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stating "insofar as the Report contains conclusory statements without discussion or direct citation, the plaintiff may bring such inadequacies to the Court's attention. Undoubtedly, these alleged flaws and inadequacies-if any-will influence the Court's evaluation of the SLC's independence and good faith, and the reasonableness of the bases for its conclusions."
Summary of this case from Sutherland v. SutherlandOpinion
06 Cv. 688 (SWK).
October 17, 2007
OPINION AND ORDER
On October 4, 2006, the Court granted the defendants a 150-day stay of the instant litigation in order to permit the special litigation committee (the "SLC") formed by the Board of Directors of the nominal defendant, Take-Two Interactive Software, Inc. ("Take-Two"), to investigate the underlying claims. The SLC completed its report (the "Report") on February 16, 2007, concluding that derivative litigation was not in Take-Two's best interests. On March 23, 2007, the SLC moved the Court to dismiss the plaintiff's derivative claims on the basis of the Report's findings. After the parties stipulated to a discovery schedule in connection with the SLC's motion to dismiss, a dispute arose concerning the proper scope of that discovery. The plaintiff now moves the Court for an order directing: (1) that the SLC make Michael J. Malone ("Malone"), who is one of the SLC's former members, available for deposition, and (2) that the SLC produce all documents it reviewed and relied upon in preparing the Report. For the reasons that follow, the Court grants the plaintiff's request to depose Malone, but denies its request for document production.
I. BACKGROUND
For a more thorough statement of the factual history of the instant litigation, including the nature of the specific claims advanced in the plaintiff's complaint (the "Complaint"), the reader is directed to the Court's Opinion and Order filed October 4, 2006. See St. Clair Shore Gen. Employees Ret. Sys. v. Eibeler, 06 Cv. 688 (SWK), 2006 WL 2849783 (S.D.N.Y. Oct. 4, 2006) (granting defendants' motion for temporary staying pending SLC's investigation). The facts relevant to the disposition of the instant motion for discovery are set forth below.
Plaintiff St. Clair Shores General Employees Retirement System ("St. Clair") filed the original complaint in this matter on January 30, 2006, advancing derivative claims for insider trading, as well as derivative and direct claims for violations of federal and state proxy laws. Id. at *1. On March 8, 2006, Take-Two's Board of Directors established the SLC with one original member, Malone, who had been named a Take-Two director in January 2006. On March 14 and March 24, 2006, respectively, John F. Levy ("Levy") and Grover C. Brown ("Brown") were appointed to Take-Two's Board and named to serve on the SLC. In order to facilitate the preparation of its Report, the SLC moved the Court in March 2006 for a discovery stay, which was granted in an Opinion and Order filed October 4, 2006. Id. On February 16, 2007, the SLC completed its Report, which concludes that the instant litigation is not in Take-Two's best interests.
St. Clair filed an amended complaint on August 24, 2007. Because the SLC evaluated St. Clair's original complaint, and as the instant motion concerns the SLC's investigation, references to the complaint in this Opinion concern the original complaint.
On the basis of that Report, the SLC moved to dismiss the instant litigation on March 23, 2007. In response to the SLC's motion, the plaintiff propounded various discovery requests concerning the SLC's investigation. On April 25, 2007, the parties entered into a stipulation whereby the SLC was required to serve responses and objections to the plaintiff's discovery requests no later than April 30, 2007, and discovery was to be completed by July 31, 2007. See Stipulation and Order of April 25, 2007, 06 Cv. 688 (SWK), Dkt. No. 47. On April 30, 2007, the SLC served its responses and objections. Significantly for the present purposes, the SLC objected to the request for "all documents provided to or reviewed by or prepared by the SLC" as follows:
The [SLC] objects to this request to the extent it seeks the production of documents beyond the scope of "limited discovery" provided for as a matter of substantive law. . . . Subject to and without waiver of these objections and the foregoing general objections, the [SLC] will produce all public documents reviewed and relied on by the [SLC] during the course of its investigation of the claims asserted in the Complaint filed in this matter, and will further produce all documents in its possession that relate to the work product of the [SLC] in investigating and reviewing the claims asserted in the Complaint filed in this matter.
