Gall v. Exxon Corp.
418 F. Supp. 508 (1976)
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Rule of Law:
A special litigation committee of disinterested directors may, in the exercise of their business judgment, decide to terminate a shareholder derivative suit, but this decision is subject to judicial scrutiny, and the plaintiff must be given the opportunity through discovery to challenge the committee's independence, disinterestedness, and good faith.
Facts:
- From 1963 to 1974, Exxon Corporation's Italian subsidiary, Esso Italiana, made approximately $59 million in political contributions and other unauthorized payments in Italy.
- The payments were primarily orchestrated by Vincenzo Cazzaniga, the head of Esso Italiana, partially through secret, off-the-books bank accounts.
- Several high-level Exxon directors learned of the political payments at various points before 1972 but, believing them to be legal and necessary for business in Italy, opted to phase them out gradually rather than stop them immediately.
- The full scope of the unauthorized payments and the secret accounts was not widely known among the board until a 1972 investigation.
- In September 1975, Exxon's Board of Directors created a Special Committee on Litigation composed of three directors who were not involved in or on the board during the period of the payments.
- The Board delegated its full authority to this Committee to investigate the matter and decide whether the corporation should sue any of its own current or former directors or officers.
- After a four-month investigation, the Special Committee concluded that pursuing legal action against any directors or officers was contrary to the best interests of Exxon.
Procedural Posture:
- Joan Levine Gall filed a shareholder derivative suit on behalf of Exxon Corporation against several of its directors in the U.S. District Court for the Southern District of New York.
- The defendants (Exxon and its directors) moved for summary judgment to dismiss the complaint.
- The defendants' motion was based on the determination of a Special Committee on Litigation, appointed by the Exxon board, which concluded that the lawsuit was not in the corporation's best interest.
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Issue:
Does the business judgment rule require a court to grant summary judgment and dismiss a shareholder derivative suit when a specially appointed committee of disinterested directors determines that the litigation is not in the corporation's best interest, without first allowing the plaintiff to conduct discovery into the committee's independence and good faith?
Opinions:
Majority - Carter, J.
No, the business judgment rule does not require immediate dismissal of a shareholder derivative suit based on a special litigation committee's recommendation without first allowing the plaintiff to test the committee's independence and good faith. While the business judgment rule generally protects a board's decision not to sue, its application here is contingent on the bona fides of the Special Committee. The court reasoned that although delegating authority to a committee of disinterested directors is a valid corporate procedure, a court cannot simply accept the committee's conclusion at face value, especially when the plaintiff challenges its independence. Because issues of motivation, intent, and good faith are factual questions, they are inappropriate for summary judgment. Therefore, the plaintiff must be permitted to conduct discovery to examine the committee's disinterestedness and the basis for its determination before the court can rule on whether to dismiss the case.
Analysis:
This decision is significant because it establishes a crucial check on the power of special litigation committees (SLCs) to dismiss shareholder derivative lawsuits. It affirms the SLC as a valid corporate governance tool but prevents it from being an automatic shield for directors accused of wrongdoing. By allowing discovery into the committee's independence and good faith, the court created a procedural safeguard for shareholders, laying the groundwork for more formalized two-step judicial reviews of SLC decisions established in later landmark cases. This case strikes a balance between protecting the board's authority under the business judgment rule and preventing its misuse to insulate directors from accountability.
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