Niesar v. Zantaz

Filed 8/16/07 Niesar v. Zantaz CA1/2

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

INTRODUCTION

Plaintiff Kristen H. Niesar appeals from a judgment of the Alameda County Superior Court following entry of summary judgment in favor of defendants Zantaz, Inc., a California corporation (Zantaz) and various other entities and individuals in plaintiffs shareholders derivative lawsuit against them. The superior court granted the defense motion for summary judgment on the ground that a special litigation committee appointed by the Zantaz board of directors made a good faith determination that it was not in the companys best interest to prosecute plaintiffs claim. On appeal, plaintiff contends: (1) the special litigation committee defense is inapplicable to actions such as this, where there are allegations of self dealing by a majority of the corporations board of directors (Corp. Code,  310, subd. (a)^[1]), and (2) the trial court erred in determining that there were no triable issues of material fact as to the adequacy of the investigation conducted by the special litigation committee. We shall affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

The complaint

Zantaz is a California corporation, and is engaged in digital archiving, compliance and discovery management solutions. Plaintiff is a shareholder in Zantaz.^[2]

To give context to the dispute here, we quote from the Key Events section of the executive summary of the Report of the Special Litigation Committee of the Board of Directors of Zantaz, Inc. (Report). In the second half of 2002, Zantaz raised approximately $10.6 million through the sale of shares of its Series E preferred stock. Major existing investors in Zantaz were the lead investors in the financing. The terms of the financing included a pre-money valuation of Zantaz of $16 million. Zantaz sold Units, which consisted of one share of its Series E preferred stock and a warrant to purchase two shares of its common stock at an exercise price of $0.05 per share, at a price of $1.01 per Unit. The Series E financing was considered a down-round financing because Zantaz sold its Series E preferred stock at a price per share that was lower than the price per share of its Series D preferred stock, which it sold in its previous round of financing.[^[3]] The Series E financing also resulted in dilution of the percentage ownership of the Companys capital stock held by the Companys existing shareholders who did not participate in the Series E financing.

Prior to the Series E financing, in February 2002, Zantaz spun-off its SmartCell technology to Persist Technologies, Inc. (Persist) in exchange for $1.2 million in cash and 1,655,000 shares of Series A-1 preferred stock of Persist (representing 9.74% of Persists fully-diluted stock). Zantaz also received a seat on the Persist board of directors and a perpetual royalty-free license to use the SmartCell technology in its business. The Series A preferred stock financing of Persist was led by ArrowPath Venture Capital (ArrowPath). Other investors in the Persist Series A financing were major investors in Zantaz, whose representatives were members of the Zantaz Board of Directors. On November 11, 2003, Hewlett Packard signed a definitive agreement to acquire Persist for $13.8 million. (Report, at pp. 1-2.)

On November 21, 2003, plaintiff filed a complaint for rescission prosecuted as a shareholder derivative action on behalf of nominal defendant Zantaz and against certain of Zantazs current and former directors and investors. The complaint alleged that the director defendants breached their fiduciary duties in connection with Zantazs Series E financing and the spin-off of Zantazs SmartCell technology to defendant Persist. It sought rescission of both the Series E round of sales and the technology sale to Persist.

Specifically, the first cause of action attacked the Series E financing transaction, alleging that, in 2002, director defendants caused Zantaz to sell shares of its stock (allegedly worth more than $10) to defendant limited partnerships who had managers or general partners on the Zantaz board. The complaint alleged that each of the directors who was a manager or general partner of the defendant limited partnerships who purchased Zantaz stock had a conflict of interest: as a director of Zantaz, he had a duty to obtain as high a price per share as possible; but as a manager or general partner of defendant limited partnerships, he had a duty to pay as low a price as possible. It was further alleged that nondefendant directors Ralph Mele and Steve King (who had approved the transactions as members of the board special finance committee) had an interest in approving the sales because their positions at Zantaz depended on the other individual defendants.

The second cause of action alleged that in 2002, before the Series E sale, defendant directors caused Zantaz to sell a valuable asset (a storage system technology called SmartCell) to Persist, a company owned or to be owned in large part by investment funds managed by one or more of the director defendants, other than Mele and King, for a sale price alleged to exceed $6 million. Again, it was alleged that director defendants had a conflict of interest because as directors of Zantaz they had a duty to obtain as high a price as possible for the assets sold, but as managers of organizations that owned an interest in Persist, they had a duty to obtain as low a price as possible. It was also alleged that directors Mele and King (who had approved the transaction as members of the restructuring committee) had an interest in approving the transaction because they were dependent on the other directors for their positions at Zantaz.

Defendant Zantaz and the individual defendants moved for an order requiring plaintiff to furnish a bond pursuant to section 800, subdivision (c), on the ground that there was no reasonable possibility that the prosecution of the action would benefit Zantaz or its shareholders. The trial court denied the motion.^[4]

Special litigation committee formation and investigation

On July 12, 2004, the Zantaz board held a special meeting at which it adopted resolutions to form a special litigation committee comprised of outside and independent directors to investigate the claims in plaintiffs complaint. Nonmanagement directors John Dorman and Peter Currie were selected to serve on the special litigation committee. Neither had been on the Zantaz board at the time of the two transactions at issue in the complaint. The board resolutions authorized the special litigation committee to fully investigate the claims in the complaint and to make any recommendations necessary. In addition, the resolutions authorized the special litigation committee to retain its own independent legal counsel. The special litigation committee engaged the litigation firm Bergeson, LLP to serve as its independent legal counsel.

