Kokocinski v. Collins: Application of the Business Judgment Rule
In Kokocinski v. Collins, 850 F.3d 354 (8th Cir. 2017), the Eighth Circuit Court of Appeals affirmed the dismissal of Charlotte Kokocinski’s (“Plaintiff”) shareholder derivative action against Medtronic’s directors and officers (“Defendants”) and the Special Litigation Committee formed by Medtronic (“SLC”). The court held that the District Court did not abuse its discretion because Defendants properly formed the SLC, the SLC was entitled to discretion under the Business Judgment Rule (“BJR”), and the District Court exercised sound discretion in concluding discovery was not necessary.
According to the allegations, Medtronic was the subject of a well-publicized controversy and Public Heath Notification by the Food and Drug Administration (“FDA”) because of the promotion to physicians of an “off-label” use of its “Infuse” product. Medtronic’s revenue and share price suffered as a result of the negative publicity.
Plaintiff brought a derivative action alleging that Defendants “violated §14(a) of the Exchange Act, 15 U.S.C. § 78(n)(a), breached their fiduciary duties, wasted corporate assets, and had been unjustly enriched.” In response, Defendants formed the SLC, which concluded it would not be in Medtronic’s best interest to pursue litigation. The court dismissed the derivative action.
After exercising inspection rights, Plaintiff an amended complaint. According to the complaint, Medtronic did not properly form the SLC. The SLC itself was not given authority to pursue litigation and the committee’s decision was not binding. Plaintiff alleged the SLC was not entitled to deference under the BJR because the SLC did not consist of disinterested and independent members and because the SLC’s report did not sufficiently address Plaintiff’s allegations. Finally, Plaintiff alleged the district court committed reversible error by declining to order discovery before deciding on the motion to terminate.
The Minnesota Supreme Court requires courts to apply the BJR and defer to an SLC’s recommendation “if the proponent of that decision demonstrates that (1) the members of the SLC possessed a disinterested independence and (2) the SLC’s investigative procedures and methodologies were adequate, appropriate, and pursued in good faith.” Under Rule 23.1(c), a “derivative action may be settled, voluntarily dismissed, or compromised only with the court’s approval.” The Court found Rule 23.1(c) “voluntary dismissal” to be the closest analog to a motion to terminate because a shareholder’s derivative claim belongs to the corporation. Thus, the Court concluded the proper standard of review was an abuse of the District Court’s discretion.
In affirming the decision, the Court determined Defendants properly formed the SLC, Defendants were bound by the SLC’s decision regarding whether to pursue litigation, and the SLC’s investigation warranted deference to its report under the BJR. The court held that the district court did not abuse its discretion in determining the SLC was independent and disinterested and the SLC’s investigation “easily met the requirements of Minnesota’s BJR” because the investigation was extensive in both length and scope. Finally, the court concluded the District Court’s denial of discovery was not reversible error because the evidence available was sufficient to “establish the SLC’s independence and the validity of its methodology.”
For the above reasons, the court affirmed the district court’s dismissal of Plaintiff’s shareholder derivative action.
The primary materials for this case may be found on the DU Corporate Governance website.