Sarnacki v. Golden et al

Filing 144

Judge Michael A. Ponsor: MEMORANDUM AND ORDER entered. As follows: For the reasons stated. Defendants Motion for Summary Dismissal of [the] Verified Shareholder Derivative Complaint (Dkt. No. 111 ) is hereby ALLOWED. The clerkwill enter judgment for Defendants. The case may now be closed. It is So Ordered. See the attached memo and order for complete details. (Lindsay, Maurice)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

AARON SARNACKI,
Derivatively on Behalf of
Smith & Wesson Holding Corp.,
Plaintiff

v.
MICHAEL F. GOLDEN,
ET AL.,
Defendants

)
)
)
)
)
)
) C.A. NO. 11-cv-30009-MAP
)
)
)
)

MEMORANDUM AND ORDER REGARDING
DEFENDANTS’ MOTION FOR SUMMARY DISMISSAL OF
VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT
(Dkt. No. 111)
March 12, 2014
PONSOR, U.S.D.J.
I.

INTRODUCTION

Plaintiff, a shareholder of Smith & Wesson (“S&W”),
brought this derivative suit against the officers and
directors of S&W Holdings, Inc, alleging, inter alia, breach
of fiduciary duty.
July 1, 2011.

Defendants filed a Motion to Dismiss on

(Dkt. No. 29.)

The court, on March 29, 2012,

denied that motion, without prejudice, to allow Plaintiff to
conduct discovery into Defendants’ Special Litigation
Committee (“SLC”).

Sarnacki v. Golden, No. 11-cv-30009-MAP,

2012 WL 1085539 at *2 (D. Mass. March 29, 2012).
On June 28, 2013, Defendants filed this Motion for
Summary Dismissal, contending that its SLC acted
independently, in good faith, and reached a reasonable
decision that litigation was not in the best interests of
the corporation.

(Dkt. No. 111.)

Because the SLC acted

appropriately, and its decision is thus entitled to
deference, the court will allow Defendants’ motion.
II. PROCEDURAL HISTORY
This suit is one of a number of legal actions arising
from the same set of facts.

Between June 2007 and October

2007, Defendants, according to Plaintiff, issued false
statements misrepresenting the demand for their products.
They purportedly made these statements while they were aware
that S&W’s inventory far exceeded demand.
On December 13, 2007, the first piece of litigation was
filed in this court.

In re Smith & Wesson Holding Corp.

Sec. Litig., No. 07-cv-30238-MAP (D. Mass.)(“Securities
Class Action.”)

Two months later, in February 2008,

Plaintiff filed a derivative suit in state court, which was
consolidated with other, similar cases.
-2-

In re Smith &

Wesson Corp. Deriv. Litig., Civil Action No. 2008-0099
(Hampden Co. Sup. Ct.).

A third matter, another derivative

class action, Bundy v. Golden et. al, No. 09-cv-30174-MAP
(D. Mass.), was filed with this court in 2009.
Those three cases have all been resolved.

The state

suit was dismissed in 2009 as the plaintiffs failed to make
a proper pre-suit demand on the Board of Directors.

On

October 20, 2010, this court dismissed Bundy v. Golden, for
failure to provide the S&W SLC, formed in June 2009, and
discussed further below, sufficient time to investigate the
claims.

In re Smith & Wesson Holding Corp. Sec. Litig., 743

F. Supp. 2d. 14, 21-22 (D. Mass. 2010).
The Securities Class Action reached its terminus on
March 25, 2011, when this court allowed Defendants’ Motion
for Summary Judgment.

In re Smith & Wesson Holding Corp.

Sec. Litig., 836 F. Supp. 2d 1 (D. Mass. 2011).

The court

determined that no genuine dispute existed respecting the
alleged misrepresentations, nor was there sufficient
evidence indicating the necessary scienter.

Id.

On

February 17, 2012, the First Circuit affirmed that decision.
In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68
-3-

(1st Cir. 2012).
The case now before the court arose in the midst of all
that litigation.

One week after the Bundy case was

dismissed, Plaintiff filed this derivative complaint in the
District of Arizona, alleging that the SLC failed to conduct
an independent evaluation of the claims.

Sarnacki v.

Golden, et al., No. 10-cv-02316-SRB (D. Ariz.)

Plaintiff

charged breach of fiduciary duty, waste of corporate assets,
unjust enrichment, and an entitlement to contribution and
indemnification.

On January 12, 2011, the parties jointly

stipulated to transfer venue to this court, and on January
13, 2011, that transfer was allowed.

