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Supreme Court Reverses Chancery Approval of Litigation Settlement for Overly Broad Release and Recommends Change to Chancery Rule 23.1

Griffith v. Stein, No. 264, 2021, C.A. No. 2017-0354 (Del. Aug. 16, 2022)
The Court of Chancery denied a non-monetary settlement for derivative claims that included allegations of excessive non-employee director compensation, siding with an objector, and awarding the objector fees. Subsequently, the parties agreed to a new settlement that included a financial benefit to the corporation. The objector then renewed his objection, arguing that the settlement improperly released future claims and that the plaintiff was not an adequate representative of the corporation’s interests. The plaintiff argued that future claims could be waived because the settlement included a compensation cap, that the released claims were covered by allegations of the complaint, and that the parties were only trying to import the Delaware standard of corporate waste into their release. The Court of Chancery approved the new settlement and did not award the objector additional attorneys’ fees. The objector appealed.

The Supreme Court held that the Court of Chancery had erred in approving an overbroad release. Due process concerns require settlements in representative litigation to only release claims if they are based on the same identical factual predicate or the same set of operative facts as the underlying action. The Supreme Court interpreted the settlement release language differently from the Court of Chancery, finding that the release was not limited to compensation caps and instead would encompass all claims relating to non-employee director compensation, even if these claims involved facts unrelated to the present complaint, such as a corporate board scandal, a significant drop in peer compensation, or investigations that might affect director compensation. Next, based on the language of Court of Chancery Rule 23.1, the Supreme Court declined to find that the Court of Chancery erred in opting not to assess the adequacy of the plaintiff as a representative prior to approving the derivative settlement. The Supreme Court did recommend, however, that the Court of Chancery Rules Committee consider an amendment to Rule 23.1 that would parallel the federal rule counterpart, requiring a finding of the plaintiff’s adequacy to maintain a derivative action or that would require an adequacy finding prior to court approval of a derivative litigation settlement. Finally, the Supreme Court found that the Court of Chancery did not abuse its discretion in declining to award the objector additional fees for the revised settlement based on the Court of Chancery’s thorough analysis of relevant factors.

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