The special litigation committee, in conjunction with the Bergeson firm, conducted its investigation into plaintiffs claims. In January 2005, at the conclusion of the investigation, the special litigation committee issued its 61-page Report.

The Report set forth the details of the committees investigation, its findings and its conclusions.

The special litigation committee concluded that the evidence did not support a finding that the director defendants breached their duty of care with respect to either the Series E financing or the sale of SmartCell to Persist. The restructuring and special finance committees were disinterested within the meaning of California law because Mele and King were not planning to invest in either transaction and they were able to, and did evaluate the merits of the two transactions without being unduly influenced by the director defendants. The evidence did not support a finding that the director defendants breached their duty of loyalty, as the subject transactions met the standard of entire fairness and they were approved by the director defendants in good faith. Plaintiff was unlikely to be able to show injury to Zantaz or to the whole of its stock and that Zantaz might not exist today without the Series E financing and Persist spin-off, both of which provided essential funding at necessary times and in an adverse funding environment, and all of its shareholders might have been left without receiving any return on their investments. (Report,  VIII, at pp. 55-59.) The report further related the committees conclusion that plaintiff appeared to be an inadequate representative of Zantaz. (Report, at pp. 59-61.) The special litigation committee concluded that plaintiffs action would be unlikely to succeed on the merits or to result in any monetary recovery to Zantaz, and thus is not in the best interests of Zantaz and should be dismissed. (Report,  IX, at p. 61.)

Defendants summary judgment motions

In April 2005, defendant Persist and the Zantaz defendants (nominal defendant Zantaz and the individual defendants) each sought to terminate the shareholder derivative action by means of motions for summary judgment. The basis for the motions was that a disinterested committee of the board (the special litigation committee) had determined in good faith after an adequate investigation not to pursue plaintiffs claims. The motions were supported by evidence relating to the independence of the special litigation committee and its counsel and details of its investigation, including declarations of special litigation committee members Currie and Dorman and of the special litigation committee counsel; authenticated board resolutions creating and charging the special litigation committee with authority to act on behalf of Zantaz; and the Report.

Plaintiff filed her opposition to summary judgment on June 13, 2005, challenging the independence of the committee and its counsel and the adequacy of its investigation, but primarily focusing upon the underlying merits of her claim rather than upon the special litigation committee and its investigation. Defendants objected to the declarations of Niesar and Bankert. The trial court issued a tentative ruling, stating its intention to grant the motions for summary judgment and sustaining all of defendants evidentiary objections. (Plaintiff does not challenge the courts evidentiary rulings on this appeal.)

Following oral argument on July 5, 2005, the trial court affirmed its tentative ruling and issued its order granting defendants motions for summary judgment, stating therein: In ruling on a Motion for Summary Judgment based on the special litigation committee defense in a shareholder derivative suit, the only material issues are the independence of the committee members, and their good faith in conducting the investigation. Neither the merits of the derivative claim nor the substance of the committees decision to reject the claim is subject to judicial review at this stage. (See Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 179 [(Desaigoudar)].) [] Defendants here have met their initial burden under Code of Civil Procedure [section] 437c, [subdivision] (p)(2), of showing that there is a complete defense to Plaintiffs claims, based on the special litigation committee defense. . . . Plaintiff fails to raise a triable issue of material fact suggesting either that the Special Litigation Committee members were not independent, or that they failed to conduct their investigation in good faith. . . . . [] . . . [] . . . [I]n deciding whether a special litigation committees investigation is in good faith, the relevant inquiry is whether the procedures employed in the investigation were so inadequate as to suggest fraud or bad faith. (Desaigoudar, supra, 108 Cal.App.4th at [p.] 189.) Plaintiff fails to submit evidence suggesting that the investigation here was so inadequate as to suggest fraud or bad faith. (See Defendants Facts Nos. 16-27, Plaintiffs Response, and all evidence cited in support of and in opposition thereto.) The Court notes that the investigation in this case was at least as thorough as the investigation approved in Desaigoudar, supra, 108 Cal.App.4th at [pp.] 192-194.)

Judgment was entered accordingly on July 26, 2005 as to the Zantaz defendants (nominal defendant Zantaz, individual defendants, and partnership defendants) and on September 23, 2005 as to defendant Persist.

On August 19, 2005, plaintiff filed a timely notice of appeal.

DISCUSSION

I. The Special Litigation Defense

Plaintiff first contends the special litigation committee defense is inapplicable to actions such as this, where there are allegations of self-dealing by a majority of the corporations board of directors in violation of section 310, subdivision (a),^[5]and where it is alleged they retain the benefits of their wrongdoing. Therefore, she argues, the trial court should not have granted defendants summary judgment motions without considering the substance of her claims. Plaintiff is wrong.

As plaintiff recognizes, the leading case of Desaigoudar, supra, 108 Cal.App.4th 173, also involved a claim of self-dealing by the board. There, as here, the plaintiffs argued that because their lawsuit alleged self-dealing among the directors the trial court should not have granted the defendants summary judgment motion without considering the substance of their claims. (Id. at p. 183.) The Court of Appeal treated the matter as presenting a pure question of law to which we apply our independent review. [Citation.] (Ibid.) It held that judicial review of the decision of a special litigation committee is governed by the business judgment rule. When asserted in connection with a summary judgment motion the material issues of fact relevant to the special litigation committee defense are the independence of the committee members and their good faith in conducting their investigation. Neither the merits of the derivative claim nor the substance of the committees decision to reject the claim is subject to judicial review at this stage. (Id. at p. 179.)

