## Facts

- A shareholder brought a derivative action on behalf of a Connecticut bank holding company and its banking subsidiary against the CEO and other officers/directors.
- The complaint challenged a series of loans and related transactions to a real-estate developer, alleging imprudent and unlawful lending, including unsecured loans and lending-limit violations.
- After the development project failed, the bank took title to the building and assumed related obligations.
- The derivative suit sought approximately $6 million plus interest and attorneys’ fees for alleged breach of fiduciary duty, breach of trust, and statutory violations.
- The board formed a Special Litigation Committee (SLC) of two outside directors to investigate whether continuing the suit served the corporation’s interests.
- The SLC recommended dismissal as to most defendants and suggested pursuing settlement discussions with a smaller group of insiders.

## Issues

1. What standard governs judicial review of an SLC’s recommendation to terminate a shareholder derivative action under applicable state corporate law principles.
2. Whether summary judgment dismissing the derivative claims based on the SLC’s recommendation was proper on the record presented.
3. Whether an SLC report submitted to and relied upon by the court may be sealed absent a strong justification.

## Decision

- The court reversed the summary judgment dismissing claims against the outside defendants.
- The court held that judges must independently assess whether dismissal is in the corporation’s best interests and may not treat the SLC’s recommendation as dispositive.
- The court placed the burden on the movants to show, as on summary judgment, that continuation of the action is more likely than not against the corporation’s interests.
- The court required that the pro-dismissal showing rest on the SLC’s underlying data and reasoning, subject to ordinary evidentiary scrutiny, not merely conclusory assertions.
- The court vacated the order sealing the SLC report because it was part of the judicial record and central to the adjudication, and no compelling countervailing basis justified blanket sealing.

## Legal Principles

- In derivative litigation, federal courts apply the relevant state corporate law rules governing the authority of independent directors (or an SLC) to seek termination of the suit, including when claims include statutory components.
- An SLC’s recommendation to dismiss does not receive the same deference as ordinary business decisions because the question is whether to abandon existing litigation alleging serious wrongdoing by corporate managers.
- Judicial review focuses on whether dismissal is likely to benefit the corporation, using a probabilistic cost-benefit framework: expected recoverable damages discounted by the likelihood of liability compared against the costs of continuing the action.
- The moving party must demonstrate that continuing the suit is more likely than not contrary to the corporation’s interests; failure to meet that burden defeats dismissal at the summary judgment stage.
- When an SLC report is filed with and relied upon by the court, the public-access presumption applies; sealing requires a strong, specific justification.

## Conclusion

The court required independent judicial evaluation of SLC-based dismissal requests in derivative suits through a probability-and-cost analysis with the movant bearing the burden, and it rejected blanket sealing of an SLC report that functioned as a key judicial record.


Joy v. North, 692 F.2d 880 (2d Cir. 1982)