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In re PSE&G Shareholder Litigation

315 N.J. Super. 323, 718 A.2d 254 (Ch. Div. 1998)

CORPORATIONS; SHAREHOLDERS; DISCOVERY—Even if shareholder’s can’t allege facts about a board’s wrongful refusal to commence action against its own management, the complaining shareholder’s are entitled, as preliminary matter, to obtain discovery concerning the board’s denial of the shareholder’s demand.

Certain shareholders of a utility company demanded that the corporation commence litigation against its officers and directors for mismanagement of the company’s nuclear plants. The demand was rejected, and subsequently those shareholders brought this action against certain officers and directors of the corporation. The corporation moved to dismiss for failure to state a claim upon which relief could be granted. The corporation’s motion was denied, with the Court finding that the shareholders’ complaint sufficiently alleged particularized facts to create a reasonable doubt that (1) the directors were disinterested and (2) the directors’ actions satisfied the business judgment rule. One year later, the corporation filed a summary judgment motion. As an issue of first impression, the Court had to determine whether the shareholders would be entitled to discovery or whether the shareholders would have to allege facts with specificity without the benefit of discovery when a demand for suit is denied.

The Court analyzed the policies and practices of several states in order to decide whether discovery would be permitted. It then determined that requiring shareholders to allege facts with specificity without discovery would place shareholders in a position bordering on the impossible. The Court placed the burden of establishing the decision maker’s independence, lack of bias, good faith, and thoroughness of investigation on the corporation. According to the Court, it would have to dismiss a shareholder derivative suit and uphold a management’s recommendation not to pursue an action if the corporation could establish that the decision maker acted reasonably, in good faith, and in a disinterested fashion. Under this standard, a court would not substitute its own business judgment for that of management. The summary judgment motion was denied and the corporation was ordered to make information available to the shareholders concerning the board’s decision to deny the demand. No other information need be disclosed unless the corporation fails to meet its burden.


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