Zapata Corp. v. Maldonado

430 A.2d 779 (1981)

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Nature of the Case

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Facts

In June 1975, P, a stockholder of D, instituted a derivative action in the Court of Chancery on behalf of D against ten officers and/or directors of D, alleging breaches of fiduciary duty. P did not first demand that the board bring this action, stating instead such demand's futility because all directors were named as defendants and allegedly participated in the acts specified. By June 1979, four of the defendant-directors were no longer on the board, and the remaining directors appointed two new outside directors to the board. The board then created an 'Independent Investigation Committee' (Committee), composed solely of the two new directors, to investigate P's actions, as well as a similar derivative action then pending in Texas, and to determine whether the corporation should continue any or all of the litigation. The Committee's determination was stated to be 'final, . . . not . . . subject to review by the Board of Directors and . . . in all respects . . . binding upon the Corporation.' The Committee concluded, that P's actions should 'be dismissed forthwith as their continued maintenance is inimical to the Company's best interests . . . .' D moved for dismissal or summary judgment in the three derivative actions. The District Court for the Southern District of New York granted D's motion for summary judgment. The Committee had the authority, under the 'business judgment' rule, to require the termination of the derivative action. P appealed. On March 18, 1980, the Court of Chancery denied D's motions, holding that Delaware law does not sanction this means of dismissal. It held that the 'business judgment' rule is not a grant of authority to dismiss derivative actions and that a stockholder has an individual right to maintain derivative actions in certain instances. D filed an interlocutory appeal. The appeal was accepted on June 5, 1980. On May 29, 1980, the Court of Chancery dismissed Ps cause of action, its decision based on principles of res judicata, expressly conditioned upon the Second Circuit affirming the earlier New York District Court's decision. The Second Circuit appeal was ordered stayed, however, pending this Court's resolution of the appeal from the April 9th Court of Chancery order denying dismissal and summary judgment.