Disputes between owners of closely-held businesses usually include allegations that one of the owners caused financial harm to the business. For example: allegations of self-dealing or stealing corporate opportunities. These types of claims oftentimes belong to the business entity, rather than to the individual owners of the business, which means that an aggrieved business owner cannot bring a claim directly. Instead, the aggrieved business owner needs to bring a “derivative” claim based upon the damages caused directly to the business entity, rather than any damages caused indirectly to the business owner, which essentially means the aggrieved business owner needs to cause the business entity to file the Complaint.
To pursue a derivative claim, the aggrieved business owner needs to follow a statutory process. In Florida, that process includes sending a pre-suit demand to the business entity demanding that the entity pursue the legal claims. See, e.g., Fla. Stat. § 607.0742 (applicable to corporations). Oftentimes, the pre-suit demand includes a draft Complaint that the aggrieved business owner is demanding the business entity file and pursue. One way in which the entity can respond to the pre-suit demand (or to a derivative action that is commenced without service of the pre-suit demand) is to appoint a special litigation committee to investigate the claims. The appointment of such a committee can effectively stay the derivative proceeding. See, e.g., Fla. Stat. § 607.0743 (“If the corporation commences an inquiry into the allegations made in the demand or complaint, the court may stay any derivative proceeding for such period as the court deems appropriate.”).
But what happens if the special litigation committee conducts its investigation and concludes there is no proper basis for the proposed derivative claims? Should the trial court allow the aggrieved business owner the opportunity to conduct discovery regarding the special litigation committee’s work? In a recent Florida appellate decision, the court concluded that no such discovery should be allowed. See Taneja v. Saraiya, — So. 3d —, Case No. 2D18-294 (Fla. 2d DCA Jan. 31, 2020).
In Taneja, the aggrieved business owner made a pre-suit demand, which resulted in the appointment of a special litigation committee. After the committee completed its work and issued its recommendation that the business entity should not pursue the proposed derivative claims, the aggrieved business owner requested that the trial court delay considering the committee’s recommendations and allow discovery “concerning the independence, objectivity, and reasonableness of the report.” Id. The appellate court rejected the request for discovery and explained:
Mr. Lennon, MFM, Mr. Saraiya, and FSFA moved to enforce the SLC’s report. DSPP set the matter for hearing. Mr. Taneja objected to the report and moved to continue the hearing to permit discovery concerning the independence, objectivity, and reasonableness of the report. Mr. Taneja faulted the SLC for failing to (a) explain its investigatory process in preparing the report, (b) differentiate factual and legal conclusions in its report, (c) identify key documents it relied on in reaching its conclusions and opinions, (d) identify witnesses interviewed and the substance of the interviews, (e) identify facts discovered during the investigation, (f) describe the document review and collection process, and (g) examine DSPP’s records. Mr. Taneja also claimed that he had good cause for discovery because the evidence did not support some of the SLC’s conclusions, there was a conflict of interest between MFM’s representation of Mr. Saraiya and its representation of DSPP, and the SLC failed to explore various documents and facts.
At the hearing, the trial court noted the large record before it and the voluminous discovery the parties had engaged in over the years. The trial court doubted that additional discovery would reveal any new facts. Thus, the trial court denied Mr. Taneja’s request to continue and for further discovery. The trial court proceeded with the evidentiary hearing on the report. Mr. King testified. Mr. Taneja’s counsel extensively cross-examined Mr. King regarding his independence and investigatory process.
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In a derivative action, a limited liability company “may appoint a special litigation committee to investigate the claims asserted … and determine whether pursuing the action is in the best interest of the company.” § 605.0804(1). Then, upon a motion to enforce the SLC’s determination, “the court shall determine whether the members of the committee were disinterested and independent and whether the committee conducted its investigation and made its recommendation in good faith, independently, and with reasonable care, with the committee having the burden of proof.” § 605.0804(5). “If the court finds that the members of the committee were disinterested and independent and that the committee acted in good faith, independently, and with reasonable care, the court may enforce the determination of the committee.” Id.
