Roberts v. Alabama Power Co.

• Decision Date: 25 September 1981
• Citation: 404 So.2d 629
• Parties: James Otis ROBERTS, on behalf of himself and all other stockholders of Alabama Power Company v. ALABAMA POWER COMPANY, et al. 79-743.
• Court: Alabama Supreme Court

Page 629

404 So.2d 629

James Otis ROBERTS, on behalf of himself and all other stockholders of Alabama Power Company v. ALABAMA POWER COMPANY, et al.

79-743.

Supreme Court of Alabama.

Sept. 25, 1981.

Alvin T. Prestwood and Claude P. Rosser, Jr., Montgomery, for appellants.

T. W. Thagard, Jr. and David R. Boyd of Smith, Bowman, Thagard, Crook & Culpepper, Montgomery, for appellees.

ALMON, Justice.

James Otis Roberts, a shareholder ¹ and former employee of Alabama Power Company, filed this derivative action on behalf of the nominal defendant, Alabama Power Company, alleging that the individually named defendants engaged in the following acts which injured the Company and shareholders:

1) the transfer of the plaintiff from a position of supervisory responsibility to a non-supervisory position;

2) the gratuitous absorption of expenses incurred in installing underground electrical facilities at Eastdale Mall, Montgomery, Alabama;

3) the gratuitous rendition of services to then State Senator Fred Jones; and

4) the gratuitous rendition of services to Alabama Christian College in Montgomery, Alabama.

The plaintiff later amended his complaint to allege that the defendants' action in transferring him to a non-supervisory position was violative of the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq.; that the defendants had violated Code 1975, § 37-8-24 by absorbing the Eastdale Mall installation costs and providing gratuitous services to Alabama Christian College; and that the rendition of gratuitous services to Senator Fred Jones violated Code 1975, § 36-25-6 and § 37-8-24. A claim for injunctive relief was also included.

The individual defendants and Alabama Power filed motions to dismiss. The trial court, pursuant to Alabama Power's motion, limited discovery to the issue of whether the action could be maintained as a derivative shareholders' action. Subsequently, Alabama Power moved for a summary judgment based on the action of the board of directors and on the action of the "independent" committee appointed by the board On January 31, 1980, the Court granted Alabama Power's motion for a summary judgment. The basis for granting the motion was:

of directors, in recommending the suit be dismissed. Plaintiff later amended his complaint to eliminate his claim based on age discrimination. It appears he did so after a jury in federal court had decided that issue against him.

(1) The Plaintiff is not a "fair and adequate" representative of the stockholders of Alabama Power Company as required by Rule 23.1 of the Alabama Rules of Civil Procedure and/or (2) the "outside" directors of Alabama Power Company, who constitute three fourths of the entire Board, unanimously made a good faith determination, after an extensive investigation, that this litigation was not in the best interest of the Company.

The first issue raised on appeal is whether the trial court correctly ruled that the "business judgment" rule authorized dismissal of the derivative action. It is the position of the plaintiff that the "business judgment" rule cannot preclude him from maintaining this derivative action because the directors' decision not to pursue the claims on behalf of Alabama Power was without the scope of their authority and therefore invalid. The plaintiff asserts that the proper application of the "business judgment" rule is at trial on the merits where the individual defendants could use the rule to insulate themselves from individual liability.

The plaintiff, in his brief, gives a proper statement of the "business judgment" rule as follows:

(Corporate management is vested in the board of directors.) If in the course of management, directors arrive at a decision, within the corporation's powers (intra vires) and their authority, for which there is a reasonable basis, and they act in good faith, as the result of their independent discretion and judgment, and uninfluenced by any consideration other than what they honestly believe to be the best interests of the corporation, a court will not interfere with internal management and substitute its judgment for that of the directors to enjoin or set aside the transaction or to surcharge the directors for any resulting loss.

