## Facts

- Shareholders brought consolidated derivative actions on behalf of Public Service Enterprise Group Inc. and its wholly owned subsidiary, Public Service Electric & Gas Co., alleging prolonged mismanagement of the Salem and Hope Creek nuclear facilities and resulting corporate losses.
- On October 4, 1995, shareholder Gloria E. Stricklin sent a formal demand to the board requesting that the corporation sue certain officers and directors for the alleged mismanagement.
- On October 17, 1995, the board retained outside counsel (Kasowitz, Benson, Torres & Friedman) to investigate the demand’s allegations.
- The investigation involved extensive document review and interviews of company personnel.
- On March 19, 1996, the board rejected the demand, concluding litigation was not in the corporation’s best interests.
- Plaintiffs filed derivative complaints asserting, among other things, wrongful refusal to pursue claims; defendants moved to dismiss.
- On December 17, 1996, the court denied dismissal, finding the pleadings alleged particularized facts raising reasonable doubt about director disinterestedness and the application of the business-judgment rule.
- On December 30, 1997, defendants moved for summary judgment, arguing the board’s demand refusal—based on the investigation—was protected by the business-judgment rule.
- Plaintiffs sought discovery into the investigation and the board’s decision-making to oppose summary judgment; the court addressed the permissible scope of such discovery.

## Issues

1. After a shareholder demand is made and rejected, what discovery may plaintiffs obtain to oppose a summary-judgment motion asserting the business-judgment rule based on a board-commissioned investigation?
2. What information is relevant to assessing whether the board’s refusal was disinterested, independent, in good faith, and reasonably informed for purposes of business-judgment deference?

## Decision

- The court held plaintiffs were entitled to discovery targeted to the board’s March 19, 1996 demand refusal and the investigation supporting it before adjudicating summary judgment.
- The court rejected defendants’ effort to cut off discovery and obtain a dispositive ruling based solely on the board’s asserted business judgment.
- The court limited discovery to matters bearing on the integrity and adequacy of the investigation and the board’s independence, disinterestedness, and informed, good-faith deliberations.

## Legal Principles

- A board’s refusal of a shareholder demand following an investigation is presumptively protected by the business-judgment rule, but the presumption may be rebutted with particularized facts showing lack of independence or disinterestedness, bad faith, or an unreasonable investigation.
- When defendants seek summary judgment premised on a demand refusal and an internal or board-commissioned investigation, plaintiffs must have a meaningful opportunity to obtain discovery concerning the investigation’s adequacy and the decision-makers’ independence and good faith.
- Discovery in demand-refusal cases may be circumscribed, but it cannot be so narrow that plaintiffs cannot test whether the business-judgment rule should apply to the refusal decision.

## Conclusion

The court permitted limited, focused discovery into the board’s investigation and deliberations supporting its rejection of a shareholder demand, holding that such discovery was necessary to allow plaintiffs to contest a business-judgment-rule summary-judgment defense.


In re PSE & G Shareholder Litigation, 315 N.J. Super. 323, 718 A.2d 254 (N.J. Super. Ct. Ch. Div. 1998)