Special Litigation Committees

In situations where demand is futile, stockholders can file derivative litigation without making demand. Does that mean that boards have forever lost control over the derivative litigation? In some circumstances the answer is no.

The following cases lay out the doctrine with respect to how a board can retake control over derivative litigation in later stages of litigation. The board through an independent committee, often known as a special litigation committee, may file a pretrial motion to retake control and then dismiss the derivative litigation. The Special Committee must be prepared to meet the burden under Rule 56 (Summary Judgment) that there is no genuine issue as to any material fact and that the moving party is entitled to dismiss as a matter of law.

Remember, unlike in the case of demand and demand futility, at this stage of the litigation, boards bear the burden of proving that notwithstanding the fact that demand was previously futile, the board is now in a position to fairly consider the facts of the complaint.  As you will see, this is a heavy burden for a board to bear.