In reaching that conclusion, the Desaigoudar court first reviewed some basic principles of corporate law involving shareholders derivative lawsuits [when a corporation has suffered injury, but fails to pursue redress, a shareholder may file a derivative action on behalf of the corporation], the business judgment rule codified in section 309 [requiring judicial deference to the business judgment of corporate directors, so long as there is no fraud, breach of trust, or conflict of interest], and the demand requirement [requiring a shareholder to demand that the board pursue the proposed action, before the shareholder prosecutes a derivative claim] codified in section 800, subdivision (b)(2). (Desaigoudar,supra, 108 Cal.App.4th at pp. 183-184.) The boards refusal to pursue the claim is protected by the business judgment rule and constitutes a defense to a shareholders derivative lawsuit. (Desaigoudar, at p. 184, citing Findley v. Garrett (1952) 109 Cal.App.2d 166, 174, 177.)

However, the board cannot avail itself of the protection of the rule if a majority of the board has a personal interest in the outcome. ( 204, subd. (a)(10)(iii).) Therefore, when the shareholder alleges wrongdoing on the part of a majority of directors, as plaintiff[] [has] alleged in this case, the common practice is for the board to appoint a special litigation committee of independent directors to investigate the challenged transaction. . . . [A] decision of a special litigation committee not to prosecute a lawsuit, like the decision of the full board, is a defense to a shareholders derivative action in California. (See Finley v. Superior Court (2000) 80 Cal.App.4th 1152, 1161 (Finley); Will [v. Engebretson & Co. (1989)] 213 Cal.App.3d [1033,] 1040 [(Will)].) (Desaigoudar, supra, 108 Cal.App.4th at pp. 184-185.)

As explained in Finley, supra, 80 Cal.App.4th at pages 1161-1162, there is a distinction between the two distinct exercises of business judgmentthe board majoritys actions in engaging in the challenged transactions and that of the special litigation committee in determining that the derivative action was not in the best interests of the corporation. In Finley, the plaintiffs challenged certain contributions toward a ballot measure made by the board on the grounds, among others, that the contributions were in breach of the boards fiduciary duties, ultra vires, illegal and unconstitutional. (Id. at pp. 1155-1156.) According to Finley, even assuming the business judgment rule would not apply to the boards decision to undertake the challenged action, if ultra vires or illegal, the decision [of the special litigation committee] not to pursue a derivative action regarding them was not ultra vires, illegal, or unconstitutional; thus, this decision was entitled to the protection of the business judgment rule. [Citations.] (Id. at p. 1162.)

California cases applying the special litigation committee defense to a shareholder derivative action have adopted the New York variation of the special litigation committee defense enunciated in Auerbach v. Bennett (1979) 47 N.Y.2d 619, 633 (Auerbach). (See Desaigoudar, supra, 108 Cal.App.4th at pp. 185-190; Finley, supra, 80 Cal.App.4th at p. 1163; Friedman, Cal. Practice Guide, Corporations (The Rutter Group 2007)  6:634, 6:636.) Th[is] traditional version of the defense requires the trial court to determine, as a matter of fact, whether the committee members were disinterested and whether they conducted an adequate investigation. If it answers yes to both questions . . . it must dismiss the derivative action. [Citation.] (Desaigoudar, at p. 185, quoting Finley, at pp. 1158-1159.)

Desaigoudar followed Finley, which held the special litigation committee defense was valid in California. The [Finley]court noted that, as a confluence of the business judgment rule and the demand requirement, the special litigation committee defense serves the same purpose those rules serve. That is, the defense is intended to further the fundamental principle that those best suited to make decisions for a corporationincluding the decision to file suit on its behalfare its directors, not its stockholders or the courts. [Citations.] To serve this purpose, the defense must be allowed whenever it is shown that a committee of disinterested directors acting in good faith has determined a derivative action is not in the best interests of the corporationif possible, on motion, but if necessary, in a full trial.  (Desaigoudar, supra, 108 Cal.App.4th at pp. 186-187, quoting Finley, supra, 80 Cal.App.4th at p. 1163.) Desaigoudar agreed with the conclusion of the Finley courtthat the substance of the derivative claim was not an element of the defense. (Desaigoudar, at p. 187.)

Desaigoudar recognized that the special litigation committee defense has numerous variations and that a modified version of the defense has been adopted in Delaware as described in Zapata Corp. v. Maldonado (Del. 1981) 430 A.2d 779, 787-789 (Zapata). Zapata adopts the Auerbach analysis but adds a second, discretionary step in which the court applies its own business judgment to the committees conclusion. Courts following the Zapata approach all require this two-step analysis but vary as to the degree of scrutiny the court may apply to the merits of the committees decision. [Citations.] (Desaigoudar, supra, 108 Cal.App.4th at p. 185, fn. omitted.)^[6] The main justification for the Zapata courts adoption of a two-step review is the problem of  structural bias that is the possibility that a derivative action will invoke a response of group loyalty such that even a  maverick  director may feel compelled to close ranks with his or her fellow directors. (Desaigoudar, at p. 187, citing Hasan v. CleveTrust Realty Investors (6th Cir. 1984) 729 F.2d 372, 377, in turn citing Coffee & Schwartz, The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform (1981) 81 Colum.L.Rev. 261, 283.) Zapata added the second step of its analysis in order to strik[e] the balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporations bestinterests as expressed by an independent investigating committee. ([Zapata],at p. 789.) (Desaigoudar, at p. 187.)

