## Facts

- A TLC Beatrice board approved a large compensation and severance arrangement for former CEO and controlling stockholder Reginald F. Lewis, described as approximately $19.5 million in value.
- Carlton Investments, a significant TLC Beatrice stockholder, filed a shareholder derivative action challenging the approval and implementation of the arrangement.
- The complaint asserted fiduciary-duty claims and also alleged fraud, conspiracy, and corporate waste arising from the transaction.
- After substantial litigation activity, TLC Beatrice added two new directors who had not participated in the challenged decisions.
- The board empowered these two directors as a Special Litigation Committee (SLC) to investigate the derivative claims and determine whether the corporation should continue the suit, settle, or seek dismissal.
- The SLC conducted an investigation lasting roughly five months and negotiated with the Lewis estate.
- The SLC reached a proposed settlement requiring the Lewis estate to repay about $15 million to TLC Beatrice.
- The SLC moved for court approval of the settlement and dismissal of the derivative action under Delaware Court of Chancery Rule 23.1; Carlton opposed.

## Issues

1. Whether the two-member SLC was independent and disinterested and whether it acted in good faith after a reasonable investigation such that its settlement recommendation warranted effect under Rule 23.1.
2. Whether the proposed settlement (approximately $15 million repayment) was fair, reasonable, and adequate for TLC Beatrice and its stockholders in light of litigation risks and potential recovery.
3. Whether, upon approving the settlement, the court should dismiss the derivative claims under Rule 23.1.

## Decision

- The Court of Chancery approved the SLC-negotiated settlement and dismissed the derivative action under Rule 23.1.
- The court found the SLC members sufficiently independent and disinterested, including because they were newly appointed and had not approved the challenged arrangement.
- The court determined the SLC conducted a good-faith, reasonable investigation over approximately five months.
- The court concluded the settlement’s monetary return to the corporation was fair and reasonable given the uncertainties and risks of continued litigation.

## Legal Principles

- In reviewing an SLC’s resolution of derivative litigation, the court examines the committee’s independence and disinterest, the good faith and reasonableness of its investigation, and the reasonableness of its substantive conclusions.
- Newly appointed directors may serve as an SLC capable of acting for the corporation if the record supports that they are not controlled by, or materially tied to, interested parties.
- Under Court of Chancery Rule 23.1, a derivative action may be dismissed following court approval of a settlement when the decision-making process is independent, informed, and made in good faith, and the settlement is fair to the corporation and stockholders.
- A substantial but partial monetary recovery can be an acceptable compromise of contested fiduciary-duty and waste claims when the expected value of continued litigation is uncertain.

## Conclusion

The Court of Chancery approved a derivative settlement requiring a substantial repayment to the corporation and dismissed the action under Rule 23.1 after determining that a newly formed, independent SLC conducted a reasonable, good-faith investigation and reached a fair settlement in light of the litigation risks and likely outcomes.


Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1997 WL 305829 (Del. Ch. May 30, 1997)