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(This message was added in version 6.7.0.) in /home1/sjayson/public_html/wp-includes/functions.php on line 6121In The Jayson Law Group LLC\u2019s previous post<\/a>, we focused on the requirements of the shareholder in commencing a derivatives commercial litigation suit<\/a>.\u00a0 This post focuses on the involvement of the courts in a derivative suit under the new law, specifically N.J.S.A. 14A:3-6.4<\/a>\u00a0and N.J.S.A. 14A:3-6.5<\/a>.<\/p>\n If the shareholder brings a derivative suit<\/a> in court, the court may stay the proceeding if the corporation can show that it is making a good faith inquiry into the alleged misconduct.\u00a0 This keeps with the spirit of the new law in that it allows a corporation to remedy the situation on its own prior to incurring legal fees from the derivative suit.<\/p>\n Subsection 5 of Assembly Bill A3123<\/a>\u00a0discusses when and how a corporation can ask the court to dismiss the derivative suit.\u00a0 There are several ways that a corporation can accomplish this.\u00a0 The first way a corporation can dismiss the derivative suit is by a majority vote of Independent Directors present at a board meeting decide that maintaining the proceeding is not in the best interest of the corporation.\u00a0 The same result would occur if it was a majority vote of a special committee headed by an Independent Director who was appointed by a majority of independent directors.\u00a0 In both circumstances, the corporation must show that this conclusion by either body was reached after diligent inquiry.<\/p>\n The second way that a company can ask the court to dismiss the derivative suit is if a vote of the majority of disinterested shareholders decides that the derivative suit is not in the best interest of the corporation.<\/p>\n Under N.J.S.A.<\/span> 14A:3-6.5(3) if a shareholder decides to proceed with a derivative suit after the corporation rejected the shareholder\u2019s demand, the shareholder bringing the derivative suit\u2019s complaint must plead \u201cwith particularity facts establishing that a majority of the board of directors, or all members of a committee, which in either case determined the matter, did not consist of independent directors at the time the determination was made.\u201d<\/p>\n N.J.S.A.<\/span> 14A:3-6.5(3) is why it is advisable for any corporation to proceed with a vote of independent directors or a committee including independent directors.\u00a0 By using such a tactic, the corporation places the burden on the shareholder alleging misconduct to prove that the corporation did not act above board.<\/p>\n N.J.S.A.<\/span> 14A:3-6.5(4) also addresses this issue.\u00a0 If a majority of the board who voted to not proceed with the derivative suit was not independent the burden is then on the corporation to prove that their recommendation to not proceed with the derivative suit was the correct decision.<\/p>\n N.J.S.A.<\/span> 14A:3-6.5(5) establishes the procedure by which a corporation can ask the court to dismiss the derivative suit brought by the shareholder.\u00a0 Among the things the corporation must show in the motion papers, are facts proving:<\/p>\n 1) that a majority of the board of directors was independent at the time of their vote; and<\/p>\n 2) that those independent directors acted in good faith in rejecting the shareholder\u2019s claim in the derivative suit.<\/p>\n If a corporation can show those things, the court shall dismiss the shareholder\u2019s derivative suit.\u00a0 The two exceptions to this are if the court finds that the court finds that the independent directors really were not independent or if the plaintiff in a pleading submitted to the court can prove with particularity that the independence of the board of directors who voted to dismiss the derivative suit was compromised.<\/p>\n But what happens if a corporation is unable to create a board of independent directors?\u00a0 Subsection 6 of the new law has a way for corporations to create a panel of independent directors.\u00a0 If a corporation is unable to create a board of independent directors it can make a motion to the court asking the court to appoint a panel to determine if the derivative suit should proceed.<\/p>\n Subsection 7 of Assembly Bill A3123<\/a>\u00a0establishes how a director of the board can be independent.\u00a0 A director is independent if that director has \u201cno economic interest in the act or transaction material to him or her, other than an economic interest that is shared by all shareholders generally; and no material personal, or business relationships with the defendant directors or officers who have a material interest in the act or transaction challenged.\u201d<\/p>\n There are several instances where a director can appear to not be independent but the law views the director as independent for the purposes of the derivative suit.\u00a0 They are:<\/p>\n 1)\u00a0\u00a0\u00a0\u00a0\u00a0 the nomination or election of the director by a person who is a defendant in the derivative proceeding or against whom action is demanded;<\/p>\n 2)\u00a0\u00a0\u00a0\u00a0\u00a0 the naming of the director as a defendant in the derivative proceeding or as a person against whom action is demanded; or<\/p>\n 3)\u00a0\u00a0\u00a0\u00a0\u00a0 the approval by the director of the action being challenged in the derivative proceeding or demand if the act resulted in no personal benefit to the director.<\/p>\n N.J.S.A.<\/span> 14A:3-6.5(7)(b).<\/p>\n These rules allow for a corporation\u2019s board of directors to protect the corporation from litigious shareholders.\u00a0 The new law establishes clear ways that a corporation can show that the actions it took were in the best interest of the corporation prior to commencing an expensive law suit. \u00a0If a corporation is accused by a shareholder of misconduct the corporation should contact a corporate attorney<\/a> to make sure it is complying with\u00a0Assembly Bill A3123<\/a>\u00a0to protect itself moving forward against a potential shareholder derivative suit.<\/p>\n<\/b>The Court\u2019s Involvement in the Derivative Suit under N.J.S.A. 14A:3-6.4<\/strong><\/h2>\n
How a Corporation Can Have the Court Dismiss the Derivative Suit under N.J.S.A. 14A:3-6.5<\/strong><\/h2>\n
How the Corporation Can Move the Court to Dismiss the Derivative Suit<\/strong><\/h2>\n
How is a Director Independent?<\/strong><\/h2>\n
Conclusion – Part 2<\/strong><\/h2>\n