The Desaigoudar court acknowledge[d] that the potential for structural bias requires the court to be  mindful of the need to scrutinize carefully the mechanism by which directors delegate to a minority committee the business judgment authority to terminate derivative litigation, particularly when the lawsuit is directed against some or a majority of the directors. (Gaines v. Haughton, supra, 645 F.2d at p. 772; fn. omitted.) (Will, supra, 213 Cal.App.3d at p. 1044.) (Desaigoudar, supra, 108 Cal.App.4th at p. 188.) However, Desaigoudar reasoned that careful scrutiny of a committees independence and its decisionmaking process strikes an acceptable balance between legitimate shareholder claims and corporate directors judgment. (Ibid.)

The Desaigoudar court listed the reasons for its adoption of the Auerbach approach rather than the two-step review of Zapata, supra, 430 A.2d 779: First, Desaigoudar recognized, as did Auerbach, supra, 47 N.Y.2d at p. 633, that the potential for structural bias is a function of the directors fiduciary duty to the corporation. . . . [I]t is an inescapable aspect of the corporations predicament that a special litigation committee has to be appointed by interested directors. (Desaigoudar, supra, 108 Cal.App.4th at p. 188.) Assigning responsibility for evaluating a claim against the company to a wholly independent body separate from the corporation would itself breach the fiduciary duty of the board. (Ibid.)

Second, the court found protection from structural bias in the requirement that the court must inquire into the independence of the committee members and the adequacy of their investigation so as to uncover any bad faith or fraud in the special litigation committees conduct of the investigation. [The business judgment rule protecting the directors decision does not apply in the case of bad faith or fraud. . . .  The policy reasons for keeping a court from evaluating after the fact the wisdom of a particular business decision do not apply when the issue is whether a party to that decision acted fraudulently or in bad faith. The assessment of fraud or bad faith is a function courts are accustomed to perform, and in performing it the courts do not intrude upon the process of business decisionmaking beyond assuring that those decisions are not improperly motivated. [Citations.] . . . [T]he business judgment rule was not designed to insulate actions of the committee committed in bad faith, and thus the committee should not receive the benefit of the presumption when the court seeks to judge the committees independence and good faith. [Citations.] (Desaigoudar, supra, 108 Cal.App.4th at pp. 188-189.) Nor is the courts review to uncover bad faith or fraud perfunctory. (Id. at p. 189.) The court must determine whether each member of the special litigation committee was  in a position to base his [or her] decision on the merits of the issue rather than being governed by extraneous considerations or influences.  [Citations.] . . . . The second questionwhether a committee employed proper procedures before rejecting the claiminvolves an analysis of the committees good faith. This means that the court must look into the procedures employed and determine whether they were adequate or whether they were so inadequate as to suggest fraud or bad faith. This is, [p]roof . . . that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by that doctrine. (Auerbach, supra, 47 N.Y.2d at pp. 634-635.) (Desaigoudar, at p. 189.)

Finally, Desaigoudar was persuaded that Californias summary judgment procedures served to protect legitimate shareholder suits while permitting exclusion of meritless claims. When the special litigation committee defense reaches the trial court on summary judgment, traditional summary judgment rules apply. (Will, supra, 213 Cal.App.3d at p. 1042.) . . . [O]n summary judgment our trial courts may not make findings of fact, but are limited to determining the existence of a factual dispute. This is in contrast with the Chancery Courts of Delaware, which under Zapata[, supra, 430 A.2d 779]are permitted to make factual findings. As was held in Will, an evidentiary hearing of the special litigation committee defense is insufficient to protect plaintiffs interests. [Citation.] Therefore, if a trial court detects a factual dispute concerning the independence of the special litigation committee or the adequacy of its investigation, the case may not be dismissed short of trial. (Desaigoudar, supra, 108 Cal.App.4th at pp. 189-190.)

Plaintiff attempts to distinguish Desaigoudar, supra, 108 Cal.App.4th 173, on the ground that the special litigation committee in that case found no credible evidence of self-dealing by any of the individual defendants . . . . (Id. at p. 181.) However, the point is that the appellate court affirmed that the trial court had correctly refused to review the merits of that committee finding once it determined that the special litigation committee was independent and the committees investigation of the claims presented in the complaint was adequate. The appellate court expressly rejected the plaintiffs assertion that the business judgment rule did not shield the defendants where fraud had been asserted against them. Whether or not the business judgment rule applies to the defendants is not the issue. We have applied the business judgment rule to the Committees decision to reject the claim. It is of no moment that the claim may be founded on an action to which the business judgment rule does not apply. In this respect the fact that a claim may be founded in fraud does not differentiate it from other claims. Refusal to sue on a fraud claim is not, as plaintiffs contend, a ratification of fraud. (Findley v. Garrett, supra, 109 Cal.App.2d at p. 177.) (Desaigoudar, supra, 108 Cal.App.4th at p. 196, fn. 7.)

