The Special Litigation Committee is a special purpose, independent group comprised of active members of the board of directors, whose sole task is too effectively and efficiently determine whether derivative claims should be pursued or dismissed, and whether the pursuit of those claims is ultimately in the corporation’s best interests. The special litigation committee, first conceived in Delaware in the landmark case Zapata v. Maldonado, has become the primary mechanism through which complex derivative claims are resolved and adjudicated. CSM has counseled Special Litigation Committees in a variety of industries and specialties. These investigations usually yield lengthy reports, usually over 400 pages long, and reflecting the committee’s factual determinations and legal conclusions in the matter. Typically, the firm’s forensic and investigative efforts are instrumental in determining the scope of the fraud, and serve as the basis for remediation to the corporation’s internal control systems.
The heart of a Special Litigation Committee engagement is the initial forensic investigation. This investigation not only entails a comprehensive review of the facts and circumstances surrounding the fraudulent conduct, but must review this conduct through the prism of the legal claims being derivatively asserted. CSM’s lawyers, a few of which hold both JD certificates and financial or CPA credentials, understand the complex interplay between the forensic efforts and the legal claims being asserted. The resulting efficiencies yield streamlined forensic investigations, whose primary function is to review only those claims being asserted, and lawyers who understand the underlying issues and likely internal control failures that resulted in the fraudulent conduct. Ultimately, CSM’s lawyers can effectively assist the Committee in resolving the derivative claims with minimal harm to the corporation.
In a significant structured fraud event, the Special Litigation Committee’s task is complex and laborious, and involves resolution of the following tensions and dynamics:
- Resolution of the derivative claims requires a full and thorough investigation, however, the Committee must be careful not to enhance or otherwise fuel the parallel class action case that has likely been asserted concurrent to the derivative claims.
- The Committee and its counsel must be very careful not to waive claims of privilege or otherwise divulge sensitive or confidential proprietary information.
- The forensic investigation must be conducted through the prism of the legal claims being asserted, and the investigators and attorneys must likewise understand the factual significance of the events and legal elements of the claims. This interplay is often difficult without attorneys who are experienced forensic investigators themselves.
- The Special Litigation Committee has no subpoena power, and must seek the cooperation of the corporation’s inside counsel, whose ultimate allegiance is to the corporation.
- The Special Litigation Committee, while comprised of members of the board of directors, must maintain its independence, both in appearance and in fact, while adjudicating the claims. This tightrope dictates that the Special Litigation Committee not permit either corporations counsel or plaintiff’s counsel to dictate or otherwise manage the investigation and its conclusions. The Special Litigation Committee, though, must seek the cooperation of both plaintiff’s counsel, the corporation and its counsel.
CSM has successfully maneuvered through the thicket of these thorny issues, and understands the complex i