Id. at (Dkt. No. 16.)

Defendants, on July 1, 2011, filed their first Motion
to Dismiss.

(Dkt. No. 29.)

On March 29, 2012, the court

denied the motion, without prejudice, and ordered limited
discovery to allow Plaintiff to investigate the adequacy of
the SLC.

Sarnacki v. Golden, No. 11-cv-30009-MAP, 2012 WL

1085539 at *2 (D. Mass. March 29, 2012).

The court opined

that deferral to the SLC was the one potential justification
for dismissal at this early stage of the case.

Id.

In response to that order, Defendants produced all
-4-

documents relied on by the SLC in its final report, company
board minutes respecting the formation and appointment of
the SLC, written discovery responses, and copies of
requested tolling agreements.

Plaintiff also deposed each

of the SLC members.1
Following this discovery, Defendants filed the pending
Motion for Summary Dismissal.

(Dkt. No. 111.)

The conduct

of the SLC is dispositve of the motion, and therefore a
detailed examination of its actions is necessary.
III.

The SLC2

As a result of Plaintiff’s allegations and the surge of
litigation, Defendant S&W established the SLC on June 22,
2009.

The SLC was explicitly tasked, on behalf of the Board

of Directors, with evaluating the viability of the claims.
The SLC comprised three members: Robert Scott, a director of
S&W since 1999; John Furman, a director of S&W since 2004;

1

In June 2012, Plaintiff moved to compel additional
discovery, (Dkt. Nos. 49 & 52); the court denied that motion
on January 15, 2013. (Dkt. No. 80.)
2

Unless otherwise noted, the facts are drawn from
Defendants’ Statement of Undisputed Facts (Dkt. No. 112),
Plaintiff’s Response to the Statement of Undisputed Facts
(Dkt. No. 123), along with the documents referenced therein.
-5-

and I. Marie Wadecki, a director of S&W since 2002.

To

assist with the process, the SLC retained as counsel the
firm of Fierst, Pucci & Kane LLP.
The SLC’s investigation occurred between August 2009
and December 2010.3

After initially reviewing the

shareholders’ claims, the SLC began its inquiry by examining
the allegedly deceptive press releases, transcripts of
earning conference calls identified as false or misleading,
public filings identified as false or misleading, key
internal financial records, the audit committee charter,
audit committee minutes for FY 2008, Board of Directors
books for FY 2008, and the corporation’s Articles of
Incorporation.
After this initial document review, the SLC turned to
material that was available from the Securities Class
Action.

Given the overlapping factual record existing

between the two cases, the SLC consulted with the Board of

3

While the investigation was pending, Plaintiff’s
counsel requested that the SLC pursue tolling agreements to
preserve potential claims. The SLC, after determining that
it was in the best interest to do so, obtained such
agreements. This tolled the relevant statute of limitations
until April 2011.
-6-

Directors’ counsel, Greenberg Traurig (“GT”), to determine
if any of the work done in that case could be used in the
SLC’s analysis.

After the SLC independently reviewed the

process by which GT conducted discovery, it decided that the
discovery process was thorough and the documents would be
relevant for its investigation.

The SLC also reviewed

transcripts and exhibits from the eleven depositions of key
company officers and employees that were conducted by the
plaintiffs in that suit.
In addition to these essential documents, the SLC
attempted to interview the confidential witnesses whose
statements spurred the Securities Class Action and whom
Plaintiff relied upon in bringing the current suit.

The SLC

retained a private investigator who interviewed twelve of
those confidential witnesses.

The investigator then

prepared a report of those meetings for the SLC.

The SLC

also met with the seven members of the Board of Directors
who were not named defendants in the Securities Class
Action.
To further assist with the investigation, the SLC
retained Dr. Craig Moore, an economic expert, to analyze
-7-

relevant financial data.

His task was to determine whether

the economic information available at the time of the
allegedly fraudulent statements supported Plaintiff’s
theory.

Dr. Moore worked on similar issues in the

Securities Class Action.
While analyzing the material, the SLC held seven formal
meetings with counsel to discuss the evidence, review the
applicable law, and decide on the best course of action.
The initial meeting occurred on August 13, 2009, and the
final meeting on December 5, 2010.

A draft report was then

circulated, and finalized on December 16, 2010.
The final SLC report, eighty-two pages in length,
concluded that insufficient evidence supported any of the
claims against any named officer or director.

No

misrepresentations had been made respecting demand, no
evidence existed of an intent to defraud, and the financial
evaluation did not support the allegations.