Plaintiff argues that it is too much to ask two directors to find their co-directors who had chosen them to have committed what California courts call constructive fraud, and argues that [t]he potential for structural bias [citing Desaigoudar, supra, 108 Cal.App.4th at p. 188], is too great. Desaigoudar rejected that very argument in adopting the Auerbach approach, giving primacy to the courts reluctance to make business decisions (Desaigoudar, at p. 187; accord, Finley, supra, 80 Cal.App.4th at p. 1163), recognizing that corporate management is best suited to make business judgments (Desaigoudar, at p. 187), and finding adequate safeguards against structural bias in the courts review of the two relevant questions relating to the special litigation committees exercise of good faith in its investigation: the independence of the special litigation committee and the adequacy of the committees investigation, particularly as supported by Californias summary judgment procedures and standards. (Id. at pp. 188-190.)

Nor are we persuaded that the special litigation committee defense is inapplicable in the circumstances present here by plaintiffs reliance upon Remillard Brick Co. v. Remillard-Dandini (1952) 109 Cal.App.2d 405 (Remillard) and Efron v. Kalmanovitz (1964) 226 Cal.App.2d 546 (Efron). Importantly, neither case involved application of the special litigation committee defense, and both were decided under former section 820, a statute that was in material respects different from its successor statute, section 310. In those cases, the appellate courts held that the procedure for disclosure and majority approval set forth in former section 820, subdivision (b), (the predecessor statute to section 310) did not limit the fiduciary duties owed by a director to all the stockholders and that simple disclosure of the fact of a common directorship and approval by the majority shareholdersliteral compliance with former section 820, subdivision (b)did not suffice to insulate the transaction where it was unfair or inequitable to the corporation, or constituted a fraud upon the minority shareholders. (Remillard, at pp. 416-422; accord, Efron, at pp. 556-557.)  The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arms length bargain. If it does not, equity will set it aside.  (Efron, at p. 556.) Under former section 820, subdivision (b), the votes of interested directors could be counted if the common directorship or financial interest was disclosed or known to the shareholders and the shareholders approved or ratified the transaction in good faith by a majority vote. (Former  820; Remillard, at pp. 417-419.) In such case, Remillard held, the burden was upon the dominant shareholders to prove the transaction was undertaken in good faith and that it was inherently fair from the viewpoint of the corporation and its shareholders. (Efron, at p. 556.) Today, section 310, subdivision (a), requires either full disclosure and good faith shareholder approval, without counting shares owned by interested directors (subd. (a)(1)), or approval by the board in good faith without counting the votes of interested directors and the transaction is just and reasonable as to the corporation at the time authorized (subd. (a)(2)), or proof that the transaction was just and reasonable at the time authorized (subd. (a)(3)).

The trial court here did not err in refusing to evaluate the merits of plaintiffs shareholder derivative lawsuit and in concluding that the material issues for purposes of summary judgment review were the independence of the committee members and their good faith in conducting their investigation.

II. Summary Judgment

We turn to the remaining issue of whether the trial court correctly determined that there were no triable issues of material fact as to the independence of the special litigation committee and the adequacy of its investigation. (See Desaigoudar, supra, 108 Cal.App.4th at pp. 191-192.)

Plaintiff has apparently abandoned her claim below that the members of the special litigation committee (directors Currie and Dorman) and its counsel (Bergeson, LLP) were not independent.^[7] However, she persists in arguing that the members of the special finance committee and the restructuring committee (Mele and King) who approved the challenged transactions were, contrary to the findings of the special litigation committee, not disinterested in the transactions. That claim invites review of the merits of the underlying shareholders derivative claim and the substance of the special litigation committees decision to reject them. As we have determined heretofore, those claims and determinations are not subject to judicial review at this summary judgment stage. (Desaigoudar, supra, 108 Cal.App.4th at p. 179.)

There remains only the question of whether the trial court correctly concluded that there were no material issues of undisputed fact regarding the adequacy of the special litigation committees investigation.

A. Standard of review

In determining whether there exists a material issue of disputed fact with respect to the adequacy of an investigation, the question is not whether the investigation was perfect or could have been conducted in a different or even more thorough manner. Rather, as Desaigoudar explains, the question of whether a committee employed proper procedures before rejecting the claiminvolves an analysis of the committees good faith. This means that the court must look into the procedures employed and determine whether they were adequate or whether they were so inadequate as to suggest fraud or bad faith. That is, [p]roof . . . that the investigation has been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham, consistent with the principles underlying the application of the business judgment doctrine, would raise questions of good faith or conceivably fraud which would never be shielded by that doctrine. (Auerbach, supra, 47 N.Y.2d at pp. 634-635.) (Desaigoudar, supra, 108 Cal.App.4th at p. 189, italics added; see Finley, supra, 80 Cal.App.4th at pp. 1163.)

The standards governing our review of the courts grant of summary judgment are well established:   Summary judgment is granted when a moving party establishes the right to the entry of judgment as a matter of law. (Code Civ. Proc.,  437c, subd. (c).) In reviewing an order granting summary judgment, we must assume the role of the trial court and redetermine the merits of the motion. In doing so, we must strictly scrutinize the moving partys papers. [Citation.] The declarations of the party opposing summary judgment, however, are liberally construed to determine the existence of triable issues of fact. [Citation.] All doubts as to whether any material, triable issues of fact exist are to be resolved in favor of the party opposing summary judgment. [Citation.] [] While the appellate court must review a summary judgment motion by the same standards as the trial court, it must independently determine as a matter of law the construction and effect of the facts presented.  [Citation.] (Desaigoudar, supra, 108 Cal.App.4th at pp. 191-192.)

