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Chancery Rejects “Largely Precatory” Proposed Derivative Settlement

Knight v. Miller, C.A. No. 2021-0581-LWW (Del. Ch. June 1, 2023)
Under Court of Chancery Rule 23.1(c), the Court must approve the settlement of any derivative litigation. This case provides a rare example of the Court rejecting a settlement after determining that the “give"—i.e., the substance of the settlement—did not justify the “get"— i.e., ending the litigation.

The plaintiffs challenged stock options issued to the company's officers and directors during the pandemic when the trading price of company shares was allegedly depressed. After the Court largely denied a motion to dismiss (covered by this blog here), the parties engaged in discovery before proposing a settlement. While the proposed settlement did not provide for any disgorgement or other monetary consideration, the parties argued that the settlement included corporate governance reforms to strengthen compensation controls and prevent the recurrence of the alleged misconduct. However, the Court disagreed and rejected the settlement, finding that most of the proposed reforms were “precatory” and did little to address the allegation that the company's controller had forced the company's board to award him a windfall. Among other reasons, the governance changes did not include objective limits on compensation, and its description of the required process going forward did not improve meaningfully on past practices. The Court accordingly rejected the settlement due to the incongruence between the "give” and the "get."

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