Not only was

the likelihood of success on the merits low, the SLC
reasoned, but the costs of litigation would be significant.
As a result, the SLC resolved that it was not in the best
interests of the corporation to pursue the claims.
-8-

IV.

DISCUSSION

A federal court looks to state law to analyze whether
independent directors have the authority to discontinue a
derivative suit.

Burks v. Lasker, 441 U.S. 471, 486 (1979).

Nevada law, as this court previously found, governs this
case.

Sarnacki, 2012 WL 1085539 at *2.

Nevada adopts

Delaware’s approach to resolve derivative litigation.

See

In re Amerco Derivative Litig., 252 P.3d 681, 697 (Nev.
2011).
Under Delaware law, a motion to terminate a derivative
suit based on the recommendation of a SLC is considered a
Motion for Summary Dismissal.

Zapata Corp. v. Maldonado,

430 A.2d 779, 787 (Del. 1981).

This is a “hybrid” motion,

distinct from a motion to dismiss under Fed. R. Civ. P.
12(b)(6), and is instead governed by “traditional summary
judgment standards.”

Wylie v. Stipes, 797 F. Supp. 2d 193,

196 (D.P.R. 2011), quoting Zapata, 430 A.2d at 788.

Thus,

the facts must be examined in the light most favorable to
the non-moving party, and the motion will only be allowed if
there is no genuine issue of material fact.

-9-

Fed. R. Civ. P.

56.4
To determine whether dismissal of a case is appropriate
based upon the recommendation of a SLC, Zapata requires the
court to apply a two-step framework.

430 A.2d 788.

First,

the court must ask whether the SLC was independent and acted
in good faith and upon reasonable grounds in reaching its
conclusion.

Id. at 788.

burden of proof.

The moving party shoulders the

See Peller v. The Southern Co., 707 F.

Supp. 525, 527 (N.D. Ga. 1988).
If the court is satisfied that the SLC was independent
and acted reasonably and in good faith, it has a choice: it
may either end the analysis and defer to the SLC’s
recommendations, or it has the discretion to proceed to
Zapata step two.

Zapata, 430 A.2d at 789.

Here, the court

may apply its own business judgment and examine whether
litigation is in the best interest of the company.
4

Id.

Even if the court viewed this filing as a traditional
Motion to Dismiss, it would use its discretion, given the
discovery period and the documents provided, to convert it
to a Motion for Summary Judgment. See Rivera v. Centro
Medico de Turabo, Inc., 575 F. 3d 10, 15 (1st Cir.
2009)(citation omitted)(“[I]f matters outside the pleadings
are considered, the motion must be decided under the more
stringent standards applicable to a Rule 56 motion for
summary judgment.”)
-10-

Step two permits a court to intervene where the SLC has met
the technical requirements of step one, but reached a result
that was “irrational” or “egregious.”

Carlton Inv. v. TLC

Beatricte Int’l Holdings, Inc., No. Civ. A. 13950, 1997 WL
305829 at *2 (Del. Ch. May 30, 1997).
A.

Zapata Step One: Independence, Good Faith, and
Reasonableness
The first Zapata factor asks whether an independent SLC

made a reasonable decision in good faith.

Plaintiff

disputes both aspects of this analysis, and each will
therefore be addressed in turn.
1.

Independence of the SLC

To be independent, a SLC’s decision must be based “on
the merits of the issue rather than being governed by
extraneous consideration or influences.”
499 A.2d 1184, 1189 (Del. 1985).

Kaplan v. Wyatt,

A number of factors are

relevant, including:
(1) a committee member’s status as a defendant, and
potential liability; (2) a committee member’s
participation in or approval of the alleged
wrongdoing; (3) a committee member’s past or
present business dealings with the corporation; (4)
a committee member’s past or present business or
social dealings with individual defendants; (5) the
-11-

number of directors on the committee; and (6) the
“structural bias” of the committee.
In re Oracle Sec. Litig., 852 F. Supp. 1437, 1441 (N.D. Cal.
1994), citing Kaplan, 499 A.2d at 1189.

This inquiry is

highly fact specific and centers on whether any member, “for
any substantial reason, [is] incapable of making a decision
with only the best interests of the corporation in mind.”
In re Oracle Deriv. Litig., 824 A.2d 917, 938 (Del. Ch.
2003)(emphasis in original).
Plaintiff’s arguments are, in essence, three-fold.5
First, the SLC members are named Defendants in the case
and, therefore, face a significant prospect of liability.
More concretely, as members of the audit committee, Furman
and Wadecki were involved in approving certain statements
that Plaintiff alleges were fraudulent.
incentive to find the claims wanting.

