Corporation Law: Delaware Supreme Court Exercises Its Own Business Judgment

Zapata Corporation v. Maldonado, 430 A.2d 779 (Del. 1981). The derivative suit is a device by which minority shareholders can enforce corporate rights that are violated by corporate management. The business judgment rule is the defense mechanism asserted by the board of directors to compel dismissal of the shareholder\u27s suit. The continued vitality of derivative suits has been seriously threatened by state and federal decisions which have consistently upheld reliance on the business judgment rule as a grounds for disinterested directors to dismiss derivative actions they deem detrimental to the corporation. Provided the directors do not stand in a dual relation creating the risk of biased decisions, the traditional application of the rule bars judicial inquiry into actions of directors taken in good faith and in honest pursuit of the legitimate purposes of the corporation. This long line of precedent was broken in May, 1981, with the Supreme Court of Delaware decision Zapata Corp. v. Maldonado. In this decision, the Delaware court created a new two prong test to be employed when deciding whether directors\u27 dismissal of a derivative suit is proper. The change of precedent occurs in the test\u27s second step, which calls upon the trial court to exercise its own business judgment to decide whether the board\u27s motion to dismiss a shareholder\u27s derivative suit should be granted. This means, of course, that instances could arise where a committee can establish its independence and sound basis for its good faith decisions and still have the corporation\u27s motion denied. This note outlines the reasoning behind the Zapata court\u27s new approach, and discusses its potential impact on future appeals determining the validity of an independent board\u27s decision not to sue