In Re UnitedHealth Group Inc. Shareholder Derivative Litigation

In re IN- UNITEDHEALTH GROUP

CORPORATED SHAREHOLDER LITIGATION.

DERIVATIVE Group Incorporated

In re UnitedHealth Litigation.

PSLRA

No. A08-114.

Supreme Court of Minnesota.

Aug. Larson, Hashmall, Felhaber

David L. MN, for defendant. Minneapolis, Mark, Supalla, John Richard G. Daniel MN, Briggs Morgan, Minneapolis, defendant. Levine, Lardner, Foley & New

Seth L. York, NY, for defendant. Shapiro, Connelly, Blair

Alexandra McGill, Brodsky, Lori Alvino David M. Watkins, York, NY, for Latham & New defendant. Harrington, Assistant

Jeffrey Jerome General, Paul, MN, amicus. Attorney St. Vanderweide, Head, & Vernon J. Seifert Vanderweide, MN, interve- Minneapolis, nor.

OPINION ANDERSON, BARRY, G. Justice. ques- This arises from a certified case District Court tion from the United States regarding for District Minnesota court, deciding a wheth- extent to which Blanchfield, Jr., Rein- Dennis Garrett settlement of approve proposed er Blanchfield, Paul, St. hardt Wendorf & action, must defer shareholder derivative MN, plaintiff. for com- special litigation of a Cambronne, & Cam- Karl L. Chestnut derivative action mittee that “SLC” MN, bronne, plaintiff. for Minneapolis, specific terms. should be settled Stoia, Brown, San Coughlin Andrew J. report- Journal In 2006 the Wall Street CA, for plaintiff. Diego, corpora- U.S. that executives at various ed Berens, Kelly & Ber- Podlucky Barbara that on dates options stock tions received MN, ens, Minneapolis, defendant. (or, in price some coincided with low cases, for a time Carter, price given lowest D. Marianne Peter William frame) options appeared that Minneapolis, and those Short, Dorsey Whitney, & Fo- See Charles have been backdated.1 MN, for defendant. accounting corporate as matter of Backdating options, the article ex- cost stock turn, company has may, brings mean problematic "an plained, is because which, necessitating a profits, possibly accounting overstated paper gain,” under instant rules, Id. past results. financial itself, “equivalent pay thus restatement to extra and is illegal "as Backdating, in is not and of company.” Forelle & Charles cost board, duly Bandler, long Payday, it is authorized Wall St. The James J., Perfect disclosed, 18, 2006, fully reported keeping with recognize at Al. Failure to Mar. Bandler, Pay- complaint creating & or the impression relie James Perfect J., 18, 2006, at Al. day, complaint Wall St. Mar. without factual basis.” Among the corporations discussed 19, 2006, July On UnitedHealth’s board Group, article was UnitedHealth Inc. passed creating a resolution a two-member id., (“UnitedHealth”), see a Minnesota cor- 302A.241, SLC under Minn.Stat. subd. 1 poration principal with its executive offices (2006).2 Both members of the SLC are The article noted that Dr. Minnetonka. justices former of this court. The board McGuire, CEO and chairman William resolution on the “complete conferred UnitedHealth, received Uni- board power authority to investigate [the options might tedHealth stock have analyze legal derivative claims] subsequent- been backdated. McGuire rights Company remedies ly resigned position from his at United- rights determine whether those or reme- Health. pursued.” dies should be In the resolu- tion, the board ability also retained the

Shortly publication after the the Wall expand the size of the SLC as it deemed article, a Street Journal number actions appropriate. 29, 2006, On November brought against were McGuire and other federal district court issued a preliminary (1) executives, including UnitedHealth fed- injunction preventing McGuire from exer- (2) litigation, eral shareholder derivative any cising options UnitedHealth stock federal class actions under securities the court injunction without approval. The Litigation Private Securities Reform Act expire was set to after the issued SLC its (“PSLRA litigation”), state and deriva- report. under tive suits Minnesota law. The state brought derivative suits were Minnesota Following an extensive investigation, the court, district whereas the federal deriva- SLC issued its report on December litigation litigation tive and PSLRA were the report, the forth SLC set the brought the United legal States District standards and defenses applicable to for Court the District of Minnesota. The each derivative Citing claim. “ongoing the Exchange Securities brought Commission federal securities fraud involving actions McGuire; its own action the against par- allegations,” however, similar the SLC de- ties reached a settlement provide which clined to any detailed factual bases agreed McGuire to return million end, to its conclusions. In $400 the the SLC pay UnitedHealth million civil determined that a number of $7 the claims action, In settling fine. “may SEC McGuire merit” have and recommended set- agreed not permit to “make or to be made tlement of the claims McGuire and any public directly statement denying, or or settlement dismissal of the claims indirectly, allegation against the other [SEC] named defendants. Un- al., Narayanan tax rules.” M.P. et may Eco- in the resolution. Committees include Impact Backdating nomic Executive special litigation consisting committee Options, Stock 105 Mich. L.Rev. 1601— independent more one or directors or other (2007). independent persons legal to consider rights or corporation remedies of the 302A.241, 2. Minnesota Statutes subd. rights whether those and remedies should provides as follows: pursued. special Committees other than approved by A resolution the affirmative litigation subject ... committees are at all majority may vote of a of the board estab- times direction and control of the having authority lish committees of the board. management board in the of the business of corporation only provided to extent settlement, to who could not pensation an individual the proposed the terms der capaci- malfeasance in his approximately deny substantial relinquish McGuire would Id. *6. The options, ty company. stock at court in UnitedHealth with million $320 had rights although “appar- to his UnitedHealth his noted surrender savings judgment favoring and executive made plan ently retirement a business might claim he relinquish any possible plan, settling Board’s UHG’s claims,” benefits. post-employment any findings to “lack have had would value McGuire showing why The total economic no or tracks how leaves amounted under the settlement relinquish judgment can be considered rea- million. approximately $420 Id. The court stated that sonable.” searching a more permitted Minnesota law recommended settle On basis ground then “there be a analysis, McGuire, with the federal derivative ment additional assets upon preserve to re with the defendants plaintiffs joined approval of the pending settlement.” injunc lifting preliminary of the quest options in excess tion McGuire’s stock Declining speculate scope on the In re settlement. United- proposed law, court Minnesota the district chose Li Inc. Derivative Group Health S’holder certify following question: court the 06-CV-1691, 06-CV-1216, tig., Nos. judgment rule “Does Minnesota’s business (D.Minn. 2007). 4571127, *2 Dec. a) WL examining from foreclose Em Public b) But one California party, of, rejecting on the reasonableness (“CalPERS”), System Retirement ployees’ merits, a of a action settlement derivative injunction be main requested Commit- proposed Special Litigation tained, of the funds fearing “release under duly constituted Minnesota Stat- tee judg to collect a jeopardize ability its UnitedHealth, will § utes 302A.241 subd. 1?” ment, PSLRA liti prevail should 4571127, accepted *8. the at We 2007 WL gation.” Id. question, which we reformulated certified to read as follows: regarding