(SLC's Opp'n, Decl. of Jennifer F. Beltrami ("Beltrami Decl."), Ex. A, at 5.) Furthermore, in its general objections, the SLC stated that it would not comply with the plaintiff's requests for discovery insofar as "they purport to require more than `limited discovery' permissible under substantive Delaware law. . . ." (SLC's Opp'n, Beltrami Decl., Ex. A, at 2.)
The SLC produced three boxes of materials to the plaintiff in April 2007. Those materials apparently consisted largely of Take-Two's public filings, as well as notes taken by Brown during the SLC's investigation. (Pl.'s Mot. 7-8.) On July 24 and July 31, 2007, the plaintiff took depositions of Brown and Levy, respectively. On the morning of his deposition, the SLC disclosed Levy's investigatory notes to the plaintiff. Following Levy's deposition, the plaintiff requested to depose the original SLC member, Malone. The plaintiff also requested the production of further documents reviewed and relied upon by the SLC during the course of its investigation. The SLC denied both requests. After unsuccessful attempts to resolve these outstanding discovery disputes through mutual agreement (see Pl.'s Mot. 8-10; Pl.'s Mot., Exs. A-D), the plaintiff filed the instant motion to compel the SLC to make Malone available for deposition and to provide all documents reviewed and relied upon by the SLC during its investigation.
Apparently, the parties had agreed to hold in abeyance an earlier request by the plaintiff for Malone's deposition until completion of the depositions of Brown and Levy. (SLC's Opp'n 6.)
II. DISCUSSION
Under Delaware law, a Delaware corporation may establish a special litigation committee to investigate derivative claims purportedly brought on behalf of the corporation and to determine whether such claims should be prosecuted. See Zapata Corp. v. Maldonado, 430 A.2d 779, 785-86 (Del. 1981). After investigating the relevant claims and preparing a thorough written record of its findings and recommendations, the committee may move to dismiss the lawsuit on the grounds that the suit is not in the corporation's best interests. Id. at 788. In evaluating the committee's motion to dismiss, a court should apply a two-step inquiry. First, the court should determine, in accordance with the standard applied to motions under Federal Rule of Civil Procedure 56, whether the committee has shown that it is independent, acted in good faith, and possessed reasonable bases for its conclusions. Id. at 788-89. Second, the court may apply its own business judgment to determine whether dismissal of the derivative suit is in the corporation's best interests. Id. at 789.
Because the parties presume in their briefs to the Court that Delaware law controls the instant discovery dispute (see, e.g., Pl.'s Mot. 10; SLC's Opp'n 7), this Opinion operates under a similar presumption. The Court merely notes here that this presumption is consistent with apposite legal precedent. See, e.g., Burks v. Lasker, 441 U.S. 471, 486 (1979) (holding that federal courts generally should apply relevant state law in evaluating authority of corporation's independent directors to dismiss derivative suit brought on corporation's behalf); Struogo v. Bassini, 97 Cv. 3579 (RWS), 1999 WL 249719, at *5-*6 (S.D.N.Y. Apr. 28, 1999) (applying state law in resolving dispute over discovery to which plaintiff was entitled in opposing motion to dismiss by SLC).
In order to facilitate its inquiry into the independence and good faith of the committee, as well as the bases for the committee's conclusions, the court may order limited discovery.Id. at 788. This "limited discovery" is not available to the plaintiff as a matter of right. Kaplan v. Wyatt, 484 A.2d 501, 507 (Del.Ch. 1984), aff'd 499 A.2d 1184 (Del. 1985). To the contrary, because discovery serves principally to assist the court's inquiries, "the type and extent of any discovery in a particular case is a matter left to the discretion of the Court. . . ." Id.; Abbey v. Computer Commc'ns Tech. Corp., Cv. A. 6941, 1983 WL 18005, at *1 (Del.Ch. Apr. 13, 1983); see also Struogo v. Bassini, 97 Cv. 3579 (SWK), 1999 WL 249719, at *6 (S.D.N.Y. Apr. 28, 1999). In order effectively to exercise its discretion in this respect, the court should "read and digest" the committee's report before deciding on requests for discovery.Kaplan, 484 A.2d at 510. Only in this fashion can the court adequately determine what discovery, if any, will assist its review of the committee's motion to dismiss. Id.; Abbey, 1983 WL 18005, at *1.
