Section 245 Derivative Suits: Independence, Good Faith, And The Governance Paper Trail That Wins Dismissals

Independence : Did Deciding Directors Have Conflicts That Compromised Judgment?

Derivative petitions often target transactions where board composition raises independence questions. The practical standard for independence in these suits is more demanding than technical definitions: courts look at relationships, incentives, and context that could reasonably affect judgment. The defense is built not on labels but on conduct.

What the record should show– Minutes evidencing that an independent committee: retained its own compensation/valuation advisor; benchmarked peers; questioned above-median elements; insisted on justification; negotiated reductions; met without management present; and exercised charter-based powers to obtain information/advice. This paper trail shows independence in practice even if plaintiffs allege soft ties or nomination histories.

Good Faith: Did Directors Act to Benefit the Company or for Improper Purposes?

Good faith is inferred from process. Where the record shows multi-meeting deliberations, independent financial advice (valuation/fairness), transparent conflict management (disclosure/recusal), and a specific strategic rationale, courts are reluctant to infer bad faith merely because results disappoint. Conversely, when issuances/structures entrench control or secure undue gain, courts intervene.

Strategic acquisitions and pricing. A defensible record typically includes: (i) a timeline of discussions across meetings (not a single compressed approval), (ii) clearly scoped advisor mandates (e.g., fairness opinion on premium ranges), (iii) documented strategic rationale (market access, technology, customer relationships, talent), and (iv) explicit conflict-handling (recusals where relationships exist). Deference turns on the quality of this contemporaneous record, not post-hoc performance.

The Specific Documentation Practices That Win These Cases

• Documented questions/challenges from directors. Avoid "discussed and approved." Show the questions that mattered and the answers relied upon.
• Multi-meeting cadence. Build reflection into the calendar. Ask for supplemental materials between meetings.
• Independent advisors with recorded reliance. Minute the mandate, the conclusions, and how they informed the decision.
• Articulated "why." Record concrete strategic/financial reasons, market access, tech assets, roadmap acceleration, talent, risk allocation, benchmarking outcomes.

The Process Architecture That Prevents These Claims

• Meeting protocols: advance circulation; alternatives and reasons for rejecting alternatives; explicit decision vs information items; bases for decisions captured.
• Independent director empowerment: advisor-retention rights; direct access to assurance functions; fiduciary duty training; structures that avoid dependence on management.
• Legal review integration: pre-approval legal analysis of fiduciary duty/process; minutes recording that legal advice was considered.
• Advisor engagement: independent valuations for material pricing; fairness opinions; executive summaries plus access to full reports.

This architecture creates the contemporaneous documentation that wins derivative defense motions because it reflects decision-making that actually satisfies fiduciary duties and attracts judicial deference to commercial wisdom.

Why Sophisticated Plaintiffs' Counsel Avoid These Cases

Derivative suits with sparse records, single-meeting approvals, lack of independent analysis, absent deliberation tend to reach trial or expensive settlements. When discovery reveals multi-meeting deliberations, documented questions and analysis, independent advisor engagement, and contemporaneous business rationale, proving breach becomes difficult. Plaintiffs may disagree with the wisdom of directors' decisions, but business judgment rules protect unwise decisions made through proper process. Absent evidence of bad faith, conflicts, or uninformed decision-making, claims don't survive dismissal.

The best defense strategy therefore focuses on early dispositive motion practice that leverages the governance paper trail to show directors acted in good faith, on an informed basis, and with independence. Strong documentation drives dismissals before expensive discovery and expert phases. Weak documentation drives settlement pressure.

The Legal Capability That Creates Prevention

Preventive governance documentation requires legal sophistication beyond secretarial compliance: understanding how courts evaluate fiduciary elements; drafting minutes that show substance without creating avoidable evidentiary risk; structuring multi-meeting processes that meet judicial standards; integrating legal advice while preserving privilege; and crafting a contemporaneous record that tells a coherent governance story years later.

Companies that treat governance documentation as administrative checklist generic minutes, minimal detail, formulaic language create evidentiary weaknesses. Companies that treat it as defensive architecture specific deliberation records, staged processes, advisor engagement, and articulated rationale, create positions that make derivative claims uneconomic to prosecute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.