 A defendant moving for summary judgment meets his burden of persuasion showing that there is no merit to a cause of action if that party has shown that one or more elements of the cause of action cannot be established or that there is a complete defense to that cause of action. (Code Civ. Proc.,  437c, [former] subd. (o)(2) [now subd. (p)(2)].) Once the defendant does so, the burden shifts back to the plaintiff to show that a triable issue of one or more material facts exists as to that cause of action or to a defense to the cause of action. In doing so, the plaintiff cannot rely on the mere allegations or denial of his pleadings, but, instead, shall set forth the specific facts showing that a triable issue of material fact exists . . . . (Ibid.; see Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 849.) (Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 572, 580-581.) (Desaigoudar, supra, 108 Cal.App.4th at p. 192.) Furthermore, responsive evidence that gives rise to no more than mere speculation cannot be regarded as substantial, and is insufficient to establish a triable issue of material fact. [Citations.] (Sangster v. Paetkau (1998) 68 Cal.App.4th 151, 163.)

B. Defendants met their initial burden

Defendants clearly met their initial burden of producing evidence to establish the adequate investigation element of the special litigation committee defense. In their moving papers, the Zantaz defendants listed the following facts supporting the adequacy of the investigation:

The special litigation committee, in conjunction with Bergeson, LLP, requested and received documents relevant to the allegations of the complaint from Zantaz, the individual defendants, plaintiff, plaintiffs counsel, and other agents of plaintiff. (Fact No. 16.) The committee and counsel also requested and received documents relevant to other allegations levied by plaintiff and her agents that were not contained in the complaint. (Fact No. 17.) During the course of the investigation, Bergeson, LLP reviewed 23,670 pages of hard copy documents and 231,230 pages of electronic documents (including emails) on behalf of the special litigation committee. (Fact No. 18.) The documents reviewed by the committee and Bergeson, LLP included, but were not limited to, (i) minutes of meetings of the Zantaz Board, Special Finance Committee, and Restructuring Committee, as well as presentations related thereto; (ii) emails and other correspondence; (iii) Zantaz financial statements; (iv) Zantaz financial plans and forecasts and related analyses; (v) documents related to the Series E financing and Persist transactions; (vi) shareholder communications; and (vii) handwritten notes. (Fact No. 19.) Bergeson, LLP interviewed 17 witnesses on behalf of the committee, including each of the individual defendants, nondefendant members of management, plaintiffs counsel, certain other agents of plaintiff and defendants counsel. (Fact No. 20.) Bergeson, LLP did not interview plaintiff herself, due to her counsels representation that it would be unproductive because she is not knowledgeable of the events alleged in the derivative complaint. (Fact No. 21.) With the exception of plaintiff, the special litigation committee, through Bergeson, LLP, interviewed each person identified as having knowledge of the facts material to its investigation. (Fact No. 22.) Bergeson, LLP sought and received confirmation from the parties that it had collected all relevant documentation to support or refute the claims in the derivative complaint. (Fact No. 23.) Bergeson, LLP regularly reported any and all findings to the special committee. Bergeson, LLP also advised the special litigation committee with respect to its duties and the applicable legal standards concerning its investigation into the allegations in the derivative complaint. (Fact No. 24.) The special litigation committee conducted an analysis of the valuations of companies comparable to Zantaz during the relevant time frame. (Fact No. 25.) The special litigation committee analyzed all of the findings in the context of plaintiffs allegations. (Fact No. 26.) In January 2005, at the conclusion of its investigation, the special litigation committee issued a 61-page Report with its findings of fact, applicable law and ultimate conclusions. (Fact No. 27.)

Persists separate statement of material facts regarding the adequacy of the committees investigation stated: 9. The Special Litigation Committee conducted a thorough investigation into Niesars complaint by reviewing over 250,000 documents, interviewing 17 witnesses, interviewing plaintiffs counsel, attempting to interview the plaintiff, reviewing correspondence from plaintiffs father, attorney Gerald Niesar, and conducting valuations of companies comparable to Zantaz during the relevant time frame. [] 10. The Special Litigation Committee analyzed all of the foregoing information in the context of plaintiffs allegations. The Special Litigation Committee ultimately concluded that this lawsuit was unlikely to succeed on the merits or result in any monetary recovery to Zantaz. The Special Litigation Committee also found that the lawsuit was not in the best interest of the company and, therefore, should be dismissed. (Fact Nos. 9, 10.)

The preceding facts were supported by the declarations of special litigation committee members Currie and Dorman, committee attorney Daniel J. Bergeson, and the committees Report.

C. Plaintiffs opposition

In her separate statement in opposition, plaintiff challenged the merits of the Report issued by the special litigation committee, and the determinations made therein by the committee. Specifically, she asserted that Mele and King, the members of the special finance committee and the restructuring committee who approved the challenged transactions, were not disinterested (based upon the trial courts ruling denying defendants request to have plaintiff post a bond). (Fact Nos. 24, 26, 27.) As we have noted, the trial courts determination on the bond issue cannot be used to support this assertion. (See, ante, p. 4, fn. 4.) In any event, this challenge to the substance of the special litigation committees decision and the merits of the Report was irrelevant to the issue at handwhether the investigation was adequate. (Desaigoudar, supra, 108 Cal.App.4th at p. 179.)

Plaintiff disputed the thoroughness of the special litigation committees investigation based upon the undisputed facts that the committee had not sought documents from, nor interviewed third parties such as Hewlett Packard, the 16 or 17 potential outside investors and lenders referred to in the [special litigation committees] Report at pages 26-27 and outside investors to whom the Series E round was allegedly shopped, nor Zantaz auditors [and] potential investors in Persist referred to in the Report at page 50 [sic] . . . .^[8] (Fact Nos. 16-18, 22.)

