When must Utah courts dismiss derivative lawsuits against corporations? Brewster v. Brewster Explained

The Utah Court of Appeals in Brewster v. Brewster clarified when trial courts must dismiss derivative lawsuits against corporations, establishing important limits on judicial review of business decisions.

Background and Facts

Dana and Steven Brewster co-owned Millcreek Coffee Roasters Corporation as equal shareholders following their divorce. When an airport retail opportunity arose requiring $200,000 in funding, Steven proposed they each contribute $100,000. After Dana failed to contribute her share, Steven used $100,000 from the corporation’s reserves to fund the remaining amount, with the corporation receiving 50% ownership and Steven retaining the other 50%. Dana filed a derivative suit alleging Steven usurped a corporate opportunity.

Key Legal Issues

The central issue was whether Utah Code section 16-10a-740(4)(a) of the Revised Business Corporation Act requires trial courts to dismiss derivative proceedings when an independent expert concludes dismissal serves the corporation’s best interests. The trial court also questioned the scope of judicial review permitted under the statute.

Court’s Analysis and Holding

The court emphasized that the statute uses mandatory language—”shall be dismissed”—when an independent person acting in good faith concludes after a reasonable inquiry that maintaining the derivative action is not in the corporation’s best interests. The court limited judicial review to three narrow areas: whether the appointed person was independent, acted in good faith, and conducted a reasonable inquiry. Importantly, courts cannot review the substance of the expert’s business judgment conclusions.

The court found the trial court erred by substituting its own business judgment for that of the appointed accountant, who had concluded that the corporation’s conservative financing practices justified the funding arrangement.

Practice Implications

This decision significantly strengthens corporate defendants’ ability to obtain dismissal of derivative suits through the RBCA process. Practitioners should ensure appointed experts conduct thorough investigations covering the corporation’s entire history and address all potential financing alternatives. Trial courts must resist the temptation to second-guess business decisions and focus solely on procedural adequacy. For plaintiffs, this ruling makes challenging the substance of expert recommendations much more difficult, emphasizing the importance of attacking the independence or thoroughness of the inquiry itself.