The Court of Chancery recently issued an opinion which reflects the perils when conferring upon a named plaintiff to a derivative action benefits unique from the shareholder class.  In the decision of Smollar v. Potarazu, C.A. No. 10287-VCN (Del. Ch. Jan. 14, 2016), Vice Chancellor Noble considered a proposed settlement of a derivative action that afforded Smollar (the named plaintiff) a unique and personal benefit: the company has committed to buy his stock at the price Smollar paid fifteen years ago–$473,153.64, or roughly $0.16 per share.

While the other terms of the settlement agreement were found by the Court to have benefited the stockholder class–a stockholders’ meeting, two independent board members, a special review committee, and the hiring of an independent auditor–the personal benefit conferred upon Smollar was unique to him and not available to the other stockholders.  Other stockholders objected to the proposed settlement on these grounds.

The Court found that such a special benefit for Smollar “fully undercuts any appearance that the settlement is fair and reasonable to the other stockholders who apparently remain locked into their equity positions with no certain or even probable exit strategy. Such self-dealing and grasping for a personal benefit drifts far from the conduct expected of a fiduciary.”  For these reasons, the Court rejected the proposed settlement.

This pithy decision is an important read for parties considering whether a proposed settlement of a derivative class action lawsuit, which confers benefits upon the lead plaintiff not available to others, is fair and reasonable.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.