Additionally, plaintiff asserted that the companies analyzed by the special litigation committee to determine Zantazs valuation at the relevant time were not in fact comparable, because they, unlike Zantaz, were publicly listed and the defendants all manage venture capital companies that do not invest in listed securities.

Plaintiff submitted her own list of undisputed material facts and supporting evidence attacking the investigation by reasserting the claims made that the committee had not interviewed third parties and others, and attacking the substance of the Report, the accuracy of its findings and conclusions.

D. Zantazs response

In response, defendant Zantaz and individual defendants challenged plaintiffs opposition as misleading and raising immaterial matters, and pointed out that much, if not all, of the opposition did not directly dispute the specific facts set forth in the defendants statement of undisputed material facts. Defendants pointed out that plaintiff did not challenge the interviews that had occurred, but complains only that more people were not interviewed and presents no evidence to demonstrate why additional interviews would be material with respect to uninterested investors and Hewlett Packard. Plaintiff further ignores testimony explaining why these additional steps were not necessary. (Fact Nos. 16-18, 22.) Defendants also stated that the special litigation committee had interviewed plaintiffs agents and [her] counsel to ensure that it [had] conducted an adequate investigation [and that a]t no time did plaintiffs counsel propose these additional people be interviewed. (Fact No. 23.)

As to plaintiffs challenge to the comparability of the companies the special litigation committee had analyzed, defendants termed plaintiffs assertions [i]ncorrect, [m]isleading [and] [i]rrelevant. Defendants pointed out that special litigation committee member Currie, who directed the comparable analysis, works at a private equity fund that invests in listed securities and that the analysis was performed to get a perspective on the broader market conditions. Defendants reasserted the companies were similar to Zantaz. Defendants also correctly observed that the evidence cited by plaintiff in support of her assertion that the companies were not comparable (i.e., Curries deposition) contained no facts supporting plaintiffs allegation or disputing defendants assertion of fact that it had conducted an analysis of the valuations of companies comparable to Zantaz during the relevant time frame. (Fact No. 25.)

E. Plaintiff has not carried her burden of showing the existence of a triable issue of material fact as to the adequacy of the investigation

Defendants successfully objected to the declarations of Niesar and Bankert, and on appeal plaintiff does not contest those evidentiary rulings. Rather, plaintiff states she relies solely upon the evidence of the Report itself and the deposition of special litigation committee member Currie.

Plaintiff argues she has shown the existence of disputed material facts as to the adequacy of the special litigation committee investigation. She attempts to do so in several ways. First, she contends the Report itself was inadequate as it did not consider the burden on the Zantaz directors to show they had not engaged in self-dealing by demonstrating that the challenged transactions resulted from arms length negotiations; she challenges the statement in the Report that the investors in the Persist spin-off essentially broke even; she asserts that the Report fails to consider that Mele and King were not disinterested directors; and she asserts the Report fails to consider the remedy of rescission. The foregoing are allegations related to the findings and conclusions of the Report, not to the good faith and adequacy of the investigation.

As we have stated heretofore, plaintiff cannot attack the findings or conclusions of the Report itself or argue the merits of her underlying lawsuit. Nor can she attack the findings and conclusions of the Report in the guise of attacking the adequacy of the investigation, as she does in the foregoing assertions. To do so invites the trial court to consider the merits of her underlying claims, which it cannot do.

Plaintiffs remaining challenges to the adequacy of the special litigation committee investigation boil down to two: first, that the special litigation committee did not seek documents from and failed to interview third parties having knowledge of facts material to its investigation; and second, that the special litigation committees method of evaluating the value of Zantaz (and consequently its stock) at the time of the transactions was flawed.

(1) Plaintiff asserts that she has produced evidence that the special litigation committees investigation was inadequate because the committee did not seek documents from and did not interview third parties having knowledge of material facts. Those third parties are asserted to be: Hewlett Packard with respect to its purchase of Persist; the 16 or 17 potential outside investors and lenders referred to in the special litigation committees Report at pages 26-27; potential outside investors to whom the Series E round was shopped; and Zantaz auditors. (Fact Nos. 16-18, 22.) Defendants did not dispute that the special litigation committee did not contact these entities and individuals.

Plaintiff asserts that interviews with these third party persons and entities was crucial to an adequate investigation as the third parties had information regarding the transactions.

In her memorandum of points and authorities in the trial court, plaintiff asserted that the failure of the special litigation committee to contact the third parties constituted a fail[ure] to verify substantially everything told them by the Director defendants and the inside directors (inside directors presumably references nondefendant directors Mele and King). She further argued that third party potential investors contacted by Zantaz should have been interviewed about the prices they would have paid for the company and that Hewlett Packard should have been contacted with respect to the Persist transaction and how much it actually paid to acquire Persist. However, in that section of her points and authorities challenging the good faith of the investigation, plaintiff did not specifically refer to auditors or to the special litigation committees failure to contact them. Nor did she explain how that failure supported her claim that the investigation was inadequate. Plaintiff presented no admissible evidence in the trial court to support her speculation that those persons interviewed by the special litigation committee had misled the committee or provided inaccurate information about Zantaz, the value of the company, its search for investors, or the amount paid by Hewlett Packard to acquire Persist.

