Number: No. 69011,69011
• Citation: 336 N.W.2d 709
• Parties: Paul B.W. MILLER, Plaintiff, v. The REGISTER AND TRIBUNE SYNDICATE, INC. and its Directors David Kruidenier, Dennis R. Allen, Louis P. Norris, Michael G. Gartner and Gary G. Gerlach, Defendants.
• Court: Iowa Supreme Court

Page 709

336 N.W.2d 709

Paul B.W. MILLER, Plaintiff, v. The REGISTER AND TRIBUNE SYNDICATE, INC. and its Directors David Kruidenier, Dennis R. Allen, Louis P. Norris, Michael G. Gartner and Gary G. Gerlach, Defendants.

No. 69011.

Supreme Court of Iowa.

July 20, 1983.

Robert B. Scism of Scalise, Scism, Gentry, Brick & Brick, and John D. Hudson of Carney, Hudson, Williams & Green, Des Moines, for plaintiff.

James E. Cooney and Richard Santi of Ahlers, Cooney, Dorweiler, Haynie & Smith, Des Moines, for defendant Register and Tribune Syndicate, Inc.

Glen R. Smith of Duncan, Jones, Riley & Finley, Des Moines, for defendant directors.

Considered en banc.

CARTER, Justice.

In accordance with Iowa Code chapter 684A (1981) and rules 451-61 Iowa Rules of Appellate Procedure, the United States District Court, Southern District of Iowa (federal court) has certified to this court a question concerning the authority of the board of directors of an Iowa corporation organized under Iowa Code chapter 491 to delegate to a special committee authority to bind the corporation concerning the conduct of derivative litigation in which a majority of the directors are named as defendants.

The certified facts upon which our answer to this question must be based indicate that the Register and Tribune Syndicate, Inc. (defendant corporation) was organized under Iowa Code chapter 491 on August 8, 1951 and has continued to exist under that chapter. On September 24, 1979, plaintiff, Paul B.W. Miller, instituted this derivative action on behalf of the defendant corporation alleging that it had sold its stock at fraudulently low prices and for grossly inadequate consideration to key employees. The four individual defendants were the members of the board of directors and allegedly purchased stock on favorable terms to the defendant corporation's detriment. The complaint, as amended, alleges several different legal theories as grounds for recovery. The case is pending in the federal court.

A meeting of the board of directors of the defendant corporation was held December 11, 1981. All four of the directors, who are also the individual defendants, were present. By action of the board, the number of directors was expanded to six, and Rolland E. Grefe and Stacey R. Henderson were nominated and unanimously elected to fill the added positions. After discussion the following resolution establishing an "Independent Litigation Committee" was adopted unanimously.

RESOLVED, that pursuant to the powers reserved by this corporation and pursuant to Section 3.3 of this corporation's By-Laws, there is hereby designated an Independent Litigation Committee which shall not be a standing committee and which shall consist of at least two (2) members of the Board of Directors, none of whom was a Director of the corporation nor was in any way involved with the management of the corporation at the times referred to in the action entitled: Paul B.W. Miller vs. The Register and Tribune Syndicate, Inc., et al., which is pending in the United States District Court for the Southern District of Iowa, Central Division; Mr. Rolland E. Grefe is hereby designated a member and Chairman of the Independent Litigation Committee; Mr. Stacey R. Henderson is designated as a member of the committee; a majority of the members of the committee shall constitute a quorum and the committee shall act only by the affirmative vote of a majority of its members; subject to the foregoing, the committee shall fix its own rules of procedure and shall have the right to employ or utilize the services of counsel and other professional or nonprofessional persons at the expense of the corporation as the committee shall determine; and further

RESOLVED, that the committee shall:

1. Conduct such investigation of the circumstances surrounding all matters referred to, or which may be referred to, in the action Paul B.W. Miller vs. The Register and Tribune Syndicate, Inc., et al., or any other action which is based in whole or in part upon a common nucleus of operative facts, as the committee deems necessary or desirable to determine whether the corporation or anyone acting on the corporation's behalf shall undertake or continue any litigation against one or more of the present or former Directors or present or former Officers of the corporation or against anyone else in respect of such matters or take any other action in respect thereof;

2. Make the determination contemplated in 1 above, in the exercise of the committee's business judgment and in good faith; and

3. Undertake and supervise any action necessary or appropriate to implement any such determination; and further

RESOLVED, that the committee shall have and may exercise in connection with its investigation and determination all the powers and authority of the Board of Directors, which are hereby delegated to the Independent Litigation Committee; and further

RESOLVED, that the determination made by the Independent Litigation Committee shall be final, shall not be subject to review by the Board of Directors, and shall in all respects be binding on the corporation.

