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Public Service Enterprise Group, Incorporated v. Ferland

A-232-99T3 and A-245-99T3 (N.J. Super. App. Div. 2001) (Unpublished)

CORPORATIONS; SHAREHOLDERS; DERIVATIVE ACTIONS—In reviewing an allegation of mismanagement by shareholders against directors, a court will abide by the directors’ decision if they act in accordance with the business judgment rule and the procedures followed were reasonable and in good faith.

A number of shareholder derivative actions for alleged reckless mismanagement of the company’s nuclear power generating facilities were filed against a public utility and certain directors and officers of the company. Substantial fines and temporary closure of one of the facilities resulted from the conduct of the company, its directors, and its officers. In some actions, demands were made upon the company’s board of directors. In others, no such demands were made, based upon the allegation that a demand would have been futile. In response to one of the shareholder’s demands, the company’s board engaged a law firm to conduct an investigation. The firm was experienced both in nuclear power matters and in shareholder litigation. It also was independent and uninvolved in other matters affecting the company. The law firm spent about 4,500 attorney hours in its investigation, reviewed over 43,000 pages of documents, conducted over 30 interviews, and investigated a number of operating failure incidents at the nuclear power facilities. Its conclusion was that the board of directors had acted pursuant to the business judgment rule and that the corporation’s certificate of incorporation absolved the directors and officers from liability from the alleged breach of duty. The investigating law firm specifically found that the directors and officers of the company instituted good faith programs to address the need for equipment improvement at the facilities and to improve operating and personnel matters. Further, the law firm found that the board and the officers utilized the assistance of outside experts in making various personnel changes and improving the organizational structure of the reactor operations. The Court endorsed the lower court’s announcement of “a single standard of judicial review in shareholders’ derivative suits of decisions by boards of directors (a) to reject demands to commence litigation, or (b) to terminate derivative litigation commenced by shareholders claiming the futility of demand.” Under the rule adopted, the approach is to shift the burden in all cases to the corporation “to demonstrate that the board’s decision to dismiss a complaint was properly made… .” This results in the adoption of a modified business judgment rule, “the key feature being that the corporation, not the shareholder, would have to meet an initial burden of proof… .” Basically, courts “would have to dismiss a shareholder derivative suit in accordance with management’s recommendation so long as the corporation could establish that a decision maker acted reasonably, in good faith, and in a disinterested fashion.” Therefore, the court would not substitute its own business judgment for that of the management. To determine whether a corporation has met this burden, a court must consider “all relevant justifications from management’s determination, including the seriousness and weight of the shareholder’s allegations. The factors that a court should consider are as follows: (1) whether the board members were independent and disinterested; (2) whether the board members acted in good faith; (3) whether the board members exercised due care in their investigation; and (4) whether the board members’ decision was reasonable.” These standards are “quite low and should be readily met, ... at least where, ... the allegations are ‘of corporate mismanagement implicating [the] duty of care.’ Following those rules, both the lower court and the Appellate Division concluded that the company’s board of directors met all of the conditions that would satisfy the proper application of the business judgment rule. As to whether the board’s investigation into the shareholder demand in the suit was made with “due care and good faith,” a Court does not make inquiry “into the substantive decision of the board, but rather [] into the procedures employed by the Board in making its determination.” Here, the Court, reviewing the qualifications of and the method employed by, the investigating law firm, felt that those conditions were met. Consequently, the shareholder’s derivative actions were dismissed.


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