In the instant case, the Court has closely considered the SLC's thorough Report. For the reasons that follow, the Court directs that the SLC make Malone available for deposition, but denies the plaintiff's request for document production.
A. The SLC Must Make Malone Available for Deposition
Courts have typically permitted plaintiffs to depose members of special litigation committees in order to probe their independence and good faith, and to evaluate the bases for their conclusions. See, e.g., Kindt v. Lund, Cv. A. 17751, 2001 WL 1671438, at *2 (Del.Ch. Dec. 14, 2001); Struogo, 1999 WL 249719, at *7; Carlton Invs. v. TLC Beatrice Int'l Holdings, Inc., Cv. A. 13950, 1997 WL 38130, at *2, *5 (Del.Ch. Jan. 29, 1997); Kaplan v. Wyatt, Cv. A. 6361, 1984 WL 8274, at *4 (Del.Ch. Jan. 18, 1984); Abbey, 1983 WL 18005, at *3. Nevertheless, courts should tailor discovery to the particular facts of the given case. See Kaplan, 484 A.2d at 510; ("each case will naturally vary according to its facts"); Abbey, 1983 WL 18005, at *1 (discovery confined "to that which the Court may choose to permit in a given case based upon the circumstances as they appear to the Court");see also Sutherland v. Sutherland, Cv. A. 2399 (VCL), 2007 WL 1954444, at *3 (Del.Ch. July 2, 2007) (granting plaintiffs liberal discovery in light of particular facts of case). Here, the SLC argues that the plaintiffs are not entitled to depose Malone because he was only minimally involved in the SLC's investigation and is no longer a member of the SLC, and because the plaintiff previously engaged in abusive conduct during its deposition of Levy. The Court disagrees.
Even assuming that Malone did not participate significantly in the SLC's investigatory work (see SLC's Opp'n 10-11), it is undisputed that he was kept abreast of the investigation's progress and was given an opportunity to consider and comment upon drafts of the Report (see SLC's Opp'n 10). Because "what the SLC knew and did during the investigation and in reaching their conclusions" is of central import, see Carlton Invs., 1997 WL 38130, at *5, and as Malone possesses insider knowledge of those facts, plaintiff St. Clair is entitled to depose him. Only through Malone's deposition can St. Clair adequately probe Malone's understanding of the investigatory process and his involvement therein, which are both matters that may bear on the Court's inquiry into the independence and good faith of the SLC, as well as the reasonableness of the bases for its conclusions.
Because the Court has determined that Malone's deposition is otherwise warranted, it need not delve into the plaintiff's further allegations that Malone is not independent of at least one of Take-Two's interested directors, Oliver Grace. (Pl.'s Mot. 12.) Nonetheless, the Court notes that Malone's deposition may provide an opportunity to further develop the record on this potentially significant issue.
The Court's conclusion in this regard is not affected by Malone's subsequent retirement from the SLC. Malone was a member of the SLC — in fact, he was the original member of the SLC — during the conduct of its investigation and at the time that it delivered the Report. As such, Malone possesses information that the plaintiff is entitled to discover at a deposition.
Furthermore, the Court has reviewed relevant portions of Levy's deposition transcript (see SLC's Opp'n, Ex. B) and has not found that the plaintiff engaged in abusive conduct that should deprive it of the opportunity to depose Malone.
