Where a derivative claim is filed and demand was excused, the board may appoint a committee of independent directors to investigate and determine whether pursuing the claim is in the company’s interest.
Composition. Directors independent of the defendants and of the challenged transaction, added to the board after the events where necessary. Independence is factual and is attacked on social, professional and financial connections.
Authority. A board resolution delegating full authority to investigate and to determine the company’s position, including to seek dismissal.
The investigation. Independent counsel, a documented scope, interviews, document review, and a written report. Its thoroughness is examined closely, and an investigation that did not interview obvious witnesses or pursue obvious documents fails.
Review. Courts examine the committee’s independence, good faith and the reasonableness of the investigation, with the burden on the company. In some jurisdictions the court then applies its own business judgment as a second step before dismissing.
Discovery. Limited to the committee’s independence and process rather than the merits, though that distinction erodes in practice.
Cost and timing. Substantial, and typically a year or more. The decision to use one should weigh that against the alternative of litigating the merits.