Michael B. Gonen of Duane Morris. Courtesy photo

Key Takeaway

The Delaware Supreme Court in Diep v. Trimaran Pollo Partners, affirmed 4-1 the Delaware Court of Chancery's finding that a special litigation committee was acting independently and reasonably in seeking to dismiss a derivative claim. An SLC bears the burden of persuasively showing its own independence, good faith and reasonableness, in contrast to the demand excuse stage where the plaintiff must rebut those presumed qualities. Previous language speaking of an SLC needing to be "above reproach" were specific to the particular circumstances of single-member SLCs and do not set forth a higher standard for independence.

Because last year's United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034 (Del. 2021) creates a director-by-director independence test for demand futility, even denied Rule 23.1 dismissal motions will provide a roadmap to the formation of an effective SLC. Read together, Diep and Zuckerberg provide a powerful tool for directors (and controlling shareholders) to neutralize derivative litigation from minority and public shareholders.

Justice Karen Valihura in dissent argued that "above reproach" is a more stringent standard that the SLC failed to meet.