Therefore, in light of the SLC's heavy burden to show that there is no genuine issue of material fact as to the SLC's independence and good faith, and as to the reasonableness of its investigation, see Zapata Corp., 430 A.2d at 788, the Court holds that the plaintiff is entitled to depose Malone.
B. The Plaintiff Is Not Entitled to the Production of All Documents Reviewed and Relied Upon by the SLC
Courts have reached varying results on plaintiffs' entitlement to the production of all materials reviewed and relied upon by special litigation committees. Compare Sutherland, 2007 WL 1954444, at *3 (ordering "production of the same documents [the SLC] and [its] counsel or advisors reviewed during [its] investigation"); Kindt, 2001 WL 1671438, at *2 (allowing discovery of, inter alia, "all documents reviewed and relied upon by the Committee"); Struogo, 1999 WL 249719, at *7 (permitting plaintiff to "inspect the documents made available to the SLC"); Abbey, 1983 WL 18005, at *3 (granting plaintiff's request for "production of the documentary materials utilized or relied upon by the Committee during its investigation") with Carlton Invs., 1997 WL 38130, at *1, *5 (denying plaintiff's request for production of "all documents received by [the SLC] or its advisors in connection with their investigation and the proposed settlement" and granting only limited document production); Kaplan, 1984 WL 8274, at *3 (denying plaintiff's request for "all other documents reviewed and relied upon [by] the Committee in compiling its report").
The common thread underlying these cases is the facts-specific nature of the discovery inquiry. See, e.g., Sutherland, 2007 WL 1954444, at *3 (granting plaintiff expansive discovery in part due to doubts as to SLC's impartiality); Carlton Invs., 1997 WL 38130, at *3-*5 (granting plaintiff only limited discovery because SLC had entered into settlement with defendants and plaintiff had already obtained substantial merits discovery);Kaplan, 1984 WL 8274, at *1-*3 (relying on "staggering" breadth of SLC's report and emptiness of plaintiff's underlying allegations to limit permissible discovery). After reviewing the applicable case law and considering the particular facts of this case, the Court denies St. Clair's request for the production of all documents reviewed and relied upon by the SLC.
As previously noted, the Court has scrutinized the Report. Its discussion of the SLC's investigation and recommendations, as well as the reasons therefor, is thorough. In this case, as inKaplan, there is "no doubt as to where [the SLC] stands on the plaintiff's charges, or why." 1984 WL 8274, at *3. Of course, the plaintiff may argue that it can best test the reasonableness of the SLC's investigation and conclusions through an examination of the documents viewed and utilized by the SLC. See, e.g., Kaplan, 484 A.2d at 511; Abbey, 1983 WL 18005, at *2. Nonetheless, where, as here, the Court finds that the Report "provide[s] a sufficient basis for [the plaintiff] to depose the SLC members themselves and determine whether the investigation was done in good faith and in an informed manner and whether the conclusions reached can be thought fair," the plaintiff is not entitled to inspect all documents reviewed and relied upon by the SLC. Carlton Invs., 1997 WL 38130, at *6. In fact, to permit such discovery would eviscerate the "perceived efficiencies generated by a committee's investigation." Sutherland, 2007 WL 1954444, at *3.
To the extent that the SLC's analysis of the plaintiff's claims is incomplete, misleading, or erroneous, the plaintiff may come forward with evidence and legal arguments to demonstrate these flaws. See Kaplan, 1984 WL 8274, at *3. Furthermore, insofar as the Report contains conclusory statements without discussion or direct citation (see Pl.'s Reply 8), the plaintiff may bring such inadequacies to the Court's attention. Undoubtedly, these alleged flaws and inadequacies — if any — will influence the Court's evaluation of the SLC's independence and good faith, and the reasonableness of the bases for its conclusions. Nonetheless, the Court finds no occasion at this time for far-reaching and comprehensive discovery of all documents reviewed and relied upon by the SLC.
III. CONCLUSION
In summary, the Court directs the SLC to make Malone available for deposition, but denies the plaintiff's request for document discovery. Malone's deposition shall take place no later than November 30, 2007.
SO ORDERED.