Applying precedent federal the To what extent does preliminary injunctions, termination of recognized in Minneso- judgment rule as federal district court considered court, deciding in require ta law Dataphase Systems, in factors set forth proposed settle- approve whether to 109, Inc., 640 F.2d 113 Systems, Inc. v. CL action, of a derivative UnitedHealth, ment shareholder (8th Cir.1981).3 2007 WL a Special the decision of to defer to 4571127, In Cal- *2. at evaluation duly constituted merits, Litigation Committee of success on the PERS’s chance 302A.241, § 1 subd. under MinmStat. probability” “significant noted a the court (2006), derivative action should part court success, on what the based specific be settled on terms? as McGuire’s admission construed *5-6. to the wrongdoing SEC. I. Nevertheless, “the the court believed that 480.065, § Minn.Stat. subd. the Uni- Under question” ultimate was whether (2006), law “may question we answer a could in conscience 3 tedHealth board a court of the United in com- ... million certified approximately release $800 parties litigant; injunction on other Dataphase, will inflict a federal court considers 3. Under (3) will "(1) probability that succeed irreparable movant harm to the threat merits; public movant; (2) interest.” the state the balance between on granting F.2d at 113. injury that 640 this and the harm 550 may provide if the answer be determi derivative actions concerned

States ... pending litigation an issue in check against native of shareholders a abuses com certifying and there no con executives, they corporate mitted but decision, appellate constitutional trolling provide disruptive an op also shareholders A cer provision, or statute of state.” system. portunity legal to abuse the Co question question tified is a law we hen, 337 U.S. at 1221. Some S.Ct. Lindquist, novo. v. review de Clark example, derivative actions—for strike (Minn.2004). The certi N.W.2d “brought suits4 —are not to redress real requires us that we question fied before wrongs, their upon but to realize nuisance legal concepts: three distinct consider value.” Id. suits, special litiga derivative shareholder Minnesota, board of directors committees, judg tion and the business litigation a special create committee “con- ment rule. sisting independent of one more di- A shareholder derivative suit is independent persons rectors or other equity in which a creation shareholder legal rights consider or remedies of the effect, may, “step corporation’s into corporation rights and whether those ... right shoes and seek in its the restitu pursued.” remedies should be Minn.Stat. tion he could not demand his own.” 302A.241, subd. “Committees other Corp., Cohen Indus. Loan v. Beneficial special litigation than committees ... are 541, 548, 93 L.Ed. U.S. S.Ct. subject at all times to direction (1949). suits share “Derivative allow By control of implication, the board.” Id. bring against wrongdoers suit holders then, an subject is not to a board’s corporation, behalf of the and force direction and control. parties corpora liable compensate Although a suit derivative be injuries tion for so caused.” Janssen longs to corporation rather than to the Flanagan, Best & N.W.2d shareholders, a board’s refusal to sue does (Minn.2003). actually “A action derivative necessarily prevent the continuation of belongs corporation, but share derivative suit the board members bring ... the action holders where the See, from suffer a conflict of interest.5 corporation to has failed take action for e.g., Copper United Sec. v. Amalgam Co. action, itself.” a derivative the 261, Copper Co., 263-64, 244 ated U.S. 37 plaintiff brings essentially two claims: 509, (1917) L.Ed. S.Ct. 61 1119 (stating against failing “one the directors for to sue; a that court seldom with a upon second interferes cor right the based the be poration’s not to longing corporation.” Brown v. decision sue unless the 348, 545, Tenney, “wrongdoers 125 126 corporation”). Ill.2d Ill.Dec. control the (1988). 230, 532 N.E.2d 232 Shareholder Special litigation committees thus enable a 5, (Minn.1990). (esp. 4. A strike suit is as a 6 n. require- "[a] defined suit 12 The demand action), excused, however, derivative based valid often on no ment be when the claim, brought either for nuisance value or as board a suffers from conflict of interest re- leverage to obtain a favorable or inflated set- garding subject the matter the derivative (8th Dictionary tlement.” Black's 1475 Law suit. See v. Coop. Winter Farmers Educ. & (cid:127) ed.2004). 257, Am., 266-67, Union 259 Minn. 107 226, (1961) ("Ordinarily N.W.2d a de- bring- We have indicated that shareholder mand should be made on the board of di- ing a derivative action must first demand that wrongdoers rectors the unless constitute a pursue the See board itself action. PJ ”). majority of the board.... 1, Acquisition Corp. Skoglund, v. 453 N.W.2d SLCs, to decisions made applied a deriva- been or settle to dismiss corporation Maldonado, see, Corp. v. e.g., Zapata a conflict of interest on despite tive suit (Del.1981); But a 779, all directors. some or A.2d Auerbach v. Ben part nett, to the decision of SLC will defer N.Y.2d 419 N.Y.S.2d delegates its properly (1979). the board “[i]f 999-1000 It is the N.E.2d Janssen, act authority [SLC].” proper application judg business words, In other at 884. 662 N.W.2d ment context that is at the rule satisfy the investigation must SLC and its question heart of the certified before us.6 business requirements

rule. H. rule is The business A. R. P. Minn. Civ. 23.09 and Fed. “developed by state presumption RCiv.P. 23.1 boards di protect courts

federal shareholder claims rectors begin analysis our of the certified We deci unprofitable business board made question by considering the contention at 882. sions.” Id. Under R. P. and Fed. Minn. Civ. 23.09 rule, long so as disinterested 23.1 define the boundaries of the R.Civ.P. deci makes “an informed business director judgment rule. Under Minnesota business sion, faith, without an abuse 23.09, a Minn. R. Civ. P. derivative suit discretion, he or she will be liable for compromised “shall not dismissed resulting from his or her corporate losses approval of court.” The without the Id.; also Minn.Stat. see decision.” state assert fore- plaintiffs (2006). judg 302A.251 judg- application closes the (1) on the notion premised ment rule is rule; plaintiffs ment PSLRA reasonable risks “protecting directors’ make similar Attorney General Minnesota overall, economy ... positive arguments implicate arguments. These to attract risk- risks allow businesses those concerning applica- Erie doctrine mar managers, adapt changing averse bility of state law federal procedural trends”; kets, emerging capitalize Tompkins, Erie v. court. R.R. Co. are ill- recognition that “courts 1188.(1938). 64, 58 S.Ct. 82 L.Ed. U.S. judge the wisdom of business equipped to replace and have been reticent ventures It under is well-settled corporate well-meaning sitting that federal courts Erie doctrine Janssen, their own.” board with substantive law and diversity apply state N.W.2d Gasperini law. Ctr. procedural federal 427, Humanities, 415, U.S. 116 518 typically op- rule judgment The business for (1996). 2211, The see, 135 L.Ed.2d 659 liability, S.Ct. director erates as a defense to applies when federal Unitrin, Erie doctrine also Corp., Inc. Am. Gen. 651 e.g., v. jurisdiction (Del.1995), supplemental 1361, has court exercises but it also A.2d 1374 Doctrine, commentator, Reality, 52 Geo. Wash. and the According to courts have one 609, (1984). Although ignored between the business the distinction 611-12 L.Rev. rule, protects directors from which more ac- judgment doctrine” term "business decisions, liability their and the business for applied curately the rule as describes doctrine, protects the deci- context, we utilize the term "business IV, Joseph Hinsey Business sion itself. majority with the judgment rule" consistent Judgment Institute's and the American Law subject. reported on this of cases Rule, Project: Corporate Governance 552 “abridge, enlarge, modify state law claims. See Felder v. Ca or substan-

