Auerbach v. Bennett
Court of Appeals of New York
393 N.E.2d 994 (1979)
After General Telephone & Electronics Corporation's (defendant) board discovered that the company and some of its own directors had made improper bribe payments, shareholder Auerbach (plaintiff), joined by shareholder Wallenstein, brought a derivative suit against the involved directors and the company's outside auditor. The board formed a special litigation committee of directors who had joined after the bribery, and that committee concluded the claims lacked merit and the suit should be dismissed. The trial court dismissed the action on that basis, and Wallenstein appealed, arguing the committee wasn't truly independent because it derived its authority from an interested board.
Whether courts are bound to dismiss shareholder derivative litigation when a special litigation committee composed of disinterested members decides that continuing it is not in the corporation's best interest.