## Facts

- Abercrombie & Fitch Co. shareholders filed a derivative action alleging certain officers and directors caused the company to make misleading public statements in mid-2005 about the success of its business model.
- The shareholders alleged the statements concealed slowing sales and that insiders sold significant personal holdings before the stock price declined.
- Securities-fraud litigation and an SEC investigation followed, which the shareholders alleged harmed the corporation.
- Abercrombie’s board formed a special litigation committee (SLC) under Delaware law to investigate the claims and determine whether pursuing the derivative litigation was in the company’s best interests.
- One SLC member (a sitting director) recused himself from evaluating claims against a particular defendant due to a prior relationship.
- The SLC reported it found no supporting evidence for the derivative claims and recommended dismissal.

## Issues

1. Whether the corporation met its burden under Delaware law to show the SLC was disinterested and independent such that dismissal based on the SLC’s recommendation was proper.
2. If independence was established, whether the SLC acted in good faith and conducted a reasonable investigation supporting its recommendation.

## Decision

- The Sixth Circuit reversed the dismissal, denied the motion to dismiss, and remanded.
- The court held the record raised serious questions about the SLC’s independence, making dismissal improper at that stage.
- Because independence is a threshold requirement, the court did not definitively resolve the good-faith and reasonableness prongs.

## Legal Principles

- Under Delaware law, a corporation seeking dismissal of a derivative action based on an SLC recommendation bears the burden to prove: (1) SLC independence (and disinterestedness), (2) good faith, and (3) a reasonable investigation supporting its conclusions.
- Independence turns on whether committee members are influenced by considerations other than the corporation’s best interests; the inquiry is fact-specific.
- An SLC member’s conflict requiring recusal as to a key defendant can create serious doubt about the committee’s independence and can preclude judicial deference to the committee’s recommendation to dismiss.

## Conclusion

The Sixth Circuit allowed the derivative action to proceed because the corporation failed to adequately establish the SLC’s independence, a prerequisite to dismissal under Delaware law.


Booth Family Trust v. Jeffries, 640 F.3d 134 (6th Cir. 2011)