Thus, they had an
See Mills v.

Esmark, Inc., 544 F. Supp. 1275, 1283-84 (N.D. Ill. 1983).

5

In his memorandum, Plaintiff offers five separate
lines of attack against the independence of the SLC. (Pl’s
Reply Mem. 16-28, Dkt. No. 121). However, the arguments
either speak to the good faith and reasonableness aspect of
the analysis, or are subsumed into these broader topics.
While the court has considered each point, they are most
clearly addressed under three headings.
-12-

The problem is that merely naming a SLC member as a
Defendant, absent specific evidence targeting his or her
neutrality, does not disqualify him or her from serving on
a SLC.

See Kindt v. Lund, No. Civ. A. 17751-NC, 2003 WL

21453879 at * 3 (Del. Ch. May 30, 2003).

Nor does an

individual’s approval of the challenged actions eradicate
independence.

See Lewis v. Anderson, 615 F.2d 778 (9th

Cir. 1979)(finding that a SLC member who approved the
challenged action was still “independent” because, inter
alia, he did not receive any personal benefit from the
decision nor had any inherent bias); Kaplan, 499 A.2d at
1189 (stating that the presence on the board of an
individual who approved the challenged act is not enough
to compromise the SLC’s independence).
Here, no evidence supports Plaintiff’s assertion that
the three members were biased, nor that they were
significantly involved in making the allegedly fraudulent
statements.

At its core, Plaintiff simply lists the

duties of the audit committee and then concludes that the
two SLC members who also served on that body were
compromised.

However, nothing in the record actually ties
-13-

these specific members to the specific accusations in the
case.

Absent such facts, this court cannot conclude that

the members were incapable of assessing the merits of the
complaint fairly.
Plaintiff’s next argument is that the SLC members were
prejudiced against Plaintiffs’ claims before the
investigation occurred.

The SLC members filed motions to

dismiss in the shareholder derivative suit and the Bundy
actions, thereby revealing their positions on the merits
prior to the investigation.

The SLC members also

testified in their depositions that they had formed
opinions on the claims before their formal analysis.

See

(Pl’s Reply Mem. 14-16, Dkt. No. 121).
This contention is not supported by the facts.

The

two motions referenced by Plaintiff did not, in fact,
address the merits of the suit.

Instead, they sought

dismissal based on procedural and pleading deficiencies.
See Bundy v. Golden, No. 3:09-cv-30174, Defs’ Mot. to
Dismiss, (D. Mass.); In re Smith & Wesson Holding Corp.
Deriv. Litig., No. 2008-00099, Defs’ Mot. to Dismiss,
(Hampden Co. Sup. Ct. Mass.)

The motions cannot be
-14-

construed as prejudgment of the merits.6
Furthermore, Plaintiff mischaracterizes the SLC
members’ deposition testimony.

The members stated that

prior to the full investigation, a preliminary analysis
into the Securities Class Action occurred.

As a result of

that brief investigation, it appeared that the claims were
without merit.

Nonetheless, the SLC members emphasized

that they had not drawn any formal conclusions before the
SLC was formed.

See, e.g., (Furman Dep. Tr. 21-23, Dkt.

No. 114, Ex. 11).
Finally, Plaintiff argues that the SLC relied on
biased advisors whose interests conflicted with the SLC’s.
In utilizing the economic expert retained for the
Securities Class Action and relying on the attorney in
that case, GT, to obtain documents, the SLC (Plaintiff
argues) essentially bound itself to the interests of the
Board of Directors.

While the SLC should have been

focused on a neutral evaluation of the merits of the
claim, Plaintiff contends, it instead relied on
6

If accepted, this argument also has the potential to
curtail an individual’s ability to invoke his or her legal
rights.
-15-

individuals whose goal was to escape any liability.
This final argument falls flat in the face of strong
evidence of the SLC’s independence.

Any reliance on GT

and other experts was reasonable under the circumstances
given the significant factual overlap between the two
cases.

Crucially, the SLC members independently reviewed

the process GT used to conduct discovery before
determining the documents obtained through that process
were reliable.

The SLC then expanded its investigation

beyond those documents where appropriate.7
A final note is necessary.

Even if Plaintiff’s

arguments did have merit, he has, as a matter of law,
tacitly conceded the independence of the SLC by making a
demand on the board.

