On July 12, 2024, the Nebraska Supreme Court clarified the standard for special litigation committee investigations in derivative actions involving limited liability companies, an issue of first impression in Nebraska. A derivative action is one brought by shareholders on behalf of a corporation that asserts a wrong against that corporation.
Under Neb. Rev. Stat § 21-168, when a limited liability company (“LLC”) is involved in a derivative proceeding, the LLC may appoint a special litigation committee (“SLC”) to investigate the matter to determine whether pursuing the action is in the best interests of the LLC. The SLC has the burden of showing its investigation was conducted independently, in good faith, and with reasonable care. If the Court determines the SLC met this burden, it must enforce the SLC’s recommendation as to whether the litigation should continue or be settled out of court.
In Tegra Corp v. Boeshart, 317 Neb. 100 (Neb. 2024), the Nebraska Supreme Court found that the SLC appointed by Boeshart had failed to use reasonable care in investigating Tegra Corp’s claims of breach of fiduciary duty and misappropriation of corporate assets. In this case, both Tegra Corp and Patrick and Sandra Boeshart own interests in Lite-Form Technologies, LLC (the “LLC”). Tegra Corp brought a derivative action against the Boesharts on behalf of the LLC. Pursuant to § 21-168, Patrick Boeshart appointed Cody Carse as a single-member SLC. The district court was satisfied with the SLC’s investigation and dismissed all claims against the Boesharts according to the SLC’s recommendation. Tegra Corp appealed.
The Nebraska Supreme Court reversed the district court’s ruling on the grounds that the SLC’s investigation was not conducted with reasonable care. The Court cited other jurisdictions that emphasize that thoroughness is the cornerstone of SLC investigations. Courts have noted that SLC’s weigh legal, ethical, commercial, promotional, public relations, fiscal, and other factors to come to a decision regarding a derivative action. Courts have considered the “length and scope of the investigation, the use of experts, the corporation or defendant’s involvement, and the adequacy and reliability of information supplied to the SLC.”
In Tegra Corp v. Boeshart, the Nebraska Supreme Court found that the SLC’s investigation was not conducted with reasonable care because the SLC did not consider the relevant law, failed to include a cost-benefit analysis, and deferred to the LLC’s members for its recommendation. The Court noted that determining whether pursuing the action is in the best interests of the company necessarily involves consideration of the “likelihood that the plaintiff will succeed on the merits, the financial burden on the corporation of litigating the case, the extent to which dismissal will permit the defendant to retain improper benefits, and the effect continuing litigation will have on the corporation’s reputation.” The Boesharts’ SLC did not conduct a legal or cost-benefit analysis and could not have done so because Mr. Carse did not gather the necessary data. Mr. Carse testified that he did not believe legal analysis was part of his duties and that his financial analysis consisted of estimations he made in his own mind, relying on intuition. His recommendation was that the LLC’s members vote on what to do about alleged misappropriation of assets and breach of fiduciary duties. The Court held that deferring to the LLC’s directors is not an exercise of reasonable care.
Finally, the Nebraska Supreme Court also clarified that, contrary to Mr. Carse’s understanding, it was not Tegra’s responsibility to provide the SLC enough evidence to support its allegations. Rather, when breach of fiduciary duties is alleged, the burden of proof is on the party holding that duty to establish its action was not such a breach. The committee bears the burden of proof.
Businesses in Nebraska now face a stricter standard when appointing an SLC under § 21-168. This standard enhances transparency and protects shareholder interests, while underscoring the importance of robust corporate governance practices. SLC’s are a rare feature of American jurisprudence by which defendants can escape litigation by appointing a committee that can control the court. In the future, courts will not be bound to enforce recommendations of SLC’s that conducted vacuous, cursory, or otherwise deficient investigations.