Auerbach v. Bennett

47 N.Y.2d 619, 419 N.Y.S.2d 920, 393 N.E.2d 994 (1979)

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Nature of the Case

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Facts

In the summer of 1975 the management of General Telephone & Electrics Corp., in response to reports that numerous other multinational companies had made questionable payments to public officials or political parties in foreign countries, directors that an internal preliminary investigation be made to ascertain whether that corporation had engaged in similar transactions. On the basis of the report of this survey, received in October management brought the issue to the attention of the corporation's board of directors. At a meeting held in November, the board referred the matter to the audit committee. The board retained as special counsel the firm of Wilmer, Cutler & Pickering and Arthur Anderson & CO., the corporation's outside auditors. The audit committee engaged in an investigation into the corporation's worldwide operations, focusing on whether, in the period January 1, 1971, to December 31, 1975, corporate funds had been paid directly or indirectly to any political party or person or to any officer, employee, shareholder or director of any governmental or private customer, or used to reimburse any officer of the corporation or other person for such payments. The audit committee reported that it had found evidence that in the period from 1971 to 1975 the corporation or its subsidiaries had made payments abroad and in the U.S. constituting bribes and kickbacks in amounts perhaps totaling more than 11 million dollars and that some of the individual defendant directors had been personally involved in a number of the transactions. At that time, P filed this action alleging in the complaint that in connection with the transactions reported by the audit committee, Ds, present and former members of the corporation's board of directors and Arthur Anderson & Co. are liable to the corporation for breach of their duties to the corporation and should be made to account for payments made in those transactions. In April, 1976 the board adopted a resolution creating a special litigation committee for the purpose of establishing a point of contacts between the Board of Directors and the Corporation's General Counsel concerning the position to be taken by the Corporation in certain litigation involving shareholder derivative action on behalf of the Corporations against certain of the directors and officers and authorizing that committee to take such steps from time to time as it deems necessary to pursue its objectives including the retention of special outside counsel. The litigation committee concluded that Arthur Anderson & Co. had conducted the investigation properly, that none of the individual defendants had violated the N.Y.S. statutory standard of care, that none had profited personally or gained in any way, that the claims asserted in the present action are without merit, that if the actions were allowed to proceed the time and talents of the corporation's senior management would be wasted on lengthy pretrial and trial proceedings, that litigation costs would be inordinately high in view of the unlikelihood of success, and that the continuing publicity could be damaging to the corporation's business.