ORDERED, that the motion (motion sequence number 004) by Ted Fine, constituting the Special Committee of the Board of Directors of nominal plaintiff Nastel Technologies, Inc., for an Order terminating the derivative causes of action asserted by plaintiff, Krish Shetty, in the Verified Complaint dated September 22, 2006 is granted. [*2]

The motion sub judice presents the question of whether the Court should dismiss certain derivative causes of action, asserted on behalf of a Delaware corporation, based on the report of a Special Committee, which finds that it is not in the best interest of the corporation to pursue such claims.

This is an action/proceeding commenced by Krish Shetty ("Shetty") for corporate dissolution of Nastel Technologies, Inc., ("Nastel"), and asserting causes of action for fraud, breach of contract, breach of fiduciary duty and breach of the covenant of good faith and fair dealing. The facts underlying this action are set forth in the Order (EMERSON, J.) dated December 12, 2007, and the parties familiarity therewith is presumed. In that Order, the Court dismissed the causes of action seeking dissolution and the appointment of a receiver (the First, Second and Fifth Causes of Action) and also dismissed the direct portions of causes of action six, seven, nine and ten as set forth herein. This leaves remaining before the Court derivative claims against defendants David Mavashev, Albert Mavashev and Steven Dmiszewicki for fraud (the Third Cause of Action); derivative claims for misconduct under BCL §720 against David Mavashev, Albert Mavashev and Steven Dmiszewicki (the Fourth Cause of Action); derivative claims for breach of fiduciary duty against David Mavashev, Albert Mavashev and Steven Dmiszewicki (the Sixth Cause of Action); derivative claims for aiding and abetting breach of fiduciary duty against Iljeto, LLC, Jitex, Inc, Matrix Concepts, Inc., Lumla Software, Inc., and Contrado, Inc. (the Seventh Cause of Action); breach of contract claim against defendant David Mavashev (the Eighth Cause of Action); derivative claim for breach of duty of good faith and fair dealing against defendant David Mavashev (the Ninth Cause of Action); and derivative claim for usurpation of corporate opportunity against defendants David Mavashev and Albert Mavashev (the Tenth Cause of Action).

Ted Fine ("Fine")^[FN1], the sole member of a the Special Committee formed by the Board of Directors of Nastel Technologies, Inc. ("Nastel") to investigate the claims made by Shetty in a demand letter dated August 11, 2006, now moves to terminate the derivative causes of action. In support of the motion, Fine has submitted a personal affidavit, an affidavit by Dmiszewicki, copy of the Report of the Special Committee (the "Report")^[FN2], Nastel Board meeting minutes dated February 29, 2008 and March 19, 2008, a copy of the Verified Petition/Complaint and a Memorandum of Law. In his affidavit, Fine states that with the assistance of counsel, he undertook the investigation of the plaintiff's allegations as set forth in his demand letter and also the allegations asserted in support of the derivative claims. The Report of the Special Committee concluded that it would not serve Nastel's best interests to maintain derivative claims against the defendants in this lawsuit and thus, the Special Committee recommended that Nastel file a motion to terminate the [*3]derivative claims. Specifically, the Special Committee found that no intellectual property had been misappropriated from Nastel by any defendant and no intellectual property was in danger of being misappropriated; that Nastel was not improperly prevented from making distributions to Shetty; that Shetty had received his proportionate share of all distributions from 1998 through 2006; that defendants Albert Mavashev and David Mavashev had not received improper distributions or payments; that David Mavashev's compensation was not excessive; and that improper payments were not made by Nastel to Albert Mavashev, David Mavashev, Steven Dmiszewicki, Lumla, Matrix Concepts, Iljeto or Contrado Partners. (see, Memorandum of Law at p. 7-8). Although the Special Committee did find certain irregularities in the corporate accounting, management and governance of Nastel as well as specific issues regarding payments and disbursements, it concluded that Nastel had suffered no damages from the conduct alleged and that pursuing the derivative claims is not in the company's interest (see, Memorandum of Law at p. 9).

Plaintiff opposes the motion and submits an affidavit in opposition and a Memorandum of Law. Plaintiff argues that the motion to dismiss the derivative claims must be denied because the Special Committee was not represented by independent counsel. Plaintiff asserts that counsel for the Special Committee "impermissibly simultaneously represents the individual named defendants alleged to have harmed Nastel and Nastel itself." Plaintiff's Memorandum of Law at p. 6. Plaintiff argues that counsel performed the majority of the work on the investigation of his claims and Fine conducted only two interviews.

