## Facts

- Par Pharmaceutical, Inc. (Par) is a generic-drug manufacturer and owned a majority interest in Quad Pharmaceuticals, Inc. (Quad), which made injectable generic drugs.
- Par shareholders filed three shareholder-derivative suits in federal court in August 1989; the actions were consolidated and a consolidated amended complaint was filed in December 1989.
- The consolidated complaint asserted federal claims under §§ 14 and 20 of the Securities Exchange Act of 1934 and RICO, along with state-law fiduciary-duty claims, arising from alleged wrongdoing by certain Par and Quad officers, directors, and former officers.
- Par’s board appointed a special litigation committee (SLC) to investigate the derivative claims and to recommend a course of action to the board, subject to a board vote.
- After its investigation, the SLC recommended that Par seek dismissal of the federal shareholder-derivative action.
- The board voted to approve the SLC’s recommendation; four directors who voted were also named defendants in the derivative litigation.
- Par moved to dismiss the federal derivative action under Federal Rule of Civil Procedure 23.1, contending the decision to seek dismissal was a protected exercise of business judgment (and pointing to Par’s preference to proceed through corporate-controlled litigation, including related state-court litigation).
- Plaintiffs opposed, arguing the board’s approval was not disinterested or independent because defendant-directors participated in the decision; plaintiffs also cross-moved for discovery into the SLC and board process only if the court found Par had made a prima facie showing supporting dismissal.

## Issues

1. Whether a corporation is entitled to dismissal of a shareholder-derivative action under Rule 23.1 when the board approved an SLC’s dismissal recommendation but several voting directors were defendants in the derivative suit.
2. Whether plaintiffs were entitled to discovery into the SLC’s independence and investigation where their discovery request was conditioned on the corporation first making a prima facie showing that dismissal should be granted.

## Decision

- The court denied Par’s Rule 23.1 motion to dismiss.
- The court denied plaintiffs’ conditional cross-motion for discovery.

## Legal Principles

- Federal Rule of Civil Procedure 23.1 sets procedural requirements for derivative actions; it does not itself supply the substantive standard for when a corporation may terminate derivative litigation.
- Under the applicable state corporate-law standard, a corporation seeking dismissal based on an SLC/board determination must make a threshold showing that the decision resulted from an independent and disinterested decisionmaker acting in good faith after a reasonable investigation.
- When directors who are defendants in the derivative action participate in the board vote to accept an SLC recommendation to dismiss, the corporation may fail to show the independence/disinterest needed for business-judgment deference at the dismissal stage.
- If the corporation does not make the required prima facie showing for dismissal, the court may deny dismissal without reaching (or triggering) discovery into the SLC’s work; a discovery request conditioned on a prima facie showing need not be granted when that condition is not met.

## Conclusion

The court refused to dismiss the consolidated federal derivative action because Par did not establish that the decision to seek dismissal was made by a sufficiently independent and disinterested corporate body, given that several directors voting to approve the SLC’s recommendation were themselves defendants in the case. Because plaintiffs sought discovery only if Par first made a prima facie showing supporting dismissal—and Par did not—the court also denied the cross-motion for discovery.


In re Par Pharmaceutical Inc. Derivative Litigation, 750 F. Supp. 641 (1990)