First Department Reverses Trial Court Approval of Derivative Action Settlement

On November 29, 2016, the First Department issued a decision in Company v. Clayton Dubilier & Rice, LLC, 2016 NY Slip Op. 08021, reversing the approval of the settlement of a derivative action, explaining:

The settlement does not provide for payment to the company. Plaintiffs are to receive the bulk of the $4 million settlement in reimbursement for their legal fees in this case, and the remainder is to be turned over to their franchisee organization for future legal fees or for distribution, at the organization's discretion, to plaintiffs. Moreover, because they have not obtained a substantial benefit for the company, but have accomplished only getting their lawyers paid, plaintiffs, who, after four attempts, have yet to plead properly that they have standing to sue derivatively, are not entitled to legal fees. It was an abuse of discretion to approve the settlement of a derivative action purporting to bind the company and all shareholders that was obtained by plaintiffs who had not established — and may never establish — their standing to bring the action. Contrary to plaintiffs' argument, defendants, as shareholders in the company who received notice of the settlement and had an opportunity to and did object to the settlement, have standing.

(Internal citations omitted).