Plaintiff also argues that the motion must be dismissed because the report on which the motion is based is not supported by any documents. Specifically, plaintiff asserts that in order for the Court to determine the reasonableness of the investigation of the Special Committee, the report must include both summaries of the interviews conducted and a list of the documents reviewed during the investigation. Plaintiff's Memorandum of Law at p. 10. Thus, since the report does not include any interview summaries or include a list of documents reviewed, plaintiff asserts that the Court cannot determine the reasonableness of the Special Committee's investigation and the appropriateness of the report. Plaintiff's Memorandum of Law at p. 11.

Finally, plaintiff asserts that the motion to dismiss must be denied as it would not be in Nastel's business judgment to dismiss the derivative causes of action. Plaintiff challenges the conclusions of the Special Committee, specifically taking issue with the overpayments to David Mavashev. Plaintiff argues that the fact Nastel was ultimately made whole is largely irrelevant and that the "misconducts' or overpayments described in the report demonstrate that David Mavashev was using Nastel as his alter ego and such cannot be found to be in the best interest of the corporation. Plaintiff's Memorandum of Law at p. 14-15. Plaintiff urges the Court to recognize that in the exercise of business judgment, the derivative causes of action must be sustained.

In reply, the Special Committee submits a Supplemental Affidavit of Fine and a copy of his deposition transcript, an Affidavit by counsel and a reply Memorandum of Law. The Special Committee asserts that plaintiff has failed to raise a genuine issue of fact regarding its independence. Moreover, it asserts that counsel's role was proper in that counsel had no involvement with the [*4]challenged transactions and was retained only after plaintiff served his original demand letter. Additionally, it argues that the dual representation alone is not fatal to the independence of the Special Committee. Instead, under a totality of the circumstances test, the role of counsel is only one factor in assessing the independence of the Special Committee. It argues that Fine is independent because he is (1) not a defendant in this action; (2) did not participate or approve the underlying transactions and was not even on the Board of Directors until after the Complaint was filed; (3) has never been an employee or consultant of Nastel; and (4) has never received any fees, payments, stock, or remuneration from Nastel for any purpose other than his director fee; and (5) has no personal, business, financial or other ties to David Mavashev, Albert Mavashev, Steven Dmiszewicki or any other defendant in this action. Reply Memorandum of Law at p. 4-5. Counsel points to Fine's testimony at his deposition that it was his choice and decision to use the same counsel and that such decision was not forced upon him by the other defendants. Moreover, Fine testified that he directed and controlled the investigation and used counsel to assist in gathering the data needed to reach a conclusion.

The Special Committee further asserts that plaintiff's argument regarding the failure to include all the data with the report is without merit in that plaintiff himself has had many of the accounting records relied on by the Special Committee and failed to challenge the reasonableness of the conclusions of the Special Committee. Reply Memorandum of Law at p. 3. Additionally it asserts that the documents reviewed are set forth in the report, that Fine oversaw and directed the contents of the report and plaintiff has failed to demonstrate that counsel withheld information or presented it fraudulently. Reply Memorandum of Law at p. 10-11.

Additionally, the Special Committee argues that plaintiff has failed to raise any genuine issues of fact with regard to its good faith. That is, the Special Committee asserts that when the Court looks at the following factors, as required by the law, that it will conclude that the investigation was conducted in good faith. Those factors are: the duration of the investigation; the number of witnesses interviewed; the amount of material reviewed; whether the committee addressed all of the issues raised by plaintiff; and whether the committee went the extra step of identifying additional issues. Reply Memorandum of law at p. 12. Here, the Special Committee argues that the report is replete with factual findings, based on the witnesses interviewed and documents reviewed, and plaintiff fails to identify any particular portion of the report which he challenges. Moreover, the Special Committee states that it addressed all of the issues raised by Shetty in its 62 page report.

Finally, the Special Committee asserts that plaintiff has failed to raise a genuine issue of fact concerning the reasonableness of its conclusions. It argues that plaintiff is erroneously arguing that the conclusions of the Special Committee were not reasonable because it was not independent. The Special Committee urges the Court to recognize that "independence" and "reasonableness" of the conclusions are two separate factors to be considered and that plaintiff has ignored the findings of the Special Committee, despite its documentation regarding payments and lack of actual damages to Nastel. The Special Committee argues that based on the detailed investigation and report, and plaintiff's failure to proffer more than unsubstantiated allegations and accusations, contradicted by [*5]documentary evidence, plaintiff has failed to raise a genuine issue of material fact regarding the reasonableness of the conclusion of the Special Committee to recommend terminating the derivative causes of action. Thus, it argues that the motion to dismiss the derivative causes of action should be granted.

