Cuker v. Mikalauskas

Rule of Law:

The business judgment rule permits a board of directors of a Pennsylvania corporation to terminate shareholder derivative actions if a disinterested and independent special litigation committee, acting in good faith and after an adequate investigation, reasonably concludes that the litigation is not in the corporation's best interest, subject to judicial review of the committee's process, not the merits of the underlying business decision.

Facts:

• PECO Energy Company (PECO) is a publicly regulated utility in Pennsylvania, subject to PUC regulations and regular management audits.
• A 1991 management audit by Ernst & Young recommended changes and criticized PECO’s credit and collection function, particularly regarding overdue accounts.
• In May 1993, a group of minority shareholders (Katzman demand) alleged wrongdoing by some PECO directors and officers, claiming mismanagement of the credit and collection function, and demanded PECO authorize litigation.
• PECO’s board responded by creating a special litigation committee consisting of three outside directors not named as defendants, to investigate the Katzman allegations.
• In July 1993, a second group of minority shareholders (Cuker) filed a complaint against PECO officers and directors making the same allegations as the Katzman demand, before the special committee had begun its substantive work.
• The special committee, assisted by independent counsel and outside auditors, conducted an extensive, months-long investigation, keeping its deliberations confidential.
• In January 1994, the special committee concluded there was no evidence of bad faith, self-dealing, or breaches of loyalty, finding that defendant officers exercised sound business judgment and their actions were reasonably calculated to further PECO’s best interests, specifically deeming further derivative litigation not in PECO's best interest.
• On March 14, 1994, the twelve non-defendant members of the PECO board unanimously voted to reject the Katzman demand and terminate the Cuker action, following the special committee's recommendation.

Procedural Posture:

• Two trustees (Katzman demand) made a demand on PECO's board, alleging wrongdoing and demanding litigation.
• A second group of minority shareholders (Cuker) filed a derivative complaint against PECO officers and directors in the Court of Common Pleas of Philadelphia (C.P. Phila. July Term, 1993, No. 3470).
• PECO filed a motion for summary judgment in the Cuker action, seeking termination of the derivative actions.
• The Court of Common Pleas denied PECO's motion for summary judgment, holding that a Pennsylvania corporation lacks the power to terminate pending derivative litigation and certified four controlling questions of law to the Superior Court.
• The Superior Court denied interlocutory review of the certified questions on January 31, 1996, stating that unresolved factual issues precluded review.
• After PECO's board rejected the Katzman demand, the Katzman claimants filed their own shareholder derivative action in the Court of Common Pleas of Philadelphia (C.P. Phila. August Term 1995, No. 1278).
• The Court of Common Pleas consolidated the Cuker and Katzman actions on February 20, 1996.
• PECO filed a petition to terminate the consolidated actions, raising factual issues regarding the independence and adequacy of the special committee's investigation.
• The Court of Common Pleas denied PECO's petition to terminate on May 21, 1996, due to its prior holding that the business judgment rule was not the law of Pennsylvania and thus it could not hear the factual disputes.
• PECO sought extraordinary relief in the Pennsylvania Supreme Court under its King's Bench powers due to the irreconcilable inconsistency between the Superior Court's and Court of Common Pleas's decisions.