## Facts

- A shareholder derivative action was brought by the executrix of an Exxon shareholder’s estate on behalf of Exxon and its shareholders.
- The complaint alleged that Exxon’s Italian subsidiary and related entities made approximately $59 million in improper payments to Italian political parties and others between 1963 and 1974 to obtain political favors and other benefits.
- The suit asserted that certain Exxon officers and directors allowed or failed to prevent the payments and caused inaccurate corporate disclosures about them.
- Federal claims alleged failures to disclose the payments in SEC filings (Exchange Act § 13(a) and Rule 13a-1) and in proxy solicitations (Exchange Act § 14(a) and related rules).
- State-law claims alleged breaches of fiduciary duty, and the complaint sought damages and corporate governance reforms (including changes in board composition and senior leadership).
- Exxon’s board formed a Special Committee on Litigation with authority to decide the corporation’s response to derivative suits arising from the payments.
- After investigating and confirming secret payments, the Special Committee concluded it was not in Exxon’s and shareholders’ interests for Exxon to sue current or former Exxon directors or officers and resolved that Exxon should seek dismissal of the derivative actions.
- The shareholder challenged the committee’s disinterestedness, independence, and good faith, asserting potential involvement or interest that could impair objective judgment.

## Issues

1. Whether a corporation is entitled to summary judgment dismissing a derivative suit based on a special litigation committee’s decision not to sue, when the plaintiff plausibly challenges the committee’s independence and good faith.
2. Whether, at the summary judgment stage, the plaintiff must be allowed discovery (and if necessary an evidentiary hearing) to test the committee’s bona fides before the court defers under the business judgment rule.

## Decision

- The court denied defendants’ motion for summary judgment.
- The denial was without prejudice to renewal after the plaintiff conducted relevant discovery.
- The court held that the plaintiff was entitled to discovery to test the Special Committee’s independence and good faith, and, if warranted, to a plenary hearing on those matters.
- The court reasoned that disputed questions of intent, motivation, and good faith are generally inappropriate for resolution on summary judgment.

## Legal Principles

- A corporation’s decision whether to pursue litigation is ordinarily for directors and officers, and courts generally will not interfere with good-faith business judgments made in the corporation’s interests.
- Judicial deference under the business judgment rule depends on the disinterestedness, independence, and good faith of the decision-maker.
- When a derivative plaintiff plausibly alleges fraud, collusion, self-interest, dishonesty, lack of good faith, or similarly serious misconduct affecting a board or committee decision to terminate litigation, the plaintiff must be permitted to develop a factual record testing the decision-making process.
- Summary judgment is premature where the record has not been developed and the plaintiff has raised a genuine dispute about a special litigation committee’s independence or bona fides.

## Conclusion

The court refused to dismiss the derivative suit at the threshold based solely on a special litigation committee’s recommendation, holding that a shareholder who credibly challenges the committee’s independence and good faith is entitled to discovery (and potentially a hearing) before the court defers to the committee’s business judgment.


Gall v. Exxon Corp., 418 F. Supp. 508 (S.D.N.Y. 1976)