Chapter 605 does not require the trial court to allow discovery from the SLC. As in other instances, “[a] trial court is given wide discretion in dealing with discovery matters.” Alvarez v. Cooper Tire & Rubber Co., 75 So. 3d 789, 793 (Fla. 4th DCA 2011). In the SLC context, the trial court’s broad discretion is particularly appropriate because “discovery is ‘intended more as an aid to the [c]ourt than it is as a preparation tool for the parties.’” LR Tr. on behalf of SunTrust Banks, Inc. v. Rogers, 270 F. Supp. 3d 1364, 1382 (N.D. Ga. 2017) (quoting (Kaplan v. Wyatt, 484 A.2d 501, 510 (Del. Ch. 1984), aff’d by 499 A.2d 1184 (Del. 1985)).
Clearly, then, discovery relating to a SLC’s report is not a matter of right. Rather, the trial court, in its discretion, may determine whether discovery is needed to enable it to make its statutorily-required findings as to the derivative claims. Delaware case law amply supports this conclusion. See, e.g., Kaplan, 484 A.2d at 510 (explaining that “discovery is not afforded to the plaintiff as a matter of right but only to such extent as the Court deems necessary for the purpose of facilitating its inquiries”); Long v. Odland, No. 11-CV-80702, 2012 WL 13019034, at *12 (S.D. Fla. Aug. 15, 2012) (explaining—based on Delaware case law—that “[t]he Court, not the plaintiff, is entitled to ‘limited discovery’ in order to facilitate inquiries as to whether the SLC’s investigation satisfied its burden of independence, good faith, and reasonableness” (citing Kaplan, 484 A.2d at 507)). It is also within the trial court’s discretion to deny a motion for continuance. See Rice v. NITV, LLC, 19 So. 3d 1095, 1099 (Fla. 2d DCA 2009).
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The trial court confronted an overly broad and nonspecific discovery request from Mr. Taneja. Essentially, Mr. Taneja asserted that the SLC lacked independence and did not conduct the investigation in good faith and with reasonable care. But, after listing these grounds as good cause, Mr. Taneja merely asked the trial court to delay the evidentiary hearing and permit him to take discovery. Mr. Taneja did not request to depose any specific individuals or obtain any specific materials. Mr. Taneja did not allege or explain what discovery, if any, was necessary to facilitate the trial court’s inquiry as to whether the SLC satisfied its burden of independence, good faith, and reasonableness. And, of course, Mr. Taneja had the opportunity to cross-examine Mr. King.
As the trial court explicitly noted, the record before it was voluminous, reflecting the extensive discovery already conducted by the parties. Moreover, Mr. King was present at the hearing and testified fully about his investigation and report. The trial court correctly found that delaying the hearing and granting discovery was not necessary for it to render a decision. After all, in his testimony, Mr. King addressed much of Mr. Taneja’s concerns about the investigation and report. He emphasized that the report cited to the pertinent documents and included the documents as exhibits. All witnesses were disclosed in the report.
The only documents that Mr. Taneja’s counsel appeared to take issue with during the evidentiary hearing were Mr. King’s interview notes. However, Mr. King repeatedly explained that the notes contained information that was already available in the record. Besides, Mr. Taneja never requested the notes. Under these circumstances, the trial court did not abuse its discretion in denying Mr. Taneja’s motion to continue and his overly broad, nonspecific discovery request. Cf. Muhammad v. State, 132 So. 3d 176, 201 (Fla. 2013) (concluding that “the court did not abuse its discretion in denying the motion [for public records]” where “[t]he requests are overly broad and Muhammad did not clearly demonstrate how the records were relevant to a colorable claim”).
Thus, although the appellate court concluded that no discovery into the special litigation committee’s work should be allowed in the case presented, it seems clear that the court would allow such discovery under different circumstances.
The motto of this story: if you are going to request discovery regarding the special litigation committee’s work, it is important to make a timely and specific request for information that goes beyond the information already set forth in the committee’s report and is designed to legitimately test whether the committee conducted its investigation independently, in good faith, and with reasonable care.