## Facts

- Minority shareholders of All American Assurance Co. (AAA) filed a shareholder derivative action alleging that AAA’s controlling insiders and affiliates engaged in self-dealing and asset transfers that “looted” AAA and breached fiduciary duties.
- After receiving demand, AAA’s board formed a special litigation committee (SLC) consisting of two outside-selected members, tasked to investigate the claims and recommend whether AAA should pursue, settle, or terminate the litigation.
- The SLC conducted an extensive investigation, including interviews, document review, written inquiries to relevant directors, and a lengthy written report with exhibits.
- Following the SLC report, the board adopted the SLC’s recommendations to abandon most claims and settle limited claims; defendants then sought summary judgment and approval of the proposed settlement on the theory that the SLC’s business judgment required dismissal.
- The trial court granted summary judgment largely on the basis of the SLC’s recommendation.
- The intermediate appellate court reversed, concluding the directors who were defendants could not delegate to a committee the power to bind the corporation’s litigation posture and that the business judgment rule did not justify summary judgment on that record.
- The state supreme court initially reversed and affirmed summary judgment under a strong-deference approach to SLC decisions, but on rehearing withdrew that decision and reconsidered the case de novo.

## Issues

1. Whether an SLC’s decision to terminate a minority-shareholder derivative action against corporate directors is binding on the courts.
2. What level of judicial review applies to an SLC’s recommendation to dismiss derivative claims alleging serious director misconduct.
3. Whether the business judgment rule requires dismissal once an SLC shows independence and a reasonable, good-faith investigation.

## Decision

- The court withdrew its prior opinion that had effectively insulated SLC dismissal recommendations once procedural independence and investigation were shown.
- The court held that an SLC’s recommendation to terminate derivative litigation is not automatically binding and is not conclusively protected by the business judgment rule.
- The court adopted a two-step framework:
  - First, the court must assess the SLC’s independence, disinterestedness, good faith, and the reasonableness of its investigation (with defendants bearing the burden).
  - Second, even if step one is satisfied, the trial court may exercise its own independent business judgment to decide whether dismissal is in the corporation’s best interests.
- The court reversed the disposition that had ended the case based on SLC deference and remanded for further proceedings under the new standard.

## Legal Principles

- In a derivative action, judicial review of an SLC’s dismissal recommendation includes a threshold inquiry into independence, disinterestedness, good faith, and adequacy of investigation; defendants bear the burden of proof on these elements.
- Satisfaction of the threshold inquiry does not require dismissal; the trial court retains discretionary authority to apply an “independent business judgment” to determine whether termination serves the corporation.
- The framework is designed to address structural bias risks that may arise when directors (or director-appointed committees) evaluate litigation targeting fellow directors or controlling insiders.
- The business judgment rule does not operate as a conclusive bar to derivative litigation termination decisions where serious insider wrongdoing is alleged; courts retain an independent role.

## Conclusion

The court limited the ability of board-appointed special litigation committees to end shareholder derivative suits by requiring both (1) judicial scrutiny of committee independence and investigative adequacy and (2) a discretionary, merits-oriented independent business judgment review that can deny dismissal despite a procedurally sound committee recommendation.


Alford v. Shaw, 320 N.C. 465, 358 S.E.2d 323 (N.C. 1987)