The crux of her claim is the same on appeal as belowpure speculation that the information the committee received from those interviewed was inaccurate, misleading or incomplete, and that the investigation was inadequate because the special litigation committee did not attempt to confirm the information it received during its investigation by interviewing at least some of these specified third parties. It is speculative, at best, that interviewing third party potential investors about the price they would have paid for Zantaz would have revealed any useful information. [R]esponsive evidence that gives rise to no more than mere speculation cannot be regarded as substantial, and is insufficient to establish a triable issue of material fact. [Citations.] (Sangster v. Paetkau, supra, 68 Cal.App.4th at p. 163.)

The undisputed fact is that third party potential investors were contacted during Zantazs search for financing and that these investors did not invest in Zantac. With respect to the terms upon which Zantaz shopped the Series E financing, that information appears to be irrelevant and plaintiff did not, in the court below, identify admissible evidence indicating that this information would be relevant on the question of the adequacy of the investigation. The only evidence on that point was provided by Currie who explained in his deposition, that [b]ased upon my experience with financings, . . . there is the asking price at which the company would like to secure funds, and then there is the offered price at which the investors are willing to make an investment. The offered price is more important. [] So Zantaz gave, in my judgment, a sufficient number of firms the opportunity to invest both in equity and in debt. And what Zantaz was proposing, whatever that number was, is less important ultimately than what the investors are willing to do. No investor was willing to make an investment. It is always, always up to the investor to name the price. It is the investors call ultimately. According to Currie, [i]t was important to me to find out that the company had contacted investors and had been in discussions. What the company proposed, as I just described, is in my judgment less relevant than what the investors were willing to do. If they werent willing to invest, they werent willing to invest.

The question is whether the failure of the special litigation committee to interview the third parties and entities during the course of their investigation raises a material question of fact as to the adequacy of the investigation. As we have heretofore observed, an adequate investigation need not be perfect. Nor does a plaintiffs assertion that the investigation could have been conducted in a different manner or that more or different persons should have been interviewed suffice to raise a triable issue of material fact as to the adequacy of the investigation here. [W]hether a committee employed proper procedures before rejecting the claiminvolves an analysis of the committees good faith. (Desaigoudar, supra, 108 Cal.App.4th at p. 189.) The undisputed facts showed that the special litigation committee in this instance conducted an investigation that, as the trial court observed, was at least as thorough as that approved in Desaigoudar.^[9] Plaintiff asserts that the investigation was inadequate because it did not confirm the information it received upon its thorough investigation with third party potential investors who did not invest in the company, company auditors and others who, plaintiff speculates, might have supplied information indicating that those persons contacted had lied to the special litigation committee. These speculative assertions do not raise a material disputed issue of fact that the procedures used in the investigation were so inadequate as to suggest fraud or bad faith by the special litigation committee. (Desaigoudar, supra, 108 Cal.App.4th at p. 189, italics added.) The evidence submitted by plaintiff simply did not raise a material issue of fact that  the investigation ha[d] been so restricted in scope, so shallow in execution, or otherwise so pro forma or halfhearted as to constitute a pretext or sham . . . .  (Ibid., quoting Auerbach, supra, 47 N.Y.2d at pp. 634-635, italics added; see Finley, supra, 80 Cal.App.4th at pp. 1163.)

It is also undisputed that plaintiffs agents and her counsel were interviewed during the course of the investigation to ensure that the special litigation committee had conducted an adequate investigation and that at no time did plaintiffs counsel propose these additional people be interviewed. (Fact No. 23.) Plaintiffs later attack on the adequacy of the investigation in opposition to the summary judgment motion, although not determinative of the issue, provides further support for our rejection of plaintiffs claim that she has raised a material question of fact as to whether the failure to interview these persons and entities rendered the investigation inadequate.

(2)  Plaintiff also asserts that she has raised a disputed issue of fact as to the adequacy of the investigation by disputing the comparability of companies analyzed by the special litigation committee to support its determination of the value of Zantaz and its stock during the relevant time periods. However, her mere assertion that the publicly-listed companies analyzed were not comparable to Zantaz for purposes of the evaluation, because Zantaz was not publicly listed, does not raise a triable issue of fact. As defendants pointed out in their response to plaintiffs assertion, the exhibit cited by her as evidence contains no facts supporting her allegations or disputing defendants fact No. 25 that an evaluation of comparable companies was undertaken.^[10] Plaintiff failed below to provide admissible declarations or other admissible evidence that such companies are not comparable for the purpose for which the special litigation committee conducted the analysis, to obtain a perspective on broader market conditions, and to assist in determining whether Zantaz had been appropriately valued.^[11] Nor did she produce any evidence to refute defendants assertion that Currie was qualified to direct the analysis or to determine the comparability of the companies. Mere assertion that there exists a material disputed issue of fact is insufficient. Plaintiff must provide evidence in support. (Desaigoudar, supra, 108 Cal.App.4th at p. 192; see Sangster v. Paetkau, supra, 68 Cal.App.4th at p. 163.) She failed to do so below.

In sum, the trial court did not err in determining that plaintiff had failed to raise a triable issue of material fact as to the adequacy of the investigation.

DISPOSITION

The judgment is affirmed. Defendants are awarded their costs in connection with this appeal.

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Kline, P.J.

We concur:

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Haerle, J.

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Lambden, J.

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Analysis and review provided by La Mesa Property line Lawyers.

^[1]All undesignated statutory references are to the Corporations Code.