How Does A Special Litigation Committee (SLC) Work In A Minnesota Shareholder Dispute?

If you have noticed potential misconduct by the board or officers of a corporation you own stock in, you may have a shareholder derivative claim. If you pursue one, the corporation may respond by appointing a special litigation committee (SLC).

An SLC is an enormously powerful entity whose purpose is to investigate the shareholder derivative claim.

If the SLC is properly appointed and performs a decent investigation, it has the power to make or break the shareholder dispute. Its conclusions are binding on the board and courts generally defer to them.

SLCs are appointed in many derivative actions against corporations and also in similar litigation against limited liability companies, nonprofits or co-ops.

When confronted with an SLC, it is crucial to provide hard evidence of your allegations at the very first meeting, so you need an experienced attorney right away.

Examples Of Shareholder Derivative Actions

A shareholder derivative action is a lawsuit that a shareholder brings against other shareholders, the board and/or company officers, alleging that the shareholders, board or officers have harmed the company in a way that violates the shareholder’s rights.

A shareholder might file a derivative action after examining the company’s financials and discovering, for example:

• The board has granted itself excessive bonuses.
• The board has overpaid a third party to obtain a private benefit. For example, it signed a lease above market value to benefit a board member’s wife.
• The board has refused to file suit against another party that harmed the company when such a lawsuit is necessary to protect the bottom line.

How The Special Litigation Committee Comes To Be

It all starts with a shareholder or group of shareholders noticing something they perceive as wrongdoing by company leadership or a co-shareholder. The first step is for them to file a demand for redress (or show that such a demand would be futile).

The board may respond by appointing an SLC. This consists of one or more disinterested parties whose job is to determine whether the board should pursue, defend or settle the claim.

The SLC’s decision is binding on the board. If the SLC says that the board should settle the claim with the shareholders, the board must do so. Furthermore, courts generally defer to the findings of an SLC, as long as it is independent and performs a good-faith, adequate investigation.

Be ‘Ready For Trial’ At The First SLC Meeting

Ordinarily, the SLC will set up meetings with the parties right away to nail down the basis for the shareholder complaint. Ideally, the shareholder would come prepared with hard evidence of the alleged wrongdoing. There may be other opportunities to share evidence with the SLC, but there is no second chance to make a first impression.

Think of this meeting as your trial.

Also, be ready to jump if you have concerns about the disinterestedness of the SLC members or the adequacy of the investigation. You need to raise these concerns right away. Don’t wait to raise them until after the SLC rules against you.

Since vital decisions are made early in the process, it is crucial to hire an experienced attorney as soon as an SLC is appointed.

Is There Any Appeal Of The SLC’s Ruling?

The courts will generally defer to the SLC’s decision, no matter how frustrating, as long as the board can show 1) that the SLC was independent and 2) that the investigation was appropriate, adequate and pursued in good faith.

If the board can’t show one of those two things, the court may rule that the shareholder derivative lawsuit can move forward.

An SLC could be your best friend or your worst enemy. The key to dealing with one requires an understanding of its role and being fully prepared.