over 131, 151, 2302, rights any litigant.” tive of Because Minn. sey, 487 U.S. 108 S.Ct. (1988). clearly R. P. procedural, the federal Civ. 23.09 is its L.Ed.2d 123 Because exercising scope analysis is has no relevance to our of court in this instance district question. the certified jurisdiction over matters of supplemental law, state we must determine whether 23.1(c), a Under Fed.R.Civ.P. sharehold- A procedural. Rule 23.09 is substantive or settled, er “may derivative action be vol- whether a is sub court determines dismissed, untarily compromised only or examining procedural by stantive or with the approval.” court’s The lead rule is “outcome-determina whether the plaintiffs assert this rule mandates Plumer, 460, tive.” Hanna v. 380 U.S. review proposed settlement (1965). 1136, 468, L.Ed.2d 8 S.Ct. fairness, regardless reasonableness and ascertain whether a rule outcome- To the content of the Minnesota business determinative, turn, a court considers essence, plain- rule. In the lead apply how failure to that rule would 23.1(c) tiffs us to urge interpret Rule so as aims” of the implicate “twin Erie doc to foreclose application of the Minnesota “discouragement forum-shopping proposed rule to deriv- trine — inequitable and avoidance of administra ative settlements.

tion of the laws.” Because federal district court did certify not—and could accordance with the Erie doc not— trine, question procedural law, court a we that Rule is a federal proce hold 23.09 we decline to applied plaintiffs’ dural rule and therefore cannot be address lead argument. As a supplemental a federal number of courts have exercising court observed, jurisdiction question process certified over claims asserted under provides no opportunity law. A Rule for a apply state failure to 23.09 state opinion implicates render federal instead Fed.R.Civ.P. 23.1 nei matters of See, Vernon, e.g., law. v. ther of the core Erie Ramos Town concerns identified in 799, 705, (2000); 254 Conn. Hanna. 761 A.2d language Because Rule substantially Co., v. 23.09 that of Mardirossian Paul Revere Ins. mirrors its fed Life (2003); 376 Md. counterpart, unlikely party eral that a A.2d Lum Indus., bermens Mut. would choose a federal forum to evade Cas. Co. Belleville Inc., 407 Mass. strictures of the rule. See N.E.2d Fed.R.Civ.P. (1990). 23.1(c) (“A Thus, may derivative action Fed.R.Civ.P. 23.1 is not set tled, dismissed, properly before voluntarily us at this time. compro approval.”). mised with the court’s B. § Minn.Stat. and Minn. 302A.24-1 Furthermore, 23.09 because Rule sets Stat. 302A.251 guide forth no substantive standards approval consideration and Having disposed settlement parties’ argu- grants party no rights one regarding ments R. P. Minn. Civ. 23.09 another, unlikely 23.1, enforce it is and Fed.R.Civ.P. we now consider apply a failure to Rule 23.09 rather than whether Minnesota statutes mandate that the similar federal rule lead ineq would to courts afford a particular level of defer- Finally, if uitable results. even Rule 23.09 ence to an SLC’s decision to settle deriv- substantive, it were would be invalid under ative action. Minnesota Statutes (2006), 302A.241, § Minn.Stat. 1, § 480.051 which forbids subd. provides for the cre- promulgation procedural the rules that ation of “consisting SLCs of one or more ” 302A.241, § indepen- 302A.251.... Minn.Stat. or other independent directors (2006). subd. legal or rights to consider persons dent and whether corporation of the remedies not controlling 302A.251 is be- Section pur- should be remedies rights and those not cause does address deference 1, 302A.241, subd. Because section sued.” an But afforded the be decision SLC. the deference to be not addresses does our statute does inform resolution of a de- question. First, an settle afforded the certified section action, good to dictate it cannot be read 302A.251 indicates that faith is rivative prerequisite application of the certified the busi- any particular resolution rule. ness Minn. State. how- require, does statute question.7 4(b). 302A.251, Additionally, § subds. be ever, of an SLC that members upon rea- permitting in reliance individuals “independent.” See id. compe- sonably believed to be reliable and 302A.251, next turn to Minn.Stat. We tent, that focus the statute indicates some sets forth the business placed fact-gathering pro- be should on liability.8 director rule as defense by the cesses undertaken decisionmaker. 302A.251,subd..l, a director section Under Id., in that a Finally, providing subd. having being liable reason of or “is not director not be indemnified corporation” for a director of the been corporation for decisions result his faith, discharged in a man- “in action benefit, receipt wrongful or her of a reasonably to be she] ner or believes [he statute also indicates disinterest- corporation.” A of the the best interests edness of director should be consid- factual may rely opinions or director Id., 4(d). subd. ered. em- provided by “officers or

information Flanagan C. Janssen Best & long of the so as corporation” ployees to be reasonably believes them director Turning precedent guid- to our own competent the matters “reliable resolving question, certified we ance 2(a)(1). Id., subd. Further- presented.” only addressing that our case observe more, corporation may eliminate or limit in the judgment rule context actions in his liability for taken a director’s Best & an SLC decision is Janssen v. director, if capacity (Minn.2003). or her but Flanagan, N.W.2d faith, actions not taken in Janssen, those were bad nonprofit corpo- of a In members id., 4(b), and did not involve transac- concerning subd. brought suit ration derivative in which the director received tions at 879. a failed business investment. benefit,” id., personal subd. “improper response, nonprofit appointed 4(d). act what attorney “Committee members are deemed as an SLC assess take, action, but any, the board purposes section[ ] directors for be should 19, 1989, 172, § ch. 1989 Minn. Laws predecessor to sec- 7. We note that the statute provided Accordingly, faith can no “[t]he tion 302A.241 we ascribe binding the committee are determinations of predecessor import to the statute. directors, corporation and its offi- upon the cers, Minn.Stat. shareholders.” application of the busi- 8. We will refer to this (1986). legislature stated § 302A.243 But judgment rule as the “business ness repeal does [section 302A.243] that "the with liability to avoid confusion rule” so as accepted imply legislature not has applicable to SLC judgment rule rejected repealed section the substance supra note decisions. interpreted manner must same but May had enacted.” Act of [it] [been] as if ah, attorney accept (quoting et the board instructed Dennis J. Block The Busi- during Judgment Fiduciary findings as correct the factual made ness Rule: Duties of (5th ed.1998)), investigations Corporate two earlier into the invest Directors 18 treatise, attorney statement was on a ment. 880. The recom based not Id. at precedent, part and it not and the was our nar- litigation, mended dismissal holding row that the two for the elements of the nonprofit moved derivative suit to judgment business rule are faith and Id. be dismissed. The district dis independence, id. at suit, appeals missed the but the court of reversed, determining that the “threshold say To that we no particular endorsed judgment test rule” had of the business approach judgment to the business rule is not Id. at 881. been met. suggest guidance not to the absence question. our resolution of the certified every in

