Legal Definitions - special jurisdiction

A Special Litigation Committee (SLC) is a temporary committee formed by a corporation's board of directors, typically in response to a shareholder derivative suit. Its primary purpose is to investigate the allegations made in the lawsuit. The committee is composed of independent directors who are not implicated in the alleged wrongdoing and are therefore considered impartial. After a thorough investigation, the SLC recommends to the full board, or sometimes directly to the court, whether the lawsuit should proceed, be settled, or be dismissed. This mechanism aims to protect the corporation from potentially meritless lawsuits while ensuring legitimate claims are addressed.

Here are some examples:

• Example 1: Allegations of Executive Misconduct
  Shareholders of "TechInnovate Inc." file a derivative lawsuit against the CEO and CFO, alleging they misused company funds for personal gain and approved contracts with companies in which they held undisclosed financial interests. To address these serious claims, TechInnovate's board forms an SLC consisting of three independent directors who have no connection to the accused executives or the questionable contracts. The SLC's task is to thoroughly investigate the financial transactions, interview relevant personnel, and determine if the allegations have merit and if pursuing the lawsuit is in the best interest of TechInnovate and its shareholders.

  This illustrates the term because the SLC is formed by the corporation to independently investigate a shareholder derivative suit alleging misconduct by top executives, ultimately recommending a course of action for the company.

• Example 2: Questionable Acquisition Deal
  After "Global Pharma Corp." completes a major acquisition, several shareholders file a derivative suit against the board of directors. They claim the board breached its fiduciary duties by approving the acquisition at an inflated price, based on insufficient due diligence and a conflict of interest involving one board member. Global Pharma's board establishes an SLC, composed of directors who were not involved in the acquisition decision, to review all documents related to the deal, assess the valuation process, and determine if the board's actions were indeed negligent or self-serving. The SLC will then advise whether the company should continue to defend against the lawsuit or seek a settlement.

  This demonstrates an SLC's role in impartially evaluating a shareholder derivative suit that challenges a significant corporate transaction and the board's decision-making process.

• Example 3: Failure in Regulatory Compliance
  "Eco-Solutions Ltd." faces a shareholder derivative suit alleging that the board of directors failed to implement adequate environmental compliance measures, leading to substantial government fines and reputational damage for the company. The shareholders contend that the board's inaction constituted a breach of their duty of oversight. In response, Eco-Solutions forms an SLC, made up of independent directors with expertise in corporate governance and regulatory affairs, to investigate the company's compliance history, the board's past oversight practices, and the direct link between any alleged failures and the resulting penalties. The SLC's findings will guide the company on how to proceed with the lawsuit.

  This example shows an SLC being used to investigate a shareholder derivative suit concerning the board's alleged failure in corporate governance and risk management, which resulted in financial and reputational harm to the company.