Shareholder Derivative Litigation and Corporate Governance

Abstract

In approving settlements of derivative actions that include fees for plaintiff's attorney, courts typically announce that attorney's fees are approved if a substantial benefit is obtained. In fact, courts, particularly Delaware courts, approve settlements in shareholder derivative actions that included substantial fees for plaintiff's attorney, despite the absence of a corresponding benefit to the corporation. Frequently, the "benefit" obtained is a reform in corporate governance, which is of dubious value to the corporation. To deter frivolous litigation, courts should resist the temptation to approve these settlements just to dispose of the litigation. The paper concludes that fees should not be approved unless the settlement (a) generates a common fund out of which such fees may be paid, (b) produces an intangible benefit reasonably susceptible of valuation, or (c) reflects a strong nexus between the relief sought in the complaint and the relief obtained.