University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

492

Pages:

1
Author:

bratrochanter

In Zapata Corp. v. Maldonado (1981), the Delaware Supreme Court examined the procedures governing shareholder derivative suits and the authority of corporate boards to dismiss these suits. Zapata Corporation’s board, which included executives benefiting from a share option plan, had voted to advance the exercise date of options, effectively lowering personal tax liabilities for participating executives and increasing the corporation’s tax liability. A shareholder, William Maldonado, filed a derivative suit alleging breach of fiduciary duty, claiming the board’s decision financially harmed the corporation. Key Points: 1. Demand Requirement and Demand Futility: Shareholders seeking to file a derivative suit typically must first make a demand on the board to take action, which was not done here. However, Maldonado argued that making a demand was unnecessary (futile) because all directors were conflicted due to their involvement in the decision in question. 2. Special Litigation Committee (SLC): In response to the suit, Zapata’s board formed a Special Litigation Committee (SLC) comprising independent directors to decide whether the lawsuit should proceed. The SLC recommended dismissal, citing the business judgment rule, which protects directors’ decisions when they act in good faith and in the corporation’s best interest. 3. Court’s Analysis of SLC’s Decision: The Delaware Supreme Court upheld the use of SLCs to decide whether derivative suits should proceed. However, it imposed a two-step judicial review: o Step 1: Courts should first assess whether the SLC acted independently, conducted a thorough investigation, and reached its conclusion in good faith. o Step 2: Even if the SLC’s process was sound, the court retains discretion to decide if allowing the suit to proceed aligns with the corporation’s best interests, adding a layer of protection for shareholders when conflicts of interest arise. Ruling: The court concluded that while the SLC’s decision is generally protected by the business judgment rule, courts have authority to review such decisions to ensure they genuinely serve the corporation’s best interests. This decision established the “Zapata Test,” which remains influential in derivative litigation, balancing board autonomy with protection for shareholder interests in cases of potential director conflicts.