Weiser v. Grace

• Decision Date: 31 August 1998
• Citation: 179 Misc.2d 116,683 N.Y.S.2d 781
• Parties: , 1998 N.Y. Slip Op. 98,679 Joyce WEISER et al., Plaintiffs, v. Margaret F. GRACE, as Executrix of the Estate of J. Peter Grace, Jr., Deceased, et al., Defendants.
• Court: New York Supreme Court

Page 781

683 N.Y.S.2d 781

179 Misc.2d 116, 1998 N.Y. Slip Op. 98,679

Joyce WEISER et al., Plaintiffs, v. Margaret F. GRACE, as Executrix of the Estate of J. Peter

Grace, Jr., Deceased, et al., Defendants.

Supreme Court, New York County.

Aug. 31, 1998.

Bizar, Martin & Taub, L.L.P. (Irving Bizar of counsel), Abbey, Gardy & Squitieri, L.L.P. (Judith L. Spanier of counsel), and Robinson, Curley & Clayton, P.C. (Fay Clayton of counsel), for plaintiffs.

Milbank, Tweed, Hadley & McCloy (Toni C. Lichstein of counsel), for Margaret F. Grace, defendant.

Wachtell, Lipton, Rosen & Katz (Marc Wolinsky of counsel), for Thomas A. Holmes and others, defendants.

Arkin, Schaffer & Supino, L.L.P. (Stanley Arkin of counsel), for Charles H. Erhart, Jr., and others, defendants.

Rosenman & Colin, L.L.P. (Gerald Walpin of counsel), for J.P. Bolduc, defendant.

Parcher, Hayes & Liebman, P.C. (Jonathan Liebman of counsel), for J. Peter Grace, III, defendant.

Patterson, Belknap, Webb & Tyler, L.L.P. (Blair Axel of counsel), for W.R. Grace & Co., defendant.

Cravath, Swaine & Moore (Evan R. Chesler and Keith R. Hummel of counsel), for Special Litigation Committee.

BARRY A. COZIER, J.

Plaintiffs move for an order compelling the Special Litigation Committee of the W.R. Grace & Co. Board of Directors (the "SLC") to produce witness outlines, notes and summaries of interviews conducted by the SLC and its counsel, which interviews form the basis of the SLC's pending motion to dismiss the amended complaint.

BACKGROUND

In this derivative action, plaintiffs, individual and institutional shareholders of W.R. Grace Co. ("Grace"), ¹ assert two causes of action for breach of fiduciary duty against the defendant directors in their amended complaint. The allegations arise out of three separate, but purportedly related, incidents. The first incident involves the payments and perquisites made to former Grace CEO, J. Peter Grace, Jr. ("Grace Jr.") beyond that required by his employment agreement, and the efforts of the Board to avoid public disclosure of the terms of those payments. The second incident relates to an alleged misappropriation of Grace funds by J.P. Grace, III ("Grace III"), in connection with his operation of a Grace subsidiary. The third incident involves J.P. Bolduc, Grace Jr.'s successor as CEO, who resigned after allegations of

his sexual harassment of several employees were apparently substantiated by Judge Harold Tyler, the special investigator appointed by the Board. It is alleged that Bolduc received a substantial and unjustified severance package. The defendants include Bolduc, Grace III, the estate of Grace Jr. and the members of the Board at the time of the incidents.

Creation of the Special Litigation Committee

On May 9, 1997, the Board created the SLC to investigate the allegations in the amended complaint. Specifically, the SLC was charged with determining whether continued pursuit of this lawsuit was in the best interests of Grace. ² The Board resolution appointing the SLC accorded the committee full authority to deal with this lawsuit without any further reference to the Board. The SLC retained the firm of Cravath, Swaine & Moore ("Cravath") to act as its counsel. The SLC conducted its investigation by reviewing documents and conducting interviews of defendants and other personnel concerning the matters raised in the complaint. The committee relied heavily on its counsel in its investigation. Indeed, counsel conducted ten of the fourteen interviews and then reported back to the SLC about the substance of the interviews.

The Pending Motions

By notice of motion dated March 2, 1998, the SLC moved to dismiss the action on the ground that it had determined that it was not in the best interests of Grace for this action to be prosecuted. The motion was supported by the affidavits of Akers, Murphy and Keith R. Hummel, a member of Cravath. Thereafter, the motion was supported by the 227 page Revised Report of the Investigation, dated May 18, 1998 ("Revised Report"), with its supporting appendices.

