Special Considerations in Internal Investigations Involving Shareholder Derivative Suits

Lesley Brovner & Mark Peters
October 14, 2026

Shareholder derivative suits present unique challenges for corporations and their boards of directors. When shareholders allege wrongdoing by directors, officers, or employees and demand that the corporation pursue legal claims on its own behalf, the board must determine how to respond in a way that fulfills its fiduciary duties to the company. This process often involves balancing competing interests, particularly when individuals accused of wrongdoing are themselves members of the board. One increasingly common approach for addressing derivative claims is the use of a Special Litigation Committee (SLC). An SLC conducts an independent investigation into the allegations and determines whether pursuing litigation is in the best interests of the corporation. Courts often defer to the conclusions of a properly structured and independent committee, particularly when its investigation is thorough and conducted in good faith.

Understanding the Role of Special Litigation Committees

When a shareholder brings a derivative claim or demands that the corporation initiate litigation against corporate leadership, the board may appoint a Special Litigation Committee to investigate the allegations. The SLC typically consists of independent directors or outside professionals who are not implicated in the alleged misconduct. The committee retains independent counsel to conduct an investigation and evaluate the merits of the claims. After reviewing the evidence gathered by counsel, the committee determines whether continuing the litigation would serve the best interests of the corporation. In some jurisdictions, the committee may decide whether to pursue the claims, while in others it may only make a recommendation to the board. If the committee concludes that litigation is not in the corporation’s best interests, defendants in the derivative suit may move to dismiss the case based on the business judgment rule.

The Demand Requirement in Derivative Litigation

Derivative suits generally require shareholders to first demand that the board address the alleged wrongdoing internally before filing suit. This demand requirement provides the board with an opportunity to investigate and determine whether litigation is appropriate. In some circumstances, shareholders argue that making a demand would be futile because the board members themselves are implicated in the alleged misconduct. When courts excuse the demand requirement on grounds of futility, shareholders may proceed directly with a derivative lawsuit. Even in those circumstances, however, a properly formed Special Litigation Committee may still investigate the allegations and recommend whether the litigation should continue.

The Business Judgment Rule and Judicial Deference

Courts typically defer to the business judgment of corporate directors when evaluating decisions about whether to pursue derivative litigation. The business judgment rule presumes that directors acted on an informed basis, in good faith, and with the honest belief that their decision served the corporation’s best interests. If those conditions are satisfied, courts will generally avoid second-guessing the board’s decision. Two landmark cases often guide courts in evaluating Special Litigation Committee decisions. In Auerbach v. Bennett, the New York Court of Appeals held that courts should defer to a committee’s decision when independent directors conduct an adequate investigation and reach a reasoned conclusion. In Zapata Corp. v. Maldonado, the Delaware Supreme Court adopted a more searching standard, allowing courts to examine both the committee’s independence and the reasonableness of its decision before applying their own business judgment. Despite these differences, both frameworks emphasize independence, good faith, and a thorough investigation.

Appointing an Independent Special Litigation Committee

Establishing an independent committee is essential for ensuring that courts will defer to the committee’s conclusions. In most derivative suits, the board appoints an SLC composed of directors who were not involved in the alleged misconduct and who have no personal or financial interest in the outcome of the investigation. In some cases, boards appoint outside professionals or newly added directors to ensure independence. Courts typically examine several factors when evaluating the committee’s independence, including whether its members were involved in the disputed transactions, whether they have any significant relationship with the defendants, and whether they possess the authority to act independently of the board. Retaining independent outside counsel is also critical. Courts have repeatedly expressed skepticism when committees rely on attorneys who previously represented the corporation or the alleged wrongdoers in related matters.

The Importance of Independent Counsel

Special Litigation Committees almost always retain independent counsel to conduct the investigation. Independent counsel helps ensure the credibility of the investigation and strengthens the committee’s claim to judicial deference. Courts are far more likely to uphold an SLC’s conclusions when the investigation is conducted by attorneys who have not previously represented the corporation or the defendants. Independent counsel conducts interviews, reviews documents, consults experts where appropriate, and prepares a report summarizing the investigative findings and recommendations. This report becomes the foundation for the committee’s ultimate decision regarding the derivative claims.

Staying Discovery During the Investigation

When a Special Litigation Committee begins its investigation, defendants often request that the court stay discovery while the investigation proceeds. Courts have discretion to grant or deny such requests, but many judges recognize that allowing discovery to continue while the committee conducts its investigation can duplicate efforts and significantly increase litigation costs. A stay can also prevent sensitive corporate information from becoming public before the investigation is complete. To improve the likelihood of obtaining a stay, corporations should appoint the committee promptly and ensure that the investigation begins without delay.

Evaluating the Corporation’s Best Interests

Once the investigation is complete, the Special Litigation Committee must determine whether pursuing the derivative claims would benefit the corporation. This decision involves more than evaluating whether legal claims exist. The committee may also consider practical business factors such as the costs of litigation, the likelihood of success, the potential impact on the company’s reputation, and the effect of the litigation on corporate operations. Courts generally respect these determinations when they are made by independent directors after a thorough review of the evidence.

Deciding Whether to Pursue or Dismiss the Claims

If the Special Litigation Committee concludes that pursuing the derivative claims is in the corporation’s best interests, the corporation may join the litigation as a plaintiff and continue the case. If the committee determines that dismissal is appropriate, the corporation will typically file a motion seeking dismissal of the derivative suit. This motion often combines elements of a motion to dismiss and a motion for summary judgment and relies heavily on the committee’s investigative report to demonstrate that there is no genuine issue of material fact regarding the committee’s independence or the thoroughness of its investigation. Courts may allow limited discovery to test the committee’s independence and the adequacy of the investigation before deciding whether the case should proceed.

How Peters Brovner Helps Corporations Navigate Derivative Investigations

Derivative litigation places corporate boards in a difficult position, requiring careful investigation, independent decision-making, and strategic legal judgment.,  Peters Brovner advises corporations, boards of directors and others on structuring independent investigations that are thorough, objective and structured to withstand judicial scrutiny.  Contact Peters Brovner to discuss how our team can help guide your organization through complex litigation and internal investigations.