We observed Janssen that vari- First, we in acknowledged Janssen that rule, judgment ation of the business jurisdiction’s every judgment business rule SLCs, applied to contains two essential minimum, at requires, analysis a of an minimum, a elements: “At the board must good faith independence. Id. in good establish that the committee acted Second, by giving no deference to im- faith sufficiently independent and was SLC, properly implied constituted we from dispassion- the board directors to no given deference is to be to the decision ately review the derivative lawsuit.” Id. at of a conflicted board of directors that nev- attorney been Because had told attempted er an independent create by the how to his nonprofit conduct inves- in place. SLC the first Certainly, id. tigation, determined that his recom- we if, would most unusual simply not warrant any mendation did deference. SLC, declining to having create an board Concluding attorney’s Id. “investi- a conflict of interest was entitled to more gation most failed the minimal version of a deference than if it had created an SLC rule,” judgment business we refused to faulty litigation. Third, later deemed “adopt particular version of the business we indicated that the board bears the bur- judgment rule for use with non- Minnesota proof den establish that the business profit organizations.” Id. at n. 5 judgment rule has been satisfied. See id. represents accep- Janssen neither an (stating that “the board must establish rejection tance nor any particular that the committee acted faith and permutation business rule. sufficiently was independent”). Finally, the need Recognizing for caution we clarified that a has opportu- board one circumstance, unique we set merely forth nity properly SLC, convene requirements the minimal of the business itself has one opportunity to conduct a good faith part on the rule — proper investigation. at Id. 889-90. independence SLC and from board at directors. 888 & n. 5. The con- III. misinterprets currence indicat- Janssen as Zapata A. Auerbach and ing “that the business rule does jurisdictions shelter decisions are irrational or Other largely have fallen Although unreasonable.” we did state in line with the opposing adopted by views Janssen “‘[t]he New York and Delaware courts re- presumption is a protecting garding conduct the deference to be afforded an that can be directors attributed to SLC’s decision to settle derivative action. ” purpose,’ rational id. two competing approaches These underlie

555 equipped infrequently are ill and that have “courts parties the dispute the between on to what are and must be court. called evaluate with this filed briefs in essentially judgments” business made Bennett, York the New In Auerbach v. business, 1000, id. at the operation of articulated deference Appeals Court any inquiry into “which fac- court forbade decision as follows: an SLC’s due by SLC] were considered or the [the tors of a de- aspects substantive While weight reaching accorded them relative de- to terminate a shareholders’ cision decision,” id. at 1002. that substantive corpo- action defendant rivative definition,” explained, the court “the “[B]y made a committee directors rate judgments responsibility for business must by the appointed disinterested directors directors; corporate with the their rest are board of directors be- corporation’s capabilities experience pecu- and individual judicial inquiry under yond qualify discharge them for the liarly doctrine, in- may court Id. responsibility.” that at indepen- as to the disinterested quire that committee sum, of the members of dence In the business' appropriateness and suffi- and as requires court to adopted Auerbach procedures ciency investigative (1) of the to the of an if defer SLC the committee. pursued by and chosen independent from board SLC appro utilized directors and 619, 920, 419 393 N.Y.S.2d 47 N.Y.2d priate procedures and meth (1979). investigative 994, 996 N.E.2d investigation in odologies pursued its and court in Auerbach stated The jurisdictions faith. A number of fol good judgment “rule shields delib- See, e.g., approach. low Auerbach of the [SLC] and conclusions erations 629, Co., v. Power 404 So.2d Roberts Ala. possess disinter- if [the members] (Ala.1981); Meyercord, v. Desaigoudar 632 in a do not stand independence and ested 408, 173, Cal.Rptr.2d Cal.App.4th prevents an unprejudi- relation which dual Intercable, (2003); Hirsch v. Jones 418-19 judgment.” Id. at 1001. exercise of cial 629, (Colo.1999); Inc., 984 P.2d 637-38 Furthermore, ju- explained that court App.3d Bargaheiser, v. 70 Ohio Miller adequacy appro- “the review of dicial (1990); see also N.E.2d investigative the committee’s priateness of Corp., 182 F.3d Atkins Hibernia methodologies” permis- procedures Cir.1999) (5th Erie (making “best court, According to the Id. at 1002. sible. apply that Louisiana courts would guess” responsible procedures for the “those Auerbach). is reached reasonably required show Maldonado, De Zapata Corp. v. investiga- chosen they pursued have their ap Supreme rejected the Court laware Id. faith.” at 1002- tive methods adopted by the New York Court proach Auerbach, emphasizing Appeals justify risk ... cau “there is sufficient Appeals New York Court of stated The theory beyond adherence an tion improper it would be review A.2d decision, judgment.” which involves business SLC’s substantive (Del.1981). two-step forth a ethi- set balancing legal, weighing “the reviewing the decision of commercial, cal, promotional, public process rela- step, The first similar tions, 788-89. and other factors familiar SLC. fiscal standard, requires evalua many corpo- to the Auerbach resolution of most faith “independence Id. at 1002. Because tion problems.” rate supporting and the bases its B. compelling Auerbach is more [SLC] If Id. at the corpora- conclusions.” The for a adopting reasons test modeled independence tion and demonstrates on the Auerbach standard are numerous faith, proceed, “may a court in its then First, and compelling. the New York discretion,” step, to the second Court Appeals properly recognized “applies] independent the court its own qualified courts are not to evaluate the judgment.” apply- Id. at 789. business SLC, business of an explaining judgment, a ing its own business court doctrine, “the business compelling corporate “how considers part, grounded prudent least in faced interest in dismissal is when with a recognition that equipped courts are ill gives lawsuit” and special non-frivolous infrequently called on to evaluate what are public consideration to “matters of law and essentially judg- must be business policy.” reviewing A court ap- Id. 920, ments.” 419 N.Y.S.2d 393 N.E.2d at prove the dismissal of a derivative suit Indeed, “judges really are not “subject ... equitable terms or equipped by training experience either or necessary conditions finds or [it] desir- judgments make business because such able.” Id. judgments intuitive, are geared to risk- provided Zapata following taking and often reliant shifting on com- allowing apply rationale for courts to their petitive and market criteria.... Whether own business deci- pursue litigation judicial a is not deci- sion: sion, rather, it is a choice.” Joy, be mindful must that directors

