Special Litigation Committee Good Defense Against Derivative Lawsuits

Every instance of data theft raises the possibility of litigation, and just as companies are building up their defenses against data breaches, their legal departments should be planning their responses against shareholder derivative lawsuits. Data breach incidents are fertile soil for shareholder suits, spawning legal claims that corporate officers and boards have breached their fiduciary duties by failing to implement reasonable safeguards against cyber-theft. In the hands of skilled plaintiffs’ attorneys, any conflicts of interest among board members can be exploited.

One important tool for any corporation facing a shareholder derivative action is the special litigation committee. Before bringing a derivative suit in court, shareholders must first make what is known as a “derivative demand,” a formal request specifying the legal claim and demanding that the corporation take action. At this point in the process special litigation committees can come into play and offer significant advantages in controlling the derivative litigation. A special litigation committee is generally a subcommittee composed of independent and disinterested board members who have no conflict of interest relating to the proposed legal action.

The disinterested nature of special litigation committees allows corporations to fend off frivolous claims, and to implement focused reform in cases where the shareholder has raised legitimate issues. General counsel can benefit themselves and their companies by standing ready to deploy special litigation committees in the event of a data breach incident or other derivative demand.