purchase additional shares, they were entitled to sell the rights to any purchaser. The rights expired on December 15, 1995.
Strougo filed his initial complaint on March 22, 1996. He filed the first amended class action and verified shareholder derivative complaint (the "Complaint") on June 17, 1996. Strougo asserts that Scudder and each of the directors of the Fund breached their respective fiduciary duties of loyalty and due care as a result of the development and implementation of the Rights Offering. Strougo alleges that the Rights Offering was motivated by the desire to increase and restore some of Scudder's compensation. In addition, he alleges, inter alia, that the Rights Offering (i) caused the market value of the Fund to decline immediately following announcement; (ii) was dilutive; (iii) was coercive; and (iv) resulted in substantial underwriting and other transactional costs. Plaintiff named the Fund, Scudder and the Fund's directors at the time of the Rights Offering as defendants.
Defendants' motions to dismiss, filed on July 29 and July 30, 1996, were granted in part and denied in part by the Court's May 6, 1997 opinion and order (the "Order"). See Strougo v. Padegs, 964 F. Supp. 783 (S.D.N.Y. 1997). The Order dismissed all direct class action claims and the excessive compensation claim under ICA Section 36(b). The motion was denied with respect to the remaining derivative claims under Sections 36(a) and 48 of the ICA and under the common law.
Defendants' motion for reargument or, in the alternative, certification for interlocutory appeal pursuant to 28 U.S.C. § 1292(b), filed on May 22, 1997, was denied by the Court on August 15, 1997. Strougo v. Padegs, 1997 U.S. Dist. LEXIS 12243, No. 96 Civ. 2136, 1997 WL 473566 (S.D.N.Y. Aug. 18, 1997).
The Board, by resolutions dated May 28, 1997, (i) created the SLC and delegated to that Committee the full powers of the Board to investigate Strougo's allegations and determine whether this litigation is in the corporation's best interests and (ii) appointed Da Costa as a member of the SLC.
Thereafter, Kenneth C. Froewiss was nominated by Da Costa as a new member of the Board, elected to the Board on July 8, 1997, and appointed by Da Costa to the SLC. On or about July 10, 1997, the SLC retained Simpson Thacher & Bartlett as independent counsel. The SLC had its first organization meeting on July 24, 1997 and estimates that it will complete its investigation by mid-December.
The Fund filed the instant motion on September 10, 1997. Oral argument was heard on September 17, 1997, at which time the motion was considered fully submitted.
In a derivative lawsuit where, as here, demand on the corporation's board is deemed futile, see Strougo, 964 F. Supp. at 795, the corporation may respond by appointing an independent special litigation committee to investigate the claims and recommend a course of action. See Rosengarten v. Buckley, 613 F. Supp. 1493, 1499 (D. Md. 1985) (concluding that "Maryland would follow the majority rule and permit an interested board of directors to appoint a special litigation committee of independent directors to review a pending derivative suit"). The court would then review the committee's recommendation, which may be to terminate the litigation, to take it over, or to permit the plaintiff's action to continue. Of course, the committee's recommendation may not be accepted. As the Second Circuit noted in Joy v. North, 692 F.2d 880, 888 (2d Cir. 1982):
The reality is ... that special litigation committees created to evaluate the merits of certain litigation are appointed by the defendants to that litigation. It is not cynical to expect that such committees will tend to view derivative actions against the other directors with skepticism. Indeed, if the ... directors expected any result other than a recommendation of termination ... they would probably never establish the committee.