## Facts

- General Telephone & Electronics Corp. (GTE) investigated whether it or its subsidiaries had made improper foreign payments during the early-to-mid 1970s.
- GTE’s audit committee, aided by outside counsel and its outside auditors, reported that GTE-related entities had made bribes and kickbacks totaling more than $11 million and that some directors were personally involved in certain transactions.
- A shareholder brought a derivative action on GTE’s behalf against current and former directors and officers, and also named GTE’s outside auditors, alleging breaches of fiduciary duty and related corporate harm.
- GTE’s board created a three-member special litigation committee (SLC) comprised of outside directors who joined the board after the period of alleged wrongdoing and were not identified as involved in the questionable payments.
- The SLC, assisted by independent counsel, reviewed the audit committee materials and conducted additional inquiry.
- The SLC concluded that continuing the derivative litigation was not in GTE’s best interests, citing litigation cost, managerial distraction, and potential reputational harm, and directed that the action be dismissed.

## Issues

1. Whether a court may review the substantive merits of an SLC’s decision to terminate a shareholder derivative action against directors, or whether that determination is protected by the business judgment rule.
2. Whether, and to what extent, a court may examine the SLC’s independence and disinterestedness and the adequacy and good faith of its investigative procedures.
3. Whether the SLC here was sufficiently independent and its investigation sufficiently adequate to justify dismissal of the derivative action.

## Decision

- The Court of Appeals reversed the Appellate Division and reinstated dismissal of the derivative action.
- The court held that, if an SLC is disinterested and independent and conducts an appropriate, sufficient investigation in good faith, its decision to terminate derivative litigation is a business judgment not subject to judicial review on the merits.
- The court held judicial review is limited to assessing the SLC’s independence and the adequacy of its procedures, not reweighing the committee’s cost-benefit analysis of continued litigation.
- Applying that standard, the court found no showing warranting further inquiry into the SLC’s independence or investigative methods and therefore deferred to its recommendation to dismiss.

## Legal Principles

- Decisions whether to initiate, pursue, or terminate litigation on a corporation’s behalf are matters of internal corporate management ordinarily committed to the board and protected by the business judgment rule.
- When director misconduct is alleged, dismissal based on a committee’s recommendation is permissible if the terminating decision is made by an SLC of disinterested, independent directors.
- Courts may inquire into:
  - whether SLC members are independent and disinterested (including whether they are dominated or controlled by interested directors); and
  - whether the SLC employed investigative and deliberative procedures that were appropriate, sufficient, and undertaken in good faith.
- Courts may not review the substantive merits of the SLC’s ultimate decision once independence and adequate process are established, including the committee’s evaluation of litigation costs, disruption, and reputational effects.
- The mere fact that interested directors participated in appointing the SLC does not, by itself, defeat the SLC’s independence where the committee members themselves are disinterested and empowered to act.

## Conclusion

The court held that dismissal of a derivative action may rest on an SLC’s recommendation when the committee is independent and disinterested and has conducted a good-faith, adequate investigation; once those predicates are met, the committee’s decision to terminate the suit is protected from merits review by the business judgment rule.


Auerbach v. Bennett, 47 N.Y.2d 619, 393 N.E.2d 994 (N.Y. 1979)