[W]e are (Cardamone, J., 692 F.2d at 898 concurring judgment on fellow passing directors in in part, dissenting in part). corporation the same and fellow di- Second, qualified even courts were instance, rectors, in the same who desig- judgments, make business it is unclear nated to serve them both directors how a judgment” court’s “business should question and committee members. The for purposes defined of reviewing an a naturally arises whether “there but for By very nature, SLC’s decision. grace go of God I” empathy might individual’s business is a unique not a play ques- role. And the further amalgamation factors, of many including tion inquiry arises whether as to inde- but not limited to personal experience, ed- pendence, good faith and reasonable in- ucation, general philosophy. vestigation safeguard sufficient The adoption of a judg- nebulous “business abuse, perhaps subconscious ment” allowing unpredictable standard abuse. results is, would endorse a standard that A jurisdictions at 787. number of have fact, Regardless no standard at all. adopted Zapata some form of the frame the good faith and independence of an , North, e.g., Joy work. v. 692 F.2d See SLC, Zapata allows court to set Cir.1982) 880, (2d (applying Connecti aside an SLC’s decision on based little law); cut Abellav. Universal Tobacco Leaf disagreement more than a concerning mat- Co., F.Supp. 795, (E.D.Va.1982); ters of business administration. Low, 810, Houle v. 407 Mass. 556 N.E.2d (1990); Shaw, Third, 320 N.C. very of a nature share Alford (1987); 358 S.E.2d House v. holder derivative suit is that the cause of Edmondson, action, Estate although 245 S.W.3d brought by shareholder, (Tenn.2008). belongs Janssen, corporation. the shareholders the cor- of conflict between Accordingly, at 882. N.W.2d prerogative management, “bog[ged] will become have should poration protracted disputes peripher- and detriments down in over the benefits weighing egregious where spend Even al Id. at months bringing lawsuit. issues.” 305. “To conduct caused bad faith years has been litigating harm or over whether it is officers, directors part litigate idea to results in that a lawsuit is may conclude corporation judicial resources, it also waste of inevita- best interests for in the corporation’s not bly disrespect fuels for the courts.” Id. publicity, cost of such as adverse reasons Fifth, courts allowing second-guess to the force. disruption of work litigation, or the the decision of an SLC undermines (Cardamone, J., F.2d at Joy, 692 itself, a process denying corporations dissenting part). As concurring part, avoiding vital means of strike suits and Court, Supreme by the Alabama explained litigation. other derivative “Prior abusive bring not an an decides to [SLC] “When Zapata, corporation to a could assume that corporation, the on behalf action it dismiss a derivative suit the suit could authorizing condoning are not directors contrary to the shareholders’ best in was merely alleged wrongful acts but are the ” Fischel, The terests. Daniel R. “Race fact that the events saying given the Re the Revisited: on Bottom” Reflections occur, interest of it is not in the best did Developments Corpora cent in Delaware’s remedy.” a pursue legal corporation the (1982). Law, tion Nw. U.L.Rev. Roberts, at 632. 404 So.2d corporation the Zapata, But same “[a]fter Fourth, the Auerbach standard avoids prospect must the that a court exer face “lengthy complicated” proceedings and the cising ‘independent judgment’ judgment deter that characterize business considering questions ‘public policy" of Zapata. Dennis J. Block minations under If go will the suit to Id. allow forward.” Prussin, Judg H. Adam The Business & to structure their investi SLCs are unable Shareholder Derivative ment Rule and can gations in manner that withstand Law. Zapata?, 37 Bus. Actions: Viva scrutiny, have judicial corporations consid (1981). Indeed, Zapata ... “the test is erably go through the sub less reason so complicated, so sub open-ended, so expense constituting of trouble and stantial judicial whimsy seems to ject to —which if it place, particularly an SLC the first ... never encourage motions can be —that the whether SLC’s decision is uncertain straightfor simple, inexpensive costly litigation. will stave- off derivative corporation proceedings which ward Sixth, applying a court its. “business going if it to eliminate detrimental needs is prone to act on its own biases judgment” way.” in a rational litigations derivative then, Ironically, Zapata predilections. of a court’s busi at 62. The exercise danger of bias on simply replaces requires “significant discov ness directors and part corporate corporation’s operations and ery” into the part danger SLC with bias lengthy hearings which evidence is The business court. A. the court. Franklin Ge presented to greatest ex- eliminate bias should vurtz, Represents Corporation? Who from possible, simply reallocate it tent Deter a Better Method In Search another. As one professional one com- Interest in Deriva mining Corporate observed, danger bias has Suits, mentator Pitt. L.Rev. 301-02 tive 46 U. likely to be correct- (1985). process in the SLC result, litigation, derivative As Stephen forces. See ed natural market timely resolution providing rather than Bainbridge, Judgment The Business such legitimate M. concerns have been Doctrine, standard, early days Rule as Abstention Vand. the Auerbach (2004). Competition they simply play be- L.Rev. have failed to out over years provides tween firms even most self- the last 29 be apparent should —as strong presently interested directors with incentive from the sizeable settlement be- decisions; (i.e., profitable) fore make us. prove themselves incapable directors who reject We also argument Auer will inevita- making profitable decisions bach’s critics that structural bias phe is a bly by others who are replaced more requires extraordinary nomenon that capable. forces “[m]arket Whereas work judicial level of intervention. See Zapata, imperfect Darwinian selection on corpo- 787; v. Register A.2d at Miller & makers, rate ... no such forces Inc., Tribune Syndicate, 336 N.W.2d erring judges.” constrain Id. As a result (Iowa 1983) (explaining that inability of the to relative market “structural bias” argument “suggests that rectify a erroneous court’s business deci- it is to unrealistic assume that the mem sion, will prefer “rational shareholders independent bers of committees are free judicial risk that of director error to from personal, financial or moral influ error.” Id. ences which flow from the directors who Finally, Zapata notion court’s that a them”). appoint general matter, As a may court the business judg- countermand unlikely seems that a of an member SLC ment of an SLC based on “matters of ... will reach a decision that could harm the public is policy” indefensible. 430 A.2d at merely company he or because she feels “[presumably Zapata some empathy for the individuals under meant even though that the costs of the investigation. The members of an SLC suit outweigh probable gains its to the will certainly almost professionals, be indi company, may the action be allowed to viduals who have dedicated their careers continue if suit overriding serves some reputations building in the business public deterring purpose corporate community and who be particularly would Gevurtz, wrongdoing.” supra, 300. It loath to reputations risk those simply for troubling is a that compels rule of law empathy. sake of More specifically, party litigation proceed with because we note that the UnitedHealth SLC was greater public good, some as determined composed not of independent board mem by a court that will have to live with bers, but two former members of the decision, the consequences of the might who, judiciary appointment until their result. SLC, had no discernible connection to We recognize that the standard we the UnitedHealth board. Even if indepen well, adopt subject has to criticism as been dent are acting directors at risk of on their but we consider this criticism to be largely strong for empathy directors, their fellow Some argue, example, unfounded. for we that cannot how empathy see that would that, forth Auerbach sets a rule adopted factor into the decision of SLC com courts, posed wholesale nation’s could of individuals drawn from so far “presage demise of corporate the derivative suit.” outside the ranks. We believe Dent, Jr., George The Power W. Di that scrutiny careful of an indepen SLC’s rectors to Terminate Shareholder Litiga investigative dence and procedures is a Suit?, tion: Death the Derivative protection sufficient against structural (1980). 75 Nw. U.L.Rev. While bias. possessed argue that an the SLC a disinter- might critics members Finally, some (2) the independence or settle —rather ested and SLC’s in- to dismiss appears procedures methodologies to be a merito vestigative pursue than —-what deriva sign adequate, appropriate, pursued rious claim itself were been undermined. also process tive faith. reaffirm our state- We has. Cox, Searching Corpora D. James ment in if the initial Janssen SLC Litigation: Suit in Derivative tion’s Voice fail investigation and recommendation Project, the ALI A Critique Zapata standard, satisfy this “the derivative suit (noting L.J. Duke opportuni- on merits” no proceeds its with uniformly rec almost concern SLCs ty rectify any deficiencies. 662 N.W.2d lit maintaining derivative ommend at 889. of a meritori As to the dismissal