Quoting H. Henn, Law of Corporations, § 242 (2d ed. 1970). Whether the application of the above rule can be used to terminate a shareholder's derivative suit has never been presented to this Court. However, the question has been litigated quite often in recent years, in both federal and state courts, with varying results. The trend has been to allow the "business judgment" rule to act as a complete bar to derivative suits, especially where the decision of the board is based on the recommendation of a committee of disinterested directors. Gall v. Exxon Corporation, 418 F.Supp. 508 (S.D. N.Y. 1976), and Abbey v. Control Data Corporation, 460 F.Supp. 1242 (D. Minn. 1978), aff'd 603 F.2d 724 (8th Cir. 1979). The trend has been weakened considerably recently by cases in Delaware and Texas. Maldonado v. Flynn, 413 A.2d 1251 (Del. Ch. 1980), and Maher v. Zapata Corporation, 490 F.Supp. 348 (S.D.Tex.1980). Maldonado and Maher held that the board of directors could not dismiss a derivative suit by reliance on the "business judgment" rule. Maher appears to be the first federal court case to so hold. Against this rapidly fluctuating backdrop, this Court must decide which line of cases it will follow.

As this question has never been presented to this Court, we first look to any statutory authority the board of directors might have had to terminate a derivative suit.

Code 1975, § 10-2A-57 says that ".... the business and affairs of a corporation shall be managed under the direction of a board of directors except as may be otherwise provided in this chapter or the articles of incorporation." The board is also authorized by Code 1975, § 10-2A-64, to delegate matters to a committee of directors and such committee shall exercise the same authority as the board of directors except as to certain fundamental actions that only the board can act upon. While the above statutes do not speak directly to the authority Having found no applicable statute, we turn to decisions of other jurisdictions and the rationale they employ.

of the board of directors to dismiss a derivative suit, it makes apparent the broad discretion the board has in regard to corporate affairs.

The strongest support for the plaintiff's position can be found in the Maldonado case, cited previously. In Maldonado, certain officers and directors of Zapata Corporation had been granted options to buy Zapata common stock. Subsequently, the board of directors accelerated the date of exercise of the options to allow the directors a tax savings. Maldonado, a shareholder, brought a derivative suit claiming the directors, by accelerating the option exercise date, had breached their fiduciary duty to the corporation and had cost the corporation a tax deduction equal to the amount that the directors had saved on taxes. Four years after suit was brought, the directors appointed a committee of two outside, newly appointed directors who were independent of management. After an investigation, the committee determined the litigation was not in the best interest of the corporation and instructed the corporate counsel to seek dismissal of the suit. In support of its motions for dismissal and for summary judgment, the corporation asserted that a disinterested committee of directors could compel the dismissal of the derivative suit when, in the committee's business judgment, discontinuance of the action was in the best interest of the corporation.

The Court of Chancery of Delaware held that the "business judgment" rule was irrelevant to the issue of whether the stockholders have a right to bring an action on behalf of the corporation to rectify a breach of fiduciary duty where the corporation refuses to act. The Court went on to state that "(U)nder our system of law, courts and not litigants should decide the merits of litigation."

We cannot agree entirely with the decision of the Delaware Court. Maldonado seems to stand for the proposition that anytime a stockholder alleges a breach of fiduciary duty by a director, then no matter what would best serve the corporation, the case must proceed to a trial on the merits. Summary judgments, for all practical purposes, would be done away with in such suits. The application of the "business judgment" rule was not intended to be so limited. Justice Brandeis in United Copper Securities Co. v. Amalgamated Copper Co., 244 U.S. 261, 263, 37 S.Ct. 509, 510, 61 L.Ed. 1119 (1917), best states our view:

Whether or not a corporation shall seek to enforce in the courts a cause of action for damages is, like other business questions, ordinarily a matter of internal management and is left to the discretion of the directors, in the absence of instruction by vote of the stockholders. Courts interfere seldom to control such discretion intra vires the corporation, except where the directors are guilty of misconduct equivalent to a breach of trust, or where they stand in dual relation which prevents an unprejudiced exercise of judgment.

When an independent committee composed of disinterested directors decides not to bring an action on behalf of the corporation, the directors are not authorizing or condoning the alleged wrongful acts but are merely saying that given the fact that the events did occur, it is not in the best interest of the corporation to pursue a legal remedy. The plaintiff in the present case asserts that the "outside" directors cannot approve acts that are ultra vires or illegal. We agree with this assertion but disagree with its application to the present case. The case of Genzer v. Cunningham, 498 F.Supp. 682 (E.D.Mich.1980), states the rule, that we adopt as follows: "(U)pon finding that a special committee of disinterested directors has determined in good faith and...