Re: Crystallex Reports Q1 2009 Financial Results
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posted on
May 15, 2009 06:49AM
Crystallex International Corporation is a Canadian-based gold company with a successful record of developing and operating gold mines in Venezuela and elsewhere in South America
"Derivative action dismissed with prejudice"
When a plaintiff files a derivative action on behalf of a corporation, the board of directors of that corporation has the right to appoint an individual, the independent investigator, or a group of individuals, the Special Litigation Committee (SLC), to review the derivative action and to recommend if that litigation should be dismissed. If the investigator or the SLC (collectively the "reviewer," for want of a better term) recommends in a written report that the derivative action be dismissed, the corporation may file a motion seeking to dismiss, with prejudice, the derivative action. This written report, together with the legal and practical problems it creates both for the corporation and the lawyers advising the corporation, is the subject of this article.
Who Makes the Report
F.S. [section]607.07401(3)(a) and (b) provides that the board of directors may appoint either of the following to review the derivative action: 1) a committee consisting of two or more independent directors (the SLC); or 2) a panel of one or more independent persons appointed by the court upon motion by the corporation (the independent investigator).
SLCs and independent investigators by their evaluation of the derivative action:
serve to balance the rights and duties of the board and the dissenting shareholder by providing the corporation with "an important tool to rid itself of meritless or harmful litigation" while preventing directors from using the committee "to wrest control of bona fide derivative claims away from well-meaning plaintiffs." (3)
The statutory requirements for the appointment of the reviewer are straightforward, but for two issues: 1) the independence requirement discussed below; and 2) whether the independent investigator can be a sitting member of the board of directors of the corporation on whose behalf the derivative action is brought. If that were the case, in effect, there could be an SLC of one director, when the statute requires two or more directors. In fact, some states, but not Florida, would seem to permit SLCs of one director. (4) But in none of those cases is the one member a sitting member of the board, and in all of those cases the sole reviewer is subjected to the increased scrutiny given to the independence of the reviewer, the smaller the size of the committee. (5) "If a single member committee is to be used, the member should, like Caesar's wife, be above reproach." (6)
If a corporation is willing to run the risk of the heightened scrutiny given to an independent investigator who is a sitting member of the board, there appears to be no absolute bar to such an appointment. However, that individual, as any independent investigator, would be subject to judicial review of its independence prior to appointment by the court, unlike an SLC, whose independence is reviewed by a court only if and when the SLC submits a written report recommending dismissal and the corporation moves to dismiss the derivative action based on that report. This is the only significant difference between an SLC and an independent investigator.
There is one less significant difference between an SLC and an independent investigator and that is that the corporation has an absolute right to appoint an SLC, there being no statutory requirement of judicial appointment, whereas a corporation does not have the absolute right to the appointment of an independent investigator. Although the issue seldom comes up, appointment of an independent investigator is a matter of discretion for the court, and there are cases in which motions to appoint an independent investigator have been denied. (7)
Independence
The most important and heavily ligated requirement of the reviewer is that of independence. (8) Courts look at the "totality of the circumstances" to determine if the reviewer "is in a position to base his decision on the merits of the issue rather than being governed by extraneous considerations or influences." (9) A number of factors are usually considered: "(1) a [reviewer's] status as a defendant, and potential liability; (2) a [reviewer's] participation in or approval of the alleged wrongdoing; (3) a [reviewer's] past or present business dealings with the corporation; (4) a [reviewer's] past or present business or social dealings with the individual defendants; (5) the number of directors on the [reviewer]; and (6) the 'structural bias' of the [reviewer]." (10)