September 09, 2008

What Amount of Deference Should a Court Give to a Special Litigation Committee? The Minnesota Supreme Court Gives a Deferential Answer

The stock options backdating issues at UnitedHealth Group have been the subject of many headlines, but not much new law. That changed on August 14, 2008, when the Minnesota Supreme Court issued a decision favorable to UnitedHealth on the question of whether, under Minnesota law, the federal district judge handling multiple civil actions against the company and its directors and officers relating to the alleged backdating must defer to the decision of a Special Litigation Committee (SLC) to support a reported $900 million settlement that derivative plaintiffs had made with several former officers. Under the settlement, the former officers would (1) pay the company $20.55 million, (2) surrender certain stock option grants to the company, and (3) relinquish certain rights and interests in an executive retirement plan, an executive savings account and an employment agreement. Boards of directors frequently appoint SLCs to investigate legal claims and act for the company when the directors themselves might have actual or alleged conflicts of interest. The SLC appointed by United Health was comprised of two former justices of the Minnesota Supreme Court who reportedly investigated the matter for 15 months, conducted more than 50 interviews and reviewed millions of pages of documents before reaching a decision to support the settlement. Under Delaware law, a court can, in its discretion, apply its own "business judgment" in reviewing the decision of an SLC. The Minnesota Supreme Court decided that Delaware's rule was a bad one because, among other things, it would allow a judge to second-guess the merits of an SLC's decision based on open-ended criteria. According to the Court, the Delaware standard "simply replaces the danger of bias on the part of the corporate directors and the SLC with the danger of bias on the part of the court." Instead, the Minnesota Supreme Court adopted a deferential standard of review, holding that "a court must defer to an SLC's decision to settle a shareholder derivative action if the proponent of that decision demonstrates that (1) the members of the SLC possessed a disinterested independence and (2) the SLC's investigative procedures and methodologies were adequate, appropriate, and pursued in good faith." Now the case goes back to the federal district court, which will apply this new standard to the settlement of the derivative action. Certainly, following this decision, SLCs are alive and well in Minnesota.
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