Shareholder Action Challenging Executive Compensation Dismissed Based Upon Special Litigation

The Supreme Court of State of New York, County of New York, in Kahn v. Buttner, No. 600456/97 (N.Y. Sup. Ct. N.Y. Co. Sept. 28, 1999), in a decision written by Justice Charles Edward Ramos, dismissed a shareholder derivative action contending that the chief executive officer of Value Line Inc., Jean Bernhard Buttner, had received excessive compensation. The court based its decision upon a recommendation by a special litigation committee of Value Line's board appointed to "investigate the allegations in the Action . . . to determine whether the Action has merit and whether or not it is in the best interest of the company for the Action to proceed."

The committee conducted an investigation that included retention of an independent counsel and an independent compensation expert, review of documents plaintiff had requested, review of transcripts of three depositions plaintiff had conducted, interviews of eight past or present officers, directors and employees of Value Line, and an interview of plaintiff's attorney. Following this investigation, the committee concluded "that it is not in the best interest of Value Line or its shareholders for the Action to continue to be prosecuted on Value Line's behalf." The committee accordingly directed Value Line's counsel to "make an appropriate motion to dismiss the Action."

Quoting Auerbach v. Bennett, 47 N.Y.2d 619, 419 N.Y.S.2d 920 (1979), the court explained the governing law as follows:

The business judgment rule . . . bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. Questions of policy, of management, expediency of contracts or action, adequacy of consideration, and lawful appropriation of corporate funds to advance corporate interests, are left solely to their honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.

Here, the court stated, "[t]he newspaper and magazine articles relied on by plaintiff paint a very unflattering picture of Buttner's management skills," but, the court held, "Buttner's abilities as well as the substantive aspect of the Committee's Report and Value Line's determination that Buttner's compensation was appropriate are beyond judicial inquiry under the business judgment rule." To the contrary, "[t]he court may only inquire into questions of bad faith, fraud and whether the members of the Committee possessed 'disinterested independence' rather than standing in a dual role which prevented an unprejudicial exercise of judgment."

The court held that the record demonstrated that the committee's investigation was "reasonably objective and thorough" and that there was "no evidence of bad faith or fraud." The three members of the committee included:

  1. a non-employee director who was not a member of the board during the period of time underlying the allegations in the complaint and who was not named as a defendant in the litigation, and
  2. two non-employee members of the board during the period of time underlying the allegations in the complaint who were named as defendants.

With respect to the two committee members who were named as defendants, the court reasoned that "no specific allegations" were made against those two directors, who, the court stated, "as non-employee Board members of Value Line, are presumably and apparently independent."

The court rejected plaintiff's request to depose the three committee members, each of whom had submitted affidavits in support of the motion to dismiss the action. The court stated that depositions of the three committee members "would serve no purpose other than encourage a fishing expedition based on wishful thinking."