/SPESH-uhl lit-uh-GAY-shuhn KUH-mit-eez/·procedural term
Also known as:special litigation committee · special litigation committees' · SLC · SLCs
Written by attorneys · grounded in primary & secondary sources — see below
A group of disinterested and independent individuals appointed by a limited liability company or limited partnership to investigate claims asserted in a derivative proceeding and determine whether pursuing the action is in the entity's best interests. After investigation the committee files a report with the court. The court then reviews whether the committee members were disinterested and independent and whether the committee acted in good faith, independently, and with reasonable care.
Sources & Authorities· 8 primary sources
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Uniform Acts
Hornbooks
How it applies
Common Examples
6
Independent Member Committee Formed
Skyline Construction, an LLC, faces a derivative suit by member Selena Singh alleging mismanagement. The LLC appoints two outside consultants with no financial ties to the managers as the special litigation committee. The committee members review records and interview employees, then recommend dismissal because continued litigation would harm ongoing projects. The court later examines whether those members were disinterested and independent before enforcing the recommendation.
Partnership Appoints Committee And Seeks Stay
Summit Bank, a limited partnership, is named in a derivative action by limited partner Sasha Stone claiming improper loans. The partnership appoints a committee of two independent partners to investigate. The committee moves for a stay of discovery while it examines the claims and weighs whether suit serves the partnership's interests. The court grants the stay absent good cause to proceed immediately.
Disinterested Partners Selected
Stonehaven Properties, a limited partnership, faces a derivative claim by limited partner Samantha Stone over alleged self-dealing. The general partners appoint a committee consisting of two limited partners who have no involvement in the disputed transaction. The committee conducts interviews and document review before determining that dismissal best serves the partnership.
Court Reviews Committee Process
Sterling Dynamics faces a shareholder derivative suit alleging board waste. The board forms a special litigation committee of two newly elected outside directors. The committee interviews witnesses and reviews financial records then recommends dismissal. The court evaluates the committee's independence and the thoroughness of its inquiry before deciding whether to enforce the recommendation.
Joy v. North692 F.2d 880, 887 (2d Cir. 1982)
Committee Investigates Demand Futility Claim
Sydney Santos, a shareholder in a mutual fund, files a derivative suit alleging improper fees. The fund's board appoints a special litigation committee of independent directors to investigate. The committee concludes that pursuing the claims would harm investor relations and moves to dismiss. The court assesses whether the committee's determination meets the standards for deference.
Kamen v. Kemper Financial Services, Inc.500 U.S. 90 (1991)
Independence Of Committee Members Challenged
Sabrina Shah sues derivatively alleging that directors approved an unfair merger. The board appoints a special litigation committee of two directors elected after the merger. The committee recommends dismissal after a brief review. The court examines whether those directors lacked material relationships that would undermine their independence under the applicable test.
Aronson v. LewisDel. Supr., 473 A.2d 805, 812 (1984)
Common questions
Frequently Asked
5
What composition requirements apply to a special litigation committee?+
The committee must consist of one or more disinterested and independent individuals who may be members or partners of the entity.
Supporting sources
What happens after a special litigation committee completes its investigation?+
The committee files a statement of its determination and supporting report with the court and serves the parties. The court then reviews whether the members were disinterested and independent and whether the committee acted in good faith, independently, and with reasonable care.
Does appointment of a special litigation committee automatically dismiss the derivative suit?+
No. Appointment stays discovery for a reasonable time to allow investigation, but the court must later determine that the committee met the statutory standards before enforcing any recommendation to dismiss.
Supporting sources
Can a special litigation committee address claims to enforce information rights?+
Yes. The committee may investigate and determine whether pursuing any claim asserted in the derivative proceeding, including enforcement of information rights, serves the entity's best interests.
Supporting sources
What must a plaintiff allege to prevent enforcement of a committee recommendation?+
The plaintiff must allege with particularity facts showing that the committee members were not disinterested and independent or that the committee failed to act in good faith, independently, and with reasonable care.
Supporting sources
. See Comment,
Special Litigation Committees
--An Expanding and Potent Threat to Shareholder Derivative Suits, 2 Cardozo L.Rev. 169 (1980); Note, The Business Judgment Rule in Derivative…
“for the purpose of establishing a point of contact between the Board of Directors and the Corporation’s General Counsel concerning the position to be taken by the Corporation in certain…
Business Associations Corporations and LlcsShareholder and member litigation: direct, derivative, and class litigation · Shareholder and member litigation: direct, derivative, and class litigationUBEFoundational