Charlotte Kokocinski v. Arthur D. Collins, Jr.
850 F.3d 354, 2017 U.S. App. LEXIS 3681, 2017 WL 780862 (2017)
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Rule of Law:
Under Minnesota law, a court will defer to a special litigation committee's (SLC) recommendation to dismiss a shareholder derivative lawsuit under the business judgment rule if the SLC was disinterested and independent, and its investigative procedures were adequate, appropriate, and pursued in good faith.
Facts:
- From 2006 to 2008, Medtronic, Inc. was involved in a public controversy regarding its improper promotion of an "off-label" use for its medical device, Infuse.
- The controversy led to whistleblower lawsuits, government investigations, and a public health notification from the FDA, causing Medtronic's revenue and stock price to decline.
- In response to shareholder derivative complaints, Medtronic's board of directors formed a Special Litigation Committee (SLC) to investigate the allegations.
- The SLC was composed of two independent members, a law professor and a former judge, after a third member who was on the board resigned to avoid a perception of interestedness.
- The SLC conducted an 18-month investigation, retaining independent legal counsel and experts, reviewing over 2.6 million documents, and interviewing 60 individuals.
- Following its investigation, the SLC issued a 69-page report concluding that it was not in Medtronic's best interest to pursue the litigation initiated by shareholders like Charlotte Kokocinski.
Procedural Posture:
- Charlotte Kokocinski filed a shareholder derivative action on behalf of Medtronic against its directors and officers in the U.S. District Court for the District of Minnesota.
- The district court first dismissed her complaint for failure to establish demand futility.
- Kokocinski subsequently filed an amended complaint.
- Medtronic and the individual defendants filed a motion to dismiss the amended complaint, relying on the report and recommendation of the Special Litigation Committee (SLC).
- The district court granted the motion to dismiss, finding the SLC's investigation and methodologies warranted deference under the business judgment rule.
- The district court also denied Kokocinski's subsequent motion for relief from the judgment.
- Kokocinski, as appellant, appealed the district court's dismissal and its denial of her post-judgment motion to the U.S. Court of Appeals for the Eighth Circuit.
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Issue:
Under Minnesota law, does a court properly defer to a Special Litigation Committee's recommendation to dismiss a shareholder derivative lawsuit when the committee was formed with adequate authority, its members were disinterested and independent, and its investigation was thorough and conducted in good faith?
Opinions:
Majority - Beam, J.
Yes, a court properly defers to an SLC's recommendation under the business judgment rule when the committee meets the criteria for independence and procedural adequacy established by Minnesota law. The court first determined that its review of the district court's decision would be for an abuse of discretion, as a motion to terminate based on an SLC report is most analogous to a voluntary dismissal under Federal Rule of Civil Procedure 23.1(c). The court found the SLC was properly formed because the board's resolution gave it 'complete power and authority' to determine if the litigation should be pursued, making its role more than merely advisory. The court then applied Minnesota's two-part test from In re UnitedHealth Group Inc. (UnitedHealth I). It found the SLC members were disinterested and independent, as their compensation at a standard hourly rate did not violate bylaws or create an improper benefit that would compromise their judgment. The court also found the SLC's investigation was adequate and conducted in good faith, given its extensive length, scope, and reliance on independent experts. The court is precluded from reviewing the substantive correctness of the SLC's conclusion, focusing only on the integrity of the investigative process. Finally, the district court did not abuse its discretion in denying discovery, as the plaintiff failed to show that further investigation would be fruitful.
Analysis:
This case reinforces the significant deference courts afford to the recommendations of a properly constituted Special Litigation Committee (SLC) in shareholder derivative suits. By adopting an 'abuse of discretion' standard of appellate review, the Eighth Circuit makes it more difficult to overturn a district court's decision to dismiss a case based on an SLC report. The ruling emphasizes that judicial review is strictly limited to the SLC's independence and the procedural adequacy of its investigation, not the substantive merits of its decision. This precedent strengthens the power of the SLC as a tool for corporations to terminate derivative litigation, creating a high procedural hurdle for shareholder plaintiffs to overcome.
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