## Facts

- Jugal (Jugul) Tenja, a shareholder of Familymeds Groups, Inc. (Familymeds), sought to pursue corporate claims through a shareholder derivative action.
- Tenja alleged serious fraud and misconduct by certain Familymeds directors and officers.
- Tenja made a shareholder demand asking the Familymeds board to investigate the alleged misconduct and cause the company to pursue claims.
- Robinson & Cole, a law firm already representing Familymeds and also representing or advising the individual directors whose conduct was at issue, was involved while the allegations were being investigated.
- Robinson & Cole advised the board in connection with responding to the demand and recommended that the board reject it.
- The board rejected Tenja’s demand.
- Tenja then pursued derivative litigation and moved to disqualify Robinson & Cole from representing Familymeds and the directors in the matter, arguing the firm could not both defend the accused directors and function as an independent evaluator of the corporation’s potential claims against them.

## Issues

1. In a derivative context, may a corporation’s counsel simultaneously represent the corporation and the accused directors while also advising the board on whether to reject a shareholder demand based on allegations against those directors?
2. Does a board act in good faith and with a reasonable investigative process when it relies on a demand-investigation and recommendation conducted by counsel whose duties include defending the directors accused of harming the corporation?
3. If the demand-review process is compromised by conflicted counsel, is the board’s refusal entitled to business-judgment deference?

## Decision

- The court granted Tenja’s motion to disqualify Robinson & Cole from the challenged joint role in the derivative matter.
- The court concluded that using counsel who was simultaneously positioned to defend the director targets of the demand to conduct (or drive) the demand investigation and advise rejection created an impermissible conflict for purposes of that role.
- Because the demand-refusal decision rested on an investigation and recommendation produced through conflicted counsel, the court declined to treat the board’s refusal as the product of a good-faith, reasonable process entitled to customary deference.

## Legal Principles

- In a shareholder derivative action, the corporation is the real party in interest; the shareholder seeks to enforce rights belonging to the corporation against fiduciaries or other wrongdoers.
- When a shareholder makes a demand, judicial review of a board’s refusal focuses on the board’s good faith and the reasonableness of the board’s investigation and decision-making process.
- A demand investigation meant to inform whether the corporation should pursue claims against directors must be conducted through a process capable of objective assessment; counsel tasked with defending the accused directors cannot reliably serve as the corporation’s independent investigator on the same accusations.
- A law firm’s concurrent responsibilities to protect individual directors from liability can materially limit the firm’s ability to advise the corporation on whether to pursue claims against those same directors.
- Where a demand refusal is based on a conflicted investigative process, the refusal is not entitled to the usual presumption that it was a reasonable exercise of business judgment.

## Conclusion

Tenja holds that, in a derivative demand setting, a board cannot shield its demand-refusal decision behind business-judgment deference when the investigation and recommendation were conducted by counsel laboring under a conflict created by simultaneously defending or advising the directors accused of wrongdoing; the court therefore disqualified the firm from serving in that dual capacity and refused to credit the demand-refusal process as a good-faith, reasonable investigation.


Tenja v. Familymeds Groups, Inc., 50 Conn. L. Rptr. 73, 2010 WL 2573762 (2010)