igation). today we adopt The standard consis claim, we find cause for concern ous little tent with our observation Janssen that today, forth under the rule we set requires, at a review of ensures robust minimum, indepen that an bare SLC be Further, it must investigative procedures. act in & dent and faith. Id. at 888 n. dismissal of meri be remembered knowledge, jurisdiction 5. To our no has justifiable, such litigation torious questioned propriety require of these prove claim will pursuit as when See, Zapata, 788; e.g., ments. 430 A.2d at costly than beneficial. As more Auerbach, 920, 419 N.Y.S.2d 393 N.E.2d at claim, it is of meritorious a settlement support 1000-01. This standard also finds legal practice modern that settle fact of in requiring the statute that the members rath commonplace are and the rule ments independent, of an SLC be Minn.Stat. moreover, exception; the er than 302A.241, 1, § the statute subd. acknowledged settlements are broadly liability for actions tak precluding director judicial they “conserve[ ] favored because faith, 302A.251, § en in Minn.Stat. ex litigation ] resources and minimize[ Finally, 1 of subds. & the evaluation the Corr., Dep’t Pa. 876 penses,” Austin v. of by with procedures utilized an SLC well (E.D.Pa.1996). 1437, It 1455 F.Supp. expertise judiciary, the that, to us little concern under seems adequacy pro frequently considers the today, the we set forth a substan standard sys the trial throughout cedures utilized tial of eases end settlement number Auerbach, tem, 920, N.Y.S.2d litigation. than adversarial rather legislative codifi N.E.2d at and the liability judgment cation of the business judgment C. The business Minnesota at contemplate rule least some seems rule analysis the in which a judicial manner stat Finding nothing either our factual data un gathers decisionmaker the compels utes case the level of law decision, Minn.Stat. derlying see Zapata, and con scrutiny contemplated in 302A.251, subd. reasoning of Auerbach is cluding that the heavily on sec- The concurrence relies adopt we modeled persuasive, more test concluding that the busi- tion 302A.251 In standard. accordance the Auerbach rationality ness rule contains Auerbach, 419 N.Y.S.2d with sets forth requirement. Section 302A.251 1001-03, that, we hold under the N.E.2d rule, liability rule, the court Minnesota business protects rule that the to settle should defer to an SLC’s decision judicial scruti- of an SLC from action if decision a shareholder derivative Accordingly, ny. although parties’ consider- did briefs not address the pres- underlying ations section 302A.251 inform expansion ence of this or- provision, we understanding of judg- our supplemental briefing dered on whether applies to decision of ment rule as it provision so undermined the United- action, a derivative SLC to settle stat- Health independence SLC’s as to render here. controlling ute itself is not The fact any judicial inappropriate deference protects that section SLC mem- 302A.251 judgment. SLC’s business liability for personal bers from their deci- mean that the statute ap- sions does not Expansion corpo of an SLC at a plies decision of an to the actual SLC to rate board’s discretion ef could have the reject action. settle a derivative We fect diluting original votes presumption legisla- that the concurrence’s by members addition new members “unmistakably] ture that the inten[ded]” who the board feels more likely are same in both apply contexts. The make a favorable concerning state, so we statute does not decline to litigation. Furthermore, derivative al expand scope of suggest- the statute as though there is no indication that the ex ed the concurrence.9 pansion power was exercised case, board in this the mere retention D. provision Expansion that power by a board could influence A must the totality consider members alter their recommenda of the circumstances evaluating when tions so having avoid their votes See, independence. e.g., Strougo v. meaningless.10 rendered We conclude Bassini, (S.D.N.Y. F.Supp.2d expansion existence of an provi 2000); Hui, F.Supp. Johnson sion is one factor in a totality-of- court’s (N.D.Cal.1991); Corp. re Oracle the-circumstances evaluation of an SLC’s (Del. Litig., Derivative A.2d independence. Because we have not been Ch.2003). The board resolution creating apply asked to the business judgment the UnitedHealth SLC contains the follow rule we forth today, only set but to delin ing provision: RESOLVED, “FURTHER boundaries, eate its. that we leave the the number of final Special members analysis of the Litigation can expanded Committee in UnitedHealth SLC’s inde through pendence the future Board action if the discretion of the federal Board appropriate.” deems Because the district court.11 9. We pansion do not share the provision concurrence’s confi- power that limits the rationality dence expand that its test would not de- membership the SLC's to disinterest- volve, time, immediately either or over into a ed directors would raise fewer concerns than here, substituting provision means of the of a court the at gave issue the for the decision of an SLC. the In absence of board absolute add discretion to members authority adopt test, compelling however, us to such a the noting, SLC. It is worth that the we decline to do so. expansion effect provision of an such the as one question in this case is a impres- of first recognize expansion provision We that an Minnesota, sion not in but also nation- wholly legitimate purposes, serve such as wide. allowing for the addition of a member to the original SLC if one of its members is disabled that 11.Factors other courts have considered include, or investigation evaluating if the size in independence necessitates an SLC’s expansion. expansion provision to, (1) An that lim- but are following: not limited power disability its this to instances of or whether the members are defendants in the (2) necessity litigation; would raise no little or concerns whether the members are ex- regarding independence, posed (3) an SLC's and an ex- to direct and liability; substantial independent. not good act in faith was proof E. Burden of Thus, proving that “[t]he [the burden elements of Having set forth the rest, all been met must have] elements rule, we business Minnesota fairness, capable making party on the proof the burden also address must Houle, 556 proof corporation.” that —the Janssen, we indicated these elements. N.E.2d on the cor proof the burden of rests that es “the board must noting that poration, Under the Minnesota in good acted the committee tablish that rule, must to an deci- a court defer sufficiently independent.” and was faith ac- sion to settle shareholder derivative reaffirm this at 888. We 662 N.W.2d that if the decision dem- proponent tion statement, corporation, concluding (1) the members of onstrates that SLC proponent other as well independence possessed a disinterested recommendation, bear the burden should investigative procedures and the SLC’s of our standard elements to show methodologies adequate, appro- were have been met. faith. priate, pursued underlying question answered. principles

Basic Certified proof provide am burdens of allocation of MAGNUSON, C.J., having been a First, “all support for this conclusion. ple of this court at time of the member equal, the burden better being else submission, part in took no argument party on the with easier access placed consideration or decision of case. Commc’ns information.” Nat’l relevant Ass’n, Corp., v. AT & T 238 F.3d Inc. MEYER, J., part took no Cir.2001). (2d Clearly, corpora or decision of this case. consideration tion, any records con possess which would H., (con- ANDERSON, PAUL Justice and inves membership cerning the SLC’s curring). provide position tigation, is best rejection the court’s agree I with regarding the SLC’s facts detailed Second, Corp. v. Maldona- Zapata rule set forth independence. faith (Del.1981). do, I also agree 430 A.2d party rule” that “the asserts “general the Minnesota issue has the burden affirmative SLC requires proponent to its claim.” rule the facts essential proving that establish Dairy v. Farm recommendation State Bank Auburndale (7th investiga- 888, independent, utilized sound Leasing 890 F.2d 893 Cir. was Corp., 1989). good and acted in faith. proof procedures, tive the burden Allocation of my to voice concern separately But I write in these circum plaintiffs the derivative that, by the rule set forth adopting effectively require them would stances Bennett, 619, 419 47 N.Y.2d v. did not Auerbach negative the SLC prove —that outside, relationships with one "had or social are non-man- business whether the "members defendants”; directors"; (4) (9) agement whether the members whether or more of wrongdo- alleged independent on the board when were received advice from members occurred; (5) par- advisors; ing the "members (10) whether independent counsel or other (6) wrongdoing”; ticipated alleged alleged wrongdoing; and severity approved in- conduct whether the members (11) 2 Dennis J. of the committee. size (7) volving alleged wrongdoing; whether al., Judgment The Rule: Business Block et "had affiliated firms the members their Fiduciary Corporate Directors 1746- Duties of dealings corporation other business with 1998). (5th 53 ed. directors”; (8) whether members than 562 920, (1979), 692, (1996); 393 N.E.2d 994

