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Current Developments in the Commercial Divisions of the
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Posted: October 30, 2015

Court Blasts Derivative Class Action Settlement

On October 23, 2015, Justice Ramos of the New York County Commercial Division issued a decision in Matter of Allied Healthcare Shareholder Litigation, 2015 NY Slip Op. 51552(U), denying a “joint unopposed motion for the entry of an order directing notice to the proposed class and scheduling a hearing on class certification and settlement.”

In Matter of Allied Healthcare Shareholder Litigation, the plaintiffs brought claims in connection with “a proposed merger between Allied Healthcare (Allied), Saga Group Limited (Saga), and AHL Acquisition Corp (AHL) . . . alleging various breaches of fiduciary duty and seeking to compel additional disclosures to shareholders and to prevent closing of the merger.” “Prior to the closing of the merger and pursuant to an agreement with class counsel, the defendants included a supplement to the proxy which contained additional disclosures. All of the terms of the merger offer remained completely unchanged. Shortly thereafter, the shareholders voted to approve the merger and the merger closed on October 20, 2011.”

Plaintiffs and defendants ultimately agreed to settle. However, Justice Ramos rejected the settlement in strong language we repeat below:

[T]his proposed settlement offers nothing to the shareholders except that attorneys they did not hire will receive a $375,000 fee and the corporate officers who were accused of wrongdoing, will receive general releases. Presumably, the releases would release, not only the alleged wrongdoing, but also the act of the payment of the attorney fees to class counsel.

“What did counsel do to earn this fee?” might well the shareholders ask this Court before we approve this settlement.

In virtually every other area of law, there is some risk. No attorney should expect to be paid for losing or obtaining a meaningless settlement. In most civil litigation, if one party wins, the other losses. If a person is injured, there is no guaranty of a recovery or of a legal fee unless the injured party prevails. There is no justification to reward an attorney for losing a case. And, typically, a legal fee bears some relationship to the result. A large result will earn a large fee. Ultimately, the degree of a plaintiff’s success is the most critical factor in determining the reasonableness of the fee award.

However, in the area of derivative litigation, a culture has developed that results in cases of relatively worthless settlements (derivative actions are rarely tried to a verdict) that discontinue the action (with releases) resulting in the corporate defendants not opposing an agreed upon legal fee to class counsel. The rationale for this practice of rewarding plaintiffs’ counsel without any meaningful recovery is that even unsuccessful derivative litigation serves a societal purpose. That merely bringing on derivative litigation that seeks to examine the doings of corporate America has a prophylactic effect discouraging malfeasance. Horse-hockey.

If this was the standard, then all unsuccessful attorneys should be likewise compensated because, as examples, the motoring public would drive more carefully, doctors would avoid malpractice, spouses would not cheat and Wall Street would not have to be “Occupied.”

Putting aside any concerns of collusion, (and there are many), this practice of compensating class counsel no matter how meaningless the result is, creates the impression with most objective observers that these actions are brought merely for the purpose of generating legal fees. In addition, the named plaintiffs in many of these settled class actions, typically own only a handful of shares and often seek additional compensation for their “services,” which are usually illusory.

The willingness to rubber stamp class action settlements reflects poorly on the profession and on those courts that, from time to time, have approved these settlements.

Our profession does serve society, but settlements like these (which do require court approval) make it appear that society is being “served up” as if society was an item on a menu! These settlements are all too often entered into because the corporate officers are faced with the dilemma of protracted costly litigation versus a quick, relatively cheap settlement that releases the corporate officers and compensates class counsel with someone else’s money (the shareholders).

The settlement in this matter is not worthy of any further consideration. The parties may file a stipulation of discontinuance or prepare this matter for a trial or a dispositive motion.

(Internal citations omitted).

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