The Special Litigation Committee Defense in California: Specially Detrimental to Shareholders

Thomas Doniger

Abstract

This article analyzes the Special Litigation defense (“SLC Defense”), as recently adopted in California. The SLC Defense is based upon the Business Judgment Rule and is a defense frequently asserted by directors when charged by shareholders, in a derivative action, with misappropriation of corporate assets or waste. California has departed from the two most common constructions of the SLC Defense and, as a result, the SLC Defense affords directors in California more protection against shareholder claims than is available in almost every other state. This article examines the derivation and adoption of the SLC Defense in California; analyzes and criticizes its implementation by the California courts; and suggests an alternative formulation of the SLC Defense.