N.Y.S.2d we S.W.2d 699 Katz v. Chevron judicial rule 1352, have endorsed a under which 22 Corp., Cal.App.4th Cal.Rptr.2d 27 given 681, (1994); might deference to SLC recom- 689 v. Wis. Willens 2720 Ave. are, face, Ass’n, Inc., wholly Coop. 1126, mendations that their 844 A.2d 1137 (D.C.2004). particularly result is pro- irrational. This A number of academic com blematic, such given that a rule conflicts objec mentators have also concluded that language tively with of Minn.Stat. irrational decisions should not be (2006), codifying the by 302A.251 business sheltered judgment business rule. See, rule. liability Millon, judgment e.g., David Redefining Corpo Law, 223, rate 24 Ind. L.Rev. 253 courts—our court Several included— (“An objectively obvious example irra judgment that the business have observed tional behavior not entitled to business does not rule shelter decisions are judgment protection rule would be a deci unreasonable,1 i.e., irrational or wholly that, sion at the expense corpora underlying pur without rational business shareholders, tion’s conferred a benefit on pose. See v. Flanagan, Janssen Best & some third party legitimately not entitled (Minn.2003) (‘“The 876, 662 882 N.W.2d management’s largesse.”); David business rule presumption is a Rosenberg, Galactic Stupidity protecting conduct directors can be Rule, Judgment Business Corp. 32 J. L. pur attributed to rational business 301, (2007) (“Courts 322 will often im ”) Block, al., pose’ (quoting Dennis J. et pose liability galactic for the stupidity of Judgment Fiduciary Business Rule: directors, but the possibility at must least (5th Corporate Duties Directors 18 exist, duty or the faith dissolves ed.1998) added)); (emphasis id. (noting completely....”). not pro does discretion”);2 tect a director’s “abuse of As explained, one court has review for Eisner, 244, (Del. v. Brehm A.2d irrationality is another means which a 2000) (“Irrationality is the may outer limit of ensure that the decision under (footnote rule.” scrutiny was made faith. See omitted)); North, Joy Brehm, see v. also 692 F.2d (“Irrationality A.2d at 264 ... (2d Cir.1982); v. Cramer Gen. Tel. tend to show that the decision is not (3d & F.2d Corp., Elees. good faith, Cir. made in a key ingredi- 1978); Long Lampton, Ark. rule.”).3 922 ent of the Arsht, synonymous 1. I utilize the terms Judgment "irrational” uel The Business Rule Revis interchangeably, ited, and "unreasonable” with no (1979) ("This 8 Hofstra L.Rev. particular significance ascribed to the use of [rationality] judg limitation to the business one term over the other. is, all, perhaps, ment rule not a limitation simply application but of the fundamental generally The term "abuse of discretion” is rule.”). principle behind the Because deci- " in used this context to ‘a describe mind, good sionmaker's faith is a state of see that is so from the removed realm of reason 302A.011, (2006) (de § Minn.Stat. subd. 13 per- or so as to fall unreasonable outside the fining good "honesty ” faith as in fact in the Block, sound missible realm of discretion.’ of conduct the act or transaction con al., supra, (quoting Proposed et at 85 Model cerned”), of typi which direct will evidence Comment, Corp. § Bus. Act. 8.30 Official cally lacking, good usually be faith will have (1997)). Law. Bus. by be ascertained means of indirect evi analysis Any good particularly dence. Evidence of decisionmaker's indicative of a faith, nature, very will necessitate scru- decisionmaker’s state of mind be would (or tiny thereof) of the rationality. relationship decision’s S. Sam- lack of the decision Cf. rule ad- three-part [section 302A.251’s] that have courts importantly, two Most determined of ‘in a manner the di- this matter have dition the words considered rule does in reasonably rector believes to be best objectively ”).4 judicial deference corporation’ mandate interests of the recommendations. unreasonable SLC argue that One could section 302A.251 Low, 556 N.E.2d Houle v. Mass. rationality no requirement, contains but determine, (1990) (“The judge must clarify only language to provides additional presented, evidence basis of the meaning “good faith.” such Under a reason- the committee reached whether interpretation, an section 302A.251 would decision.”); v. principled House able and faith, only requirement good set forth Edmondson, 372, 382 245 S.W.3d Estate requirement to restate that alternative (Tenn.2008) take (stating that courts must language setting before forth additional into “the soundness consideration requirement legisla- of due care. But the recommenda- conclusions and committee’s “honesty as “good ture has defined faith” tions”). or in fact in conduct of the act transac- rationality requirement reflected This 302A.011, § tion concerned.” Minn.Stat. 302A.251, § language of Minn.Stat. (2006). Thus, good the statute’s subd. concedes, which, majority “inform[s] as requirement entirely faith unlike its rea- judg understanding of the business our requirement; sonableness the former sets applies as it to the decision of ment rule particular required forth the state of mind action.” Ante. to settle derivative director, a corporate while the latter 302A.251, a director section Under mandates that decision be reasonable. advantage take of the business Further, if “good “reasonably faith” and or she has acted “in only he essentially to mean believes” were reasonably faith, she] in a manner or [he thing, part same a substantial section interests of believes be the best superfluous. be To inter- 302A.251 would an ordinari corporation, and with the care pret synonymously those would words person like would ly prudent position in a only requiring essence treat the statute as under similar circumstances.” exercise to be in that the director believe his actions 302A.251, Notably, § subd. Minn.Stat. corporation, rath- the best interests significantly expands 302A.251 section “reasonably them be believe[ ]” er than upon language predecessor, of its conflicts with interpretation so. Such an “in required that directors act which construction, statutory under our canons of faith, diligence and with that “a to be construed statute is ordinarily prudent men would care which give as to harmonize and effect to whole so similar circumstances in exercise under word, possible, and where no parts, all its § positions.” like Minn.Stat. 301.31 superflu- held phrase, or sentence will be (1980); Minn.Stat. Ann. see also ous, void, insignificant.” Anderson 302A.251, at 353 Reporter’s § Note—1981 Taxation, 528, 533, 2004) 253 Minn. (West Comm’r to the Minnesota (Reporter Law) (1958); Minn. see also (stating N.W.2d Corporate Task Force on (2006) (“Every law “is 645.16 shall judgment rule made a Stat. that the business parties on this pur- who submitted briefs to the facts on which the decisionmaker matter, opinion ports to base the decision. in our and was not addressed in Janssen. language of relevant section 302A.251 The appears largely escaped to the attention have construed, give to possible, effect to all normally sions shielded the business provisions.”). Auerbach, judgment rule. (not- N.Y.S.2d 393 N.E.2d 1000-01 language par- The of section 302A.251is ing similarity litigation between decisions ticularly analysis relevant to our of the “questions corporate policy and other question, federal district court’s certified Yet, management”). explana- without legislature that given specifically has tion, majority a requires lesser show- applicable made this section to SLC mem- ing of an part judicial seeking 302A.241, § bers. See Minn.Stat. subd. deference to a not pursue de- (2006) (deeming committee members “di- litigation required rivative than would be purposes rectors ] section! corporate defending, director or seek- 302A.251”); Shaw, 320 N.C. cf. Alford to, ing deference the exact same decision. (relying 358 S.E.2d 327-28 majority despite The legisla- does so concerning on a statute director conflicts that, ture’s unmistakable generally, intent an “expression legislative intent” re- judgments the business of directors and garding North Carolina business judg- SLC members receive identical treatment rule). legislature ment Minnesota from the courts. See Minn.Stat. significant considered it that SLC mem- 302A.241, § 7.5 I agree subd. While that light be bers’ actions reasonable an concerns about SLC’s structural bias corporation’s fact, best interests. inadequate are an justify expansion legislature considered reasonableness rule, judgment those concerns significance of such that it be made it im- are more than sufficient to counsel possible for SLC member to seek shel- majority’s excision of an entire element judgment ter under the business liability from the judgment rule. rule if he could have reasonably thought actions be in the corpora- his upon Based the language of section interests. tion’s best 302A.251, I conclude that the Minnesota then, requires