At the annual meeting of stockholders of the defendant corporation held February 15, 1982, the four individual defendants and Mr. Grefe and Mr. Henderson were elected as directors.

On May 13, 1982, the independent litigation committee filed a report in which it reached the conclusion that:

The Committee believes that there is no justification for any further expenditure of legal expenses, or of other expenses, for the purpose of continuing this lawsuit.

As a direct consequence of the committee's report, the defendant corporation filed a motion for summary judgment in the federal court derivative action brought by plaintiff Paul B.W. Miller seeking dismissal thereof on the basis that the litigation had been determined by the independent litigation committee to be not in the best interests of the defendant corporation. The federal court thereupon issued the following certified question which is the subject of the present opinion:

Under the law of the State of Iowa, may the Board of Directors of a corporation organized under Chapter 491, Code of Iowa, with Articles of Incorporation and By-Laws similar to those involved here, acting through directors who are named as defendants in a derivative action brought by a minority shareholder on behalf of the corporation, (1) appoint a Special Litigation Committee composed of two directors who were not serving as directors at the time of the incidents in question, and (2) confer upon such committee the power to (a) investigate the merits of such derivative action, (b) determine in good faith whether, in its business judgment, the best interest of the corporation would be served by the prosecution, dismissal or settlement of such action, and (c) bind the corporation to its decision?

The motion for summary judgment in the derivative action involves a special application of the so-called "business judgment rule." In its broad sense, that doctrine merely establishes a standard of care to which directors are held in corporate decision making. M. Brown & W. Phillips, The Business Judgment Rule: Burks v. Lasker and Other Recent Developments, 6 J.Corp.Law 453, 454-61 (1981). A specific application of the doctrine has evolved in stockholder derivative litigation by means of which corporate directors, usually acting through special litigation committees, invoke the business judgment rule to terminate derivative actions on the ground such actions are not in the best interest of the corporation. Id. at 453, 462. This application of the rule is based on the premise that whether or not a corporation (which is the real party in interest in a derivative action) should seek to enforce a claim in the courts is a business decision best left to internal management. It is in the latter sense that the rule has been invoked in the motion for summary judgment which precipitated the certified question now before us.

We have considered the broader aspects of the business judgment rule in Independent Order of Forresters v. Scott, 223 Iowa 105, 115, 272 N.W. 68, 74 (1937). We have not, however, had occasion to consider its application in the context in which the defendant corporation seeks to invoke it in the pending federal derivative litigation. Elements commonly required to be shown in the use of the business judgment rule in derivative actions include: (1) whether the special litigation committee appointed by the board of directors is endowed with the requisite corporate power to bind the corporation to its recommendation of dismissal; and (2) whether it has been demonstrated that the special litigation committee was disinterested, independent, acted in good faith, and that the bases for its conclusions were sufficient based upon reasonable investigative techniques. Abbey v. Control Data Corp., 603 F.2d 724, 730 (8th Cir.1979), cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980); Watts v. Des Moines Register and Tribune, 525 F.Supp. 1311, 1326 (S.D.Iowa 1981); Rosengarten v. International Telephone & Telegraph Corp., 466 F.Supp. 817, 822-23 (S.D.N.Y.1979); Maldonado v. Flynn, 485 F.Supp. 274, 285-86 (S.D.N.Y.1980), rev'd in part, 671 F.2d 729 (2d Cir.1982); Gall v. Exxon Corp., 418 F.Supp. 508, 519-20 (S.D.N.Y.1976). If these two elements are affirmatively established, the authorities are somewhat divided concerning the test to be applied by the court in determining whether to permit dismissal at the behest of the corporate representatives. Some courts have held that there should be no substantive judicial review of the decision of the corporation's representatives. The only reviewable issues for these courts are the independence and good faith of the directors or litigation committee making the decision. The leading case for this view is Auerbach v. Bennett, 47 N.Y.2d 619, 393 N.E.2d 994, 419 N.Y.S.2d 920 (1979). Other courts have...