## Facts

- S. Prestley Blake, a shareholder of Friendly Ice Cream Corporation (Friendly), filed a shareholder derivative action alleging Friendly’s directors and officers breached fiduciary duties and committed related wrongdoing.
- After Blake made a demand, Friendly’s board appointed a Special Litigation Committee (SLC) to investigate the asserted claims and decide whether pursuing them was in Friendly’s best interests.
- Daly, a member of Friendly’s board, served on the SLC.
- Blake challenged the SLC’s ability to seek dismissal because Daly was among the directors accused of fiduciary breaches and had participated in earlier board or committee activity connected to matters raised by Blake.
- The SLC recommended that Friendly terminate the derivative litigation and moved to dismiss under Mass. Gen. Laws ch. 156D, § 7.44, which permits dismissal based on an independent committee’s good-faith determination after reasonable inquiry.

## Issues

1. Under Mass. Gen. Laws ch. 156D, § 7.44, was the SLC “independent” where a key member (Daly) was a director alleged to have breached fiduciary duties and had prior involvement in matters tied to the claims?
2. Is “independence” under § 7.44 limited to the absence of domination/control or direct financial conflicts, or may the court consider the director’s prior conduct in the challenged matters, including whether the director showed a record of informed business judgment?
3. Did the SLC carry its statutory burden to justify dismissal under § 7.44?

## Decision

- The court denied the SLC’s motion to dismiss the derivative action under Mass. Gen. Laws ch. 156D, § 7.44.
- The court found there was sufficient evidence to question Daly’s independence and, therefore, to question whether the SLC’s recommendation to terminate the litigation was entitled to statutory deference.
- The derivative action was allowed to proceed.

## Legal Principles

- For dismissal under Mass. Gen. Laws ch. 156D, § 7.44, the corporation bears the burden to show that the SLC (or comparable decision maker) was independent and that its determination was made in good faith after reasonable inquiry.
- “Independence” is not confined to a narrow test limited to domination/control or the presence of a direct financial stake; it is assessed in light of the facts bearing on whether the committee member can make a detached decision for the corporation.
- In evaluating independence, a court may consider a director’s prior role in, and handling of, the transactions or decisions being challenged, including whether the director previously acted with adequate information and meaningful scrutiny.
- Judicial deference to an SLC’s business decision to terminate derivative litigation is conditioned on a satisfactory showing of independence; where independence is reasonably in doubt, dismissal under § 7.44 is not warranted.

## Conclusion

Blake held that Friendly’s SLC was not entitled to dismissal under § 7.44 because the record supported a reasonable question about the independence of an SLC member who had been involved in and accused in connection with the disputed corporate decisions, so the court denied the motion to dismiss and permitted the derivative suit to continue.


Blake v. Friendly Ice Cream Corp., 2006 WL 1579596 (2006)