Auerbach v. Bennett
393 N.E.2d 994 (1979).

Facts:
The audit committee of General Telephone & Electronics Corporation reported that it found evidence of bribes and kickbacks. Almost immediately after, Auerbach, a shareholder, instituted a derivative action against the Board of Directors for breach of their duties to the corporation.

  • The Board then adopted a resolution that created a special litigation committee comprised of three disinterested directors to consider the merits of the present suit and similar shareholder’s derivative actions, and then provide recommendations.
  • After the committee’s investigation, they determined that it would not be in the company’s best interests to proceed with the present derivative action.

Issue:
Whether the Board’s decision to create a special committee of disinterested directors was a proper exercise of the business judgment rule.

Holding:
Yes.

Reasoning:
The court held that the special committee could be broken down into two parts:

(1) The selection of procedures appropriate to the pursuit of its charge.

  • The courts are well equipped by long and continuing experience and practice to make the these determinations.

(2) The ultimate substantive decision.

  • These decisions, however, fall squarely within the business judgment doctrine and are thus outside the scope of review.

Here, “we do not find either insufficiency or infirmity as to the procedures and methodologies chosen and pursued by the special litigation committee:”

  • The committee promptly engaged eminent special counsel to guide its deliberations and to advise it,
  • reviewed the prior work of the audit committee, testing its completeness, accuracy and thoroughness, and
  • conducted individual interviews with the directors found to have participated in any way in the questioned payments.

Rule: While the court may properly inquire as to the adequacy and appropriateness of the committee’s investigative procedures and methodologies, it may not under the guise of consideration of such factors trespass in the domain of business judgment.