## Facts

- MA Federal, Inc. (iGov) was a Delaware government contractor transitioning from low-margin hardware resale to higher-margin services.
- Craig London and James Hunt, co-founders and significant stockholders, brought derivative fiduciary duty claims against officers/directors Michael Tyrrell, Patrick Neven, and Walter Hupalo.
- In 2007, iGov’s board approved an equity incentive plan granting options to directors and managers; plaintiffs alleged defendants used pessimistic projections to set an artificially low strike price and entrench control.
- Tyrrell provided a lender (Textron Financial) projections showing roughly $3 million (and later about $3.1 million) in EBITDA, but pushed the valuation firm (Chessiecap) to use a revised $1.8 million EBITDA forecast that excluded certain contract revenue.
- Chessiecap valued iGov equity at $4.7 million using the revised forecast; the board set an option exercise price of $4.92 per share and granted options including 80,000 to Tyrrell and 50,000 each to Neven and Hupalo.
- London and Hunt opposed reliance on the valuation; Neven, Hupalo, and another stockholder holding 50.1% voting power removed them from the board, then adopted the plan and issued the options.
- After the grants, plaintiffs alleged their ownership fell to 40% while defendants’ increased to 54.1%, shifting control.
- After defendants’ initial dismissal motion failed, iGov formed a two-member special litigation committee (SLC) of newly elected directors John Vinter and Vincent Salvatori to evaluate whether the derivative action should continue.
- Vinter’s wife was Tyrrell’s cousin and their families saw each other periodically; Salvatori had prior business dealings with Tyrrell and was described as grateful to Tyrrell for help obtaining a favorable sale price in an earlier venture.
- The SLC investigated for about four months and recommended dismissal, citing (a) an 8 Del. C. § 102(b)(7) exculpation provision barring monetary liability for duty-of-care claims and (b) its conclusion that the plan was entirely fair and did not involve disloyalty.
- Plaintiffs argued the SLC lacked independence, conducted an inadequate investigation, failed to analyze rescission of the plan, and unreasonably accepted Tyrrell’s explanations without reconciling conflicting forecasts.

## Issues

1. Whether material fact disputes existed as to the SLC members’ independence from the defendants.
2. Whether material fact disputes existed as to the SLC’s good faith and the reasonableness of its investigation and recommendation.
3. Whether dismissal was warranted under the two-step Zapata standard governing SLC motions to terminate derivative litigation.

## Decision

- The Court of Chancery denied the SLC’s motion to dismiss.
- The court held that material questions of fact existed regarding (1) SLC independence, (2) the good faith of its investigation, and (3) the reasonableness of the grounds for recommending dismissal.
- Because those disputes remained, the derivative action was permitted to proceed.

## Legal Principles

- Under Zapata, a court must scrutinize an SLC’s independence, good faith, and the reasonableness of its investigation and conclusions; an SLC recommendation is not automatically accepted.
- SLC independence is fact-specific; familial ties and prior business relationships that may create a sense of obligation can raise a reasonable doubt about independence.
- An SLC investigation must address material issues and remedies presented by the litigation; focusing only on monetary exposure while disregarding equitable relief may be inadequate.
- A § 102(b)(7) exculpation provision may bar monetary liability for duty-of-care claims, but it does not resolve loyalty-based claims or foreclose equitable remedies such as rescission.

## Conclusion

The court refused to terminate the derivative suit because the record supported triable disputes about whether the SLC was independent and whether it conducted a sufficiently careful, remedy-complete investigation supporting a reasonable recommendation under Zapata.


London v. Tyrrell, 2010 Del. Ch. LEXIS 54 (Del. Ch. 2010)