## Facts

- A shareholder, suing derivatively for The Southern Company (a Delaware corporation) and Georgia Power Company (a Georgia corporation and Southern’s wholly owned subsidiary), sought over $800 million in damages.
- The complaint alleged long-running negligence and fiduciary breaches tied to decisions authorizing and managing two major construction projects: the Alvin W. Vogtle nuclear plant and the Rocky Mountain pumped storage facility.
- The shareholder filed in federal district court without making a presuit demand on either corporation’s board, alleging demand was excused because directors who approved or oversaw the projects could not impartially consider suit.
- After filing, the boards formed an independent/special litigation committee (SLC) to investigate; the district court stayed the case during the investigation.
- The SLC recommended dismissal, concluding the challenged decisions were reasonable business judgments, directors were not self-interested, and responsibility lay with middle management.
- A state utility regulator separately investigated related project management for ratemaking purposes and issued findings of many imprudent management decisions shortly after the SLC’s recommendation.
- The defendants moved to dismiss or for summary judgment based on the SLC report.
- The district court excused demand as to Southern under Delaware law, declined to defer to the SLC, and denied dismissal/summary judgment, citing concerns about the SLC’s conclusions and bad faith based on investigation procedures that kept materials privileged.
- The district court certified the order for interlocutory appeal.

## Issues

1. Whether presuit demand on Southern’s board was excused under Delaware demand-futility standards.
2. Whether presuit demand on Georgia Power’s board had to be analyzed separately under Georgia law, even if demand was excused for Southern.
3. Whether, and to what extent, a court must defer to an SLC recommendation to terminate a derivative suit.
4. What level of judicial review applies to an SLC’s independence, good faith, and the reasonableness of its investigation when dismissal is sought.

## Decision

- The Eleventh Circuit agreed Delaware law governed demand futility for Southern and held the complaint adequately pleaded demand futility as to Southern.
- The court held demand for Georgia Power required a separate, Georgia-law analysis and remanded for the district court to decide whether demand was excused as to Georgia Power.
- The court rejected automatic deference to the SLC, holding courts must evaluate the SLC’s independence, good faith, and the reasonableness of its investigative procedures before dismissal may be warranted.
- The court affirmed in part and remanded in part for further proceedings consistent with these rulings.

## Legal Principles

- Demand requirements in derivative litigation are governed by the law of each corporation’s state of incorporation; demand futility for a parent does not automatically establish demand futility for a subsidiary.
- Under Delaware demand-futility doctrine, demand is excused when pleaded facts create reasonable doubt that directors are disinterested/independent or that the challenged action was a valid exercise of business judgment.
- An SLC’s recommendation to dismiss a derivative action is not conclusive; courts must scrutinize whether the SLC is independent, acted in good faith, and conducted a reasonable investigation.
- Investigation methods designed to keep key materials privileged may support a finding that an SLC did not act in good faith or did not conduct an adequate investigation, limiting deference.

## Conclusion

The Eleventh Circuit held that demand futility had to be evaluated separately for the parent and subsidiary under their respective incorporation laws, sustained demand excusal for the Delaware parent, and required judicial scrutiny of a special litigation committee’s independence, good faith, and investigative adequacy before its dismissal recommendation can justify terminating a derivative suit.


Peller v. S. Co., 911 F.2d 1532 (11th Cir. 1990)