## Facts

- PECO Energy Company, a Pennsylvania public utility, underwent a management audit that criticized aspects of its credit and collection practices.
- Minority shareholders made a demand that PECO authorize litigation against certain officers and directors for alleged mismanagement and resulting corporate harm.
- PECO’s board created a special litigation committee composed of disinterested directors to evaluate the demand and related derivative suits.
- The committee retained outside counsel and an independent auditor and conducted a months-long investigation, including review of documents and interviews.
- The committee found no evidence of self-dealing or breach of the duty of loyalty and concluded continued derivative litigation would not serve PECO’s interests.
- Disinterested board members unanimously voted to terminate the derivative suits and PECO moved for summary judgment to dismiss them.
- The trial court denied summary judgment, and PECO sought extraordinary review focused on whether the business judgment rule allows a board to terminate minority-shareholder derivative litigation.

## Issues

1. Whether Pennsylvania law permits a corporation’s board, acting through disinterested directors or a special litigation committee, to terminate a minority shareholders’ derivative suit under the business judgment rule.
2. What judicial review applies when a corporation seeks summary judgment dismissing a derivative action based on a committee’s recommendation.

## Decision

- The Pennsylvania Supreme Court held that a corporation’s board may terminate a shareholder derivative action under the business judgment rule.
- A court may dismiss the derivative suit on summary judgment if the corporation shows the termination decision was made by an independent decisionmaker, in good faith, after a reasonable investigation.
- The Court directed that judicial review should focus on the process leading to the termination decision rather than re-trying the merits of the underlying managerial choices.

## Legal Principles

- The business judgment rule creates a presumption that directors act on an informed basis, in good faith, and with an honest belief their actions serve the corporation’s best interests.
- In reviewing a special litigation committee’s recommendation to end a derivative suit, courts examine whether the decision resulted from:
  - independent and disinterested judgment,
  - good faith, and
  - a reasonable investigation.
- If these requirements are satisfied, the board’s decision to terminate the derivative action is binding and warrants dismissal, including at the summary judgment stage.
- Courts should not substitute their judgment for directors’ business decisions; the inquiry centers on the circumstances and adequacy of the committee’s decisionmaking process.

## Conclusion

Pennsylvania recognizes that a board may end shareholder derivative litigation when an independent, good-faith special litigation committee conducts a reasonable investigation and concludes the suit is not in the corporation’s interests, and courts should dismiss such actions when that process showing is made.


Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997)