After service of defendants' motion to dismiss, plaintiffs directed certain discovery requests to the SLC. Plaintiffs requested copies of any transcripts of witness interviews conducted by SLC and its counsel. In the absence of such transcripts, plaintiffs requested notes and summaries of those interviews. Plaintiffs also sought the production of any witness outlines or lists of questions prepared in advance of the interviews. The SLC informed plaintiffs that there were no transcripts made of the interviews. In addition, the SLC refused to produce the notes, summaries and witness outlines which it admitted did exist. Plaintiffs also served deposition notices on Akers, Murphy and Hummel, which have been adjourned until after the disposition of plaintiffs' present motion to compel.

Plaintiffs now move to compel production of the notes, summaries and witness outlines of the interviews, whether conducted by SLC members or its counsel. Plaintiffs contend that under Delaware law, which both parties agree governs in this action, in ruling on defendants' motion to dismiss, this Court must determine if the SLC's decision was a valid exercise of business judgment under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.Sup.Ct.1981). In this regard, plaintiffs challenge the validity of the SLC's investigation and resulting decision not to prosecute this action, on grounds of lack of independence, good faith and reasonableness. However, in asserting such a challenge, plaintiffs contend they must have access to the documents withheld by the SLC, i.e., notes, summaries and witness outlines. They argue that the witness notes, summaries, and outlines are especially critical to plaintiffs' claim because they form the basis for the Revised Report and corresponding motion to dismiss.

Consequently, plaintiffs claim that they are entitled to examine the witness materials to enable them to challenge whether the SLC discharged its duties with diligence and zeal or whether it "played softball with critical players." Peller v. The Southern Co., 707 F.Supp. 525, 529 (N.D.Ga.1988), aff'd 911 F.2d 1532 (11th Cir.1990). Further, plaintiffs support their request for the witness materials with the assertion that there are factual disputes and that examination of the notes, outlines and summaries will shed light In addition, plaintiffs contest the SLC's reliance on its counsel, and whether the participation of SLC members in the interview process was perfunctory or otherwise deficient. Plaintiffs argue that in the event that the court does not compel disclosure, they will be unfairly restricted in their cross-examinations at the depositions of the SLC members and its counsel.

on the SLC's resolution of the relevant issues.

The SLC opposes plaintiffs' motion to compel on three grounds. First, it contends that the discovery plaintiffs seek exceeds the scope of the limited discovery envisioned in the Zapata case. The SLC argues that plaintiffs are pursuing impermissible discovery on the merits of the derivative action. Second, the SLC argues that plaintiffs have received more than sufficient discovery, both from the SLC and from other sources, to enable them to challenge the SLC's investigative process. Finally, the SLC contends that the materials plaintiffs seek are protected from discovery by the attorney-client privilege and/or the work product doctrine.

DISCUSSION

As the parties acknowledge, this action is governed by Delaware law, the place of incorporation. Similarly, the parties properly invoke the two-step inquiry pronounced in Zapata Corp. v. Maldonado, supra, be applied by this Court in determining the SLC's pending motion to dismiss the action. Under Zapata, the court first must assess the independence and good faith of the committee, and the basis of its conclusion. Id. at 788-89. To aid in this inquiry, the court has discretion to permit limited discovery. Id. If the court concludes that the committee lacked independence, failed to demonstrate good faith and a reasonable basis for its conclusions or, if the court is otherwise dissatisfied with the process used by the committee, it must deny the SLC's motion. However, if the court is satisfied with the committee's independence, good faith, and the reasonableness of its decision, the court, in its discretion, may proceed to the second step. In the second phase, a court must apply its own independent business judgment to decide whether the motion to dismiss should be granted. Id. "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." Kaplan v. Wyatt, 484 A.2d 501, 505 (Del.Ch.1984), affd. 499 A.2d 1184 (Del.Sup.Ct.1985). The burden is upon the movant to prove the independence of the special litigation committee, and that it conducted a reasonable investigation of the matters alleged in the complaint in good faith. Id. at 507. The committee does not enjoy any presumption of independence, good faith or reasonableness. Id.

The court, in the exercise of its discretion, may permit the parties to engage in limited discovery to assist the court in its inquiry regarding the good faith and independence of the committee as well as the bases supporting the committee's conclusions. The "limited discovery" requested by a plaintiff "takes on particular significance since that which he gets--which in all probability will be something less than all he wants--will constitute the framework on which he must defend the motion initiated by the Special Litigation [Committee] to have his derivative suit dismissed." Id. at 511.

In this case, the Court finds that the production of the notes, summaries and outlines regarding the committee's interviews of witnesses,...