In embarking on this litigation,

Plaintiff had a choice: to plead that a demand on the
Board of Directors was excused because of a lack of
independence, or to wait for the Board, through the SLC,
to conduct its investigation.

7

In taking the latter path,

Morever, this argument more accurately addresses the
reasonableness of Defendants’ investigation. As discussed
below, no persuasive evidence suggests that the
investigation was anything but thorough and credible.
-16-

Plaintiff tacitly conceded that the majority of the board
was independent and capable of investigating the matter.
See In re Smith & Wesson Corp. Deriv. Litig., 743 F. Supp.
2d at 14, 18 n.3 (stating that “by issuing a demand rather
than pleading that demand was excused, Plaintiffs have
tacitly conceded the independence of a majority of the
board to respond.”)(internal citations and quotations
omitted); Spiegel v. Buntrock, 571 A.2d 767, 775 (Del.
1990).

This argument further justifies the court’s

conclusion that the SLC was an independent, unbiased
entity.
2.

Good Faith and Reasonableness of the SLC

Zapata also requires an evaluation of whether the SLC
acted in good faith and undertook a reasonable
investigation.

Here, “the court does not take an

independent look at the merits of [the] lawsuit, but must
find that the Special Committee’s consideration of the
merits of the claims was reasonable.”

Katell v. Morgan

Stanley Group, Inc., Civ. No. 12343, 1995 WL 376952 at *12
(Del. Ch. June 15, 1995).

In other words, the analysis

centers on the SLC’s process, rather than the substance of
-17-

its determination.

See Carlton, 1997 WL 305829 at *2.

In reviewing the thoroughness of a SLC’s
determination, courts have considered the documents the
SLC relied upon, the witnesses interviewed, depositions
reviewed, and the availability of other evidence the SLC
could have considered.

See, e.g., Grafman v. Century

Broad. Corp., 762 F. Supp. 215 (N.D. Ill. 1991).

Where

the SLC thoroughly examines the material available, its
decision will generally be affirmed.

Id.

On the other

hand, where a SLC fails to investigate the critical
transactions forming the basis of the complaint or ignores
essential evidence, including financial data, courts have
been more inclined to find a genuine dispute over the
SLC’s process.

See, e.g., London v. Tyrrell, 36 Del. J.

Corp. L. 359, 2010 WL 877528 at *17-21 (Del. Ch. 2010).
Plaintiff primarily relies on two arguments to
challenge the reasonableness of the SLC.8

First, Plaintiff

charges that the SLC unreasonably abdicated its
investigation to outside counsel.
8

Plaintiff specifically

Again, while Plaintiff presents a number of arguments
in this section, they are engulfed by these two, broader
contentions. (Pl’s Reply Mem. 28-34, Dkt. No. 121)
-18-

focuses on: the SLC members’ failure to recall significant
details at their depositions (including their failure to
recall investigating their own conduct, the scope of the
assignments given to experts, and the scope of documents
reviewed from the Securities Class Action); the SLC’s
failure to delay the investigation until document
discovery was completed in the class action; the SLC’s
failure to promptly acquire tolling agreements; and its
failure to ensure that those tolling agreements were
adequate.

In Plaintiff’s view, the SLC members

improperly, unreasonably, and in bad faith allowed outside
counsel to control the entire investigation.
Plaintiff’s claim that the SLC abdicated its authority
to counsel lacks support.

Indeed, other than lapses in

memory during the depositions of the SLC members, no
evidence backs Plaintiff’s “abdication” argument.
Instead, the tasks delegated to counsel, such as obtaining
advisors and collecting and culling documents, are
precisely those that are appropriate to delegate.

See,

e.g., In re Take-Two Interactive Software, Inc. Deriv.
Litig., No. 1:05 Civ. 5279, 2009 WL 1066251 at *6-7
-19-

(S.D.N.Y. 2009).

The SLC members meanwhile reviewed all

of the records, conferred with counsel where necessary,
and were the individuals who ultimately reached the final
decision.

See, e.g., (Wadecki Dep. Tr. 123, Dkt. No. 114,

Ex. 10)(“Q: Did you each review the same set of documents
that were provided to the SLC from your counsel? A: Yes);
(Furman Dep. Tr. 130, Dkt. No. 114, Ex.11)(“[C]onclusions,
in terms of the SLC’s conclusions, were our
conclusions.”); see also (SLC Final Rep., Dkt. No. 114,
Ex. 1); (Pucci Aff., Dkt. No. 114, Ex. 8.)