Naturally, greater one expect would scrutiny level of than contemplated Minnesota business rule to re- Auerbach, quire showing though that a not the similar limitless review reasonable- any permitted Rather, be in Zapata. ness made before deference will it appears accorded to the of a that recommendation section 302A.251 calls for a prop- middle erly-constituted all, ground SLC. After competing Auerbach between these stan- premised very itself is on the notion ground dards —a middle under which a corporate litigation court, decisions should be after evaluating indepen- an SLC’s differently dence, treated no than methods, other deci- investigative not, My majority conclusion is as the may would recommendation receive deference un- imply, premised on a mistaken belief rule, der the business while still "controlling." section' 302A.251 is Ante. exposing personal the members of the SLC to Rather, upon simple it is based fact that 302A.251, liability under section which ex- application radically of two different busi- plicitly requires showing of reasonableness. ness rules—one in the context of unlikely legislature It is intended assessments, liability the other in context contradictory such results to stem from the of SLC recommendations —creates unneces- application statutory of its scheme. Minn. Cf. sary fact, inconsistency in Minnesota law. In that, 645.16(6) (stating Stat. when inter- apply require- the failure reasonableness statute, preting a the courts are to take into ment to an SLC’s recommendations lead consequences particular account "the of a to unfortunate results. Under the rule articu- ’). interpretation’ majority, lated unreasonable SLC course, rationality if the of an SLC’s Of faith, whether SLC’s must determine adequately is to be evalu- recommendation any attributed to can be recommendation. ated, a court must take into account what allowing By purpose. rational provides for that support report SLC’s scrutiny the reasonableness limited such recommendation. some indication Without recommendation, will avoid we anof SLC explanation what SLC relied (and inexplicable) diver unnecessary recommendation, reaching it upon its rule judgment the business gence between be for court to deter- impossible would recommendation to an SLC applied rationality mine of that recommenda- liability codi judgment rule result, any tion. As a evaluation of the importantly, More fied in section 302A.251. rationality of an recommendation SLC likely will address concerns we grounds must take into account the Zapata, without the court motivated provides support SLC of its recommen- authority of encroaching rightful upon the dation. corporate affairs. See manage directors it Lastly, appears necessary point out Donovan, Jr., Litiga Derivative D. John. that, under step unlike review the second Judgment Rule in the Business tion and relatively it would be rare for Zapata, Low, 34 Boston Massachusetts: Houle rationality rejection in the review to result (noting that the rea Bar.J. recommendation, given of an may adopted in Houle review sonableness stem- unlikelihood of irrational result bal appropriately “more cause courts to ming methodologically from sound inves- necessary scrutiny ance the interests of tigation independently and in conducted second-guessing”). avoidance this applying faith. A court element un facially propose, the standard I Under rule no judgment of the business has lee- cen likely a reasonable recommendations — way, Zapata, to interfere as would under re Zapata court—will tral concern of merely disagreement on the basis of a with At judicial deference. the same ceive no judgment.7 on matters of business time, ability to will retain the an SLC If recommendation reason- the SLC’s variety from a wide of recommen choose ably corpora- interests of the best any of circumstances— given dations set tion, grant may the court not decline to only be the recommendation need reason unless deference to that recommendation able, authority would have no court another element result, upon recommenda met.8 As a to insist one reasonable has not been rationality requirement only affect will another.6 tion over Arsht, blatantly ("An imprudent to a decision "so supra, at honest error in ence 6. See inexplicable, in sense that no that it is is allowed. But a minimally per- informed basis well-motivated be sustained on some rational cannot Allen, et made it.” William T. protection of the business son could have falls outside the al., rule; may Realigning Di- the Standard Review results transaction’s honest, Policy: Due Care With Delaware Public exercise of rector often belie the faith Progeny as a Critique A WanGorkom and its judgment.”). Problem, 96 Nw. U.L.Rev. Standard Review Arsht, (“In conducting supra, at 126 omitted). (2002) (footnote analysis of the reasonableness of own appears majority concerned that judgment, the 8.The be directors’ business court does analysis an SLC attempt agrees of the reasonableness of decide whether it with dangers pose same judgment. will The court deter- recommendation the directors’ Zapata approach. concern ba- as the Such is a reasonable mines whether there decision.”). that a court upon the mistaken belief Put another based sis the directors’ conducting rationality dis- give review has broad way, may only defer- decline to in which the other elements of those eases

the business rule somehow fail manipulation pro- catch cases, In rationality

cess. most review will analy- affirm the results of

simply court’s independence, investiga-

sis good faith. procedures,

tive and Just the

same, improvi- I conclude it would be

dent to excise this element rule, which far goes to address

Zapata’s structural bias concerns without

intruding on the wide discretion to be af-

forded an SLC.

Because I believe that the Minnesota requires a court to

consider the reasonableness of an SLC’s as well

recommendation SLC’s inde- methods,

pendence, investigative

faith, only I concur the court’s question.

resolution of the certified ARREDONDO, petitioner,

Gilberto

Appellant, Minnesota, Respondent.

STATE of

No. A07-1983.

Supreme Court of Minnesota.

Aug. cretion to substitute its uncertainty own for that as to which SLC recommenda clear, however, of an SLC. make As I ration- tions will receive deference from the courts. ality scope. review supra is limited in Moreover, recognize for a court to the utter accompanying Properly note text. un- recommendation, irrationality of an SLC derstood, rationality impli- review would not to defer anyway, to that decision would itself " majority’s key rationality cate the concerns— 'inevitably disrespect fuel[ ][the] for the ’’ require application review would courts’ majority rightful about which the review, unclear standards would not in- ly (quoting Ante concerned. A. Franklin Ge rights manage trude on the directors’ vurtz, Represents Corporation? Who corporation, leeway gives no for a court to Search Detennining A Better Method SLC, impose upon biases does not take Suits, Corporate Interest in Derivative 46 U. into account such “mat- nebulous concerns as (1985)). Pitt. L.Rev. public policy,’’ ters of ... little creates

Case Details

Case Name: In Re UnitedHealth Group Inc. Shareholder Derivative Litigation

Court Name: Supreme Court of Minnesota

Date Published: Aug 14, 2008

Citation: 754 N.W.2d 544

Docket Number: A08-114

Court Abbreviation: Minn.