It is undisputed that Delaware law applies to the instant application, and the parties agree that the within motion to dismiss the derivative causes of action is governed by Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1980). In Zapata, the Delaware Supreme Court articulated the two-step process to be followed by the Court in determining a motion to dismiss a derivative claims made by an independent committee.^[FN3] First, the Court must inquire into the "independence and good faith of the committee and the bases supporting its conclusions." Id. at p. 788. Then, if the Court is satisfied that the committee was independent and showed reasonable bases for good faith findings and recommendations, the Court must strike the "balance between legitimate corporate claims as expressed in a derivative stockholder suit and a corporations's best interests as expressed by an independent investigating committee. The Court should determine, applying its own independent business judgment, whether the motion should be granted." Id. at p. 789. See also, St. Clair Shore General Employees Retirement System, v. Eibeler, 2007 WL 3071837 (S.D.NY 2007).

Thus, applying this test to the facts at bar, the Court must first determine whether the Special Committee, consisting of outside director, Ted Fine, was independent. Whether a special litigation committee's decision to terminate derivative litigation is independent or not depends on the totality of the circumstances. In re Oracle Securities Litigation, 852 F.Supp. 1437 (N.D. Cal. 1994). The factors considered by the Delaware courts include: "(1) a committee member's status as a defendant, and potential liability; (2) a committee member's participation in or approval of the alleged wrongdoing; (3) a committee member's past or present business or social dealings with the individual defendants; (5) the number of directors on the committee; and (6) the "structural bias" of the committee". Id. Moreover, a committee members presence on the Board of Directors alone does not establish a lack of independence. Kaplan v. Wyatt, 499 A.2d 1184 (Del. 1985). However, one-member special committees are "less insulated from the influence of interested directors and are closely scrutinized." Sutherland v. Sutherland, 2008 WL 1932374 (Del. Chancery Ct. 2008).

In this case, the Special Committee meets the first prong of the Zapata test by demonstrating the independence and good faith of its sole member, Ted Fine. Here, Fine is neither a defendant, nor was he a member of the Board of Directors at the time of the complained of actions. Thus, Fine did not participate in approval of any alleged wrong doing.^[FN4] Additionally, Fine avers, and plaintiff does [*6]not contest, that does not have any business, social or personal relationships with any of the defendants. The Court finds that the sole basis for plaintiff's attack on the independence and good faith of the Special Committee is the dual representation of counsel for the Special Committee and the other defendants. Such ground, standing alone, is insufficient, in this Court's view, to demonstrate an issue of material fact regarding the committee's independence. The record reflects that Ted Fine, an outside director, elected to continue the representation by counsel, after consideration of the time and efforts expended at the point of his appointment to the committee. Fine testified at his deposition that he considered the potential conflict but that the only reasonable decision was to continue the representation. Additionally, Fine testified that he directed and controlled the investigation and that counsel acted at his instructions. There is nothing in the record before the Court to demonstrate that the Special Committee conducted its investigation improperly; rather the record reflects that the Special Committee reviewed numerous documents and directed its counsel to conduct numerous and extensive interviews.^[FN5] Oracle, supra . Thus, in consideration of all these factors, the Court finds that the Special Committee has demonstrated its independence and good faith.

Next, under Zapata, supra , the Court must determine, under the business judgment rule, whether it is in the best interests of Nastel to dismiss the derivative causes of action. The Court has thoroughly reviewed the 62-page report of the Special Committee which recommends dismissal of the derivative causes of action. The report responds to each transaction complained of by plaintiff and details the facts surrounding the transaction, the outcome and the net result to Nastel. The report, prepared by counsel, at Fine's direction, was exhaustive and detailed the steps the Special Committee took to investigate each allegation levied by plaintiff.^[FN6] The report also included detailed recommendations by the Special Committee for improvement to corporate governance, structure and policies. With regard to the findings of the Special Committee, in sum, it concluded that, notwithstanding certain specific irregularities, Nastel did not suffer financial harm as a result of the transactions complained of by plaintiff. The Special Committee concluded that no intellectual property of Nastel was improperly transferred to any of the individual or corporate defendants, although it recommended dissolution of certain corporate entities. Moreover, while the Special Committee found that documentation for certain financial transfers was lacking, ultimately, it concluded that Nastel did not suffer monetary damages as a result thereof. Additionally, the Special Committee found that plaintiff was aware of certain of the complained of transactions and likewise, participated in the poor record-keeping and accounting that pervaded the operation of Nastel. Based on the foregoing, the Court concludes that upon application of the business judgment rule, it is not in the best interest of Nastel to pursue the derivative causes of action. [*7]

The Special Committee having met its burden under Zapata, the motion to dismiss the derivative claims contained in the THIRD, FOURTH, SIX, SEVENTH, EIGHTH, NINTH AND TENTH causes of action, is granted. Defendants shall serve a copy of this Order with Notice of Entry on plaintiff. Defendants shall serve an Answer to the remaining causes of action within twenty (20) days from the date of service of a copy of this Order with Notice of Entry.

This constitutes the DECISION and ORDER of the Court.