If anything,

the role that counsel played here actually undermines
Plaintiff’s point, as obtaining and relying on counsel
further illustrates the seriousness with which the SLC
approached this investigation.

Grafman, 762 F. Supp. at

220 (“Another indicia of good faith and reasonableness of
the investigation is the use of capable counsel.”)
Plaintiff’s second argument centers on the scope of
the SLC’s examination.

In relying on the evidence

produced in the Securities Class Action, the SLC, in
Plaintiff’s view, unreasonably limited its analysis.
Specifically, Plaintiff contends that the SLC never
-20-

expanded the scope of documentary evidence, never
requested additional documents from outside directors,
relied on depositions that were insufficient for SLC
purposes, did not follow-up with witnesses from the
Securities Class Action, and, until the complaint was
filed, failed to interview the directors who were not
defendants in the Security Class Action.

The SLC also

relied on experts and counsel from the Securities Class
Action who were charged with defending the corporation.
In limiting its investigation in this manner, the argument
runs, the SLC did not undertake a good faith, reasonable
look into the claims.
Plaintiff’s contention that the SLC improperly trailed
in the path set by counsel in the Securities Class Action
is without merit.

Instead, the record shows that the SLC

did its own detailed review of the process that counsel
used to conduct discovery before determining that
documents obtained through that process were reliable and
germane.

It then went beyond the Securities Class Action,

through additional interviews and additional document
review, where necessary.

See (SLC Final Rep. 20-21, Dkt.
-21-

No. 114, Ex.1); (Furman Dep. Tr. 79-80, Dkt. No. 114, Ex.
11.)

As discussed, to the extent that the probe

overlapped with the Class Action, the SLC acted
reasonably, given the similarities between the cases.
Particularly persuasive on this question is the
absence of evidence in the record illustrating a fact or
line of investigation that Defendants missed.

At the end

of its endeavor, the SLC had considered hundreds of
thousands of relevant documents, had reviewed transcripts
and exhibits from the Securities Class Action, had
conducted witness interviews, had met with additional
members of the Board of Directors, had sought out input
from an economic expert, and had intensive discussions
about the claims being made with outside counsel.
Final Rep. 19-26, Dkt. No. 114, Ex.1.)

(SLC

Nothing appearing

in the record, or identified by Plaintiff’s counsel at
oral argument, points to any significant piece of evidence
or a line of inquiry that the SLC ignored.

Instead, the

report demonstrates that the SLC thoughtfully and, in good
faith, evaluated all of the asserted claims and analyzed
the available evidence.

As such, the court finds this to
-22-

be a prototypical example of a reasonable, thorough, and
good-faith investigation.

See Strougo v. Padges, 27 F.

Supp. 2d 442, 453 (S.D.N.Y. 1998).
B.

Zapata Step Two: Independent Business Judgment
The second Zapata element is discretionary.

In this

part of the analysis, the court may conclude that it is
actually in the best interests of the company to bring
suit, and thus decline dismissal of the complaint.
As overwhelming evidence supports the conclusion that
the SLC was independent and acted reasonably and in good
faith, the court will not get into any separate
independent exercise of business judgment as contemplated
in the second, optional analytical step.

See Wyilie, 797

F. Supp. at 196 (“This does not appear to be a case in
which the result reached was [so] “irrational” or
“egregious” as to compel the court to second guess the
recommendation of the SLC.”)(internal quotations and
citations omitted).

As a result, the SLC’s decision to

bypass litigation will end this case.9
9

Even if, arguendo, the court did engage in this
inquiry, it would conclude, based on the gross improbability
of success on the merits, that litigation was not in the
-23-

V.

CONCLUSION

The Zapata inquiry balances two competing interests:
on the one hand, the need to hold corporate officers
liable when their conduct significantly harms the entity
they manage and, on the other hand, the obvious fact that
not every piece of litigation on behalf of a corporation
is actually in its best interest.

Where an independent

committee conducts a reasonable, good-faith investigation,
and concludes that filing suit is not the best route, as
was the case here, the law prioritizes that latter
consideration.
For these reasons, Defendants’ Motion for Summary
Dismissal of [the] Verified Shareholder Derivative
Complaint (Dkt. No. 111) is hereby ALLOWED.
will enter judgment for Defendants.

The clerk

The case may now be

closed.
It is So Ordered.

/s/ Michael A. Ponsor
MICHAEL A. PONSOR
U. S. District Judge

best interests of the corporation.
-24-