To Settle or Dismiss, That Is the Question

Shareholder derivative and class actions have received a lot of attention in Delaware’s Court of Chancery over the past year. Some of the suits resulted in large recoveries for shareholders and their attorneys, while others resulted in what is commonly referred to as a "bench slap." Outcomes aside, we have seen a refreshing reaffirmation of the court’s role as a fiduciary in the approval of settlements of representative litigation.

Delaware Court of Chancery Rules 23 and 23.1 require the court to approve the settlement or dismissal of class and derivative claims, respectively. As the Court of Chancery recently explained in Forsythe v. ESC Fund Management, No. 1091-VCL (Del. Ch. Feb. 6, 2013), when the court is presented with a proposed settlement, its role changes to that of a fiduciary for the company and the nonparty shareholders. Essentially, the court is asked to exercise its business judgment to determine whether the proposed settlement is fair and reasonable. In doing so, the court must balance the value of the claims being released against the value of the benefit conferred by the settlement.