As I detailed in blog posts at the time, the parties to two separate shareholder derivative lawsuits in recent months announced what were among the largest derivative suit settlements – the massive $300 settlement in the Renren derivative lawsuit and the $180 million settlement in the FirstEnergy derivative lawsuit. Though the settlements in each of these two cases were announced to great fanfare, both settlements, for separate reasons, ran into procedural roadblocks. There have now been further developments in each of these cases – the Renren settlement appears to be back on track, while the federal district judge presiding over one of the unconsolidated FirstEnergy derivative suits continues to throw up roadblocks, as discussed below.
The Renren Settlement
The Renren lawsuit is a very unusual case. It involves a derivative action under Cayman Island law prosecuted in a U.S. court (New York state court) on behalf of a China-based Cayman Islands company. The suit essentially claims that the company’s minority shareholders were cheated in a phony take private deal in which company investments worth millions of dollars allegedly were siphoned off to an insider-controlled entity.
As discussed here, in October 2021, the parties reached an agreement to settle the case for at least $300 million (the final amount subject to a truing-up process). However, as also discussed in the updated version of the same blog post, in December 2021 (here), Judge Andrew Borrock entered an order rejecting the settlement, because of questions over which shareholders should benefit from the settlement and over the size of the plaintiffs’ attorneys’ fees.
Further proceedings ensued, as a number of objectors intervened. Several features of the initial settlement were re-worked. On June 9, 2022, Judge Borrock issued an order (here) approving the revised settlement. Among other things the revised order reduced the amount of the plaintiffs’ counsels’ attorneys’ fees, and addressed some contested issues, including the record date for establishing share ownership for purposes of the recovery.
As I noted at the time of the initial settlement, the parties’ $300 million settlement in the Renren lawsuit is one of the largest shareholder derivative settlements of all time. My running tally of the largest derivative lawsuit settlements can be found here. A June 10, 2022 Law360 article discussing the court’s approval of the Renren settlement (here), quotes one of the plaintiffs’ attorneys in the case as saying that “I believe that it’s the largest ever direct-pay cash settlement in U.S. litigation history in terms of a settlement of a derivative action.”
According to my tally, the only settlement even nominally larger than the Renren settlement is the $310 million Alphabet/Google #MeToo Derivative Suit settlement (discussed here); however, the cash portion of the Alphabet settlement is to be paid out over the course of ten years. That is why the plaintiffs’ counsel referred to this lawsuit as the “largest ever direct-pay cash settlement” – that is, unlike the Alphabet settlement, in which the settlement funds will be paid out over time, the Renren settlement is to be funded in one payment.
The FirstEnergy Settlement
As I noted in a post at the time (here), in February 2022, the parties to the FirstEnergy bribery-related derivative lawsuit agreed to settle the suit for $180 million, subject of course to court approval. As I noted in a subsequent post, after the parties submitted the settlement for preliminary approval, things got weird.
The problems with the settlement stemmed from the fact that all but one of the related FirstEnergy derivative suits had been consolidated before U.S. District Judge Algenon Marbley in Columbus, while the sole exception was a separate suit pending before U.S. District Judge John Adams in Akron. As I discussed in my prior post, Judge Adams threw a huge monkey wrench into the parties’ efforts to get the settlement approved and finalized. After a court hearing that can only be described as wild, Judge Adams refused to stay the separate action pending in his court, and entered an order directing the plaintiff to identify to the court the FirstEnergy officials that actually paid the supposed bribe.
As is well told in a June 3, 2022 post on Alison Frankel’s On the Case Blog (here), on June 2, 2022, Judge Adams entered a show-cause order suggesting that he is close to appointing new plaintiffs’ attorneys to continue to litigate the case in his court, even though the parties’ settlement, if finalized, resolves all of the related cases, including the one pending before Judge Adams – and even though the settlement prohibits the shareholders from continuing to litigate the case.
And all of this comes after Judge Marbley has granted preliminary approval of the settlement in May. In granting preliminary approval, Judge Marbley noted the benefits of the settlement for FirstEnergy, the company on whose behalf the shareholder plaintiffs’ brought the lawsuit. Judge Marbley noted not only the cash payment, as compensation for the harm done to the company by the bribery scheme, as well the corporate governance reforms, including a reconstituted board, that were agreed to in the settlement.
However, while Judge Marbley did grant preliminary approval, he also cautioned that final approval would not be decided until a fairness hearing in August. Marbley also denied the parties’ request to enjoin further litigation before Judge Adams, concluding that until he granted final approval he did not have authority, even in the “unique posture” of the litigation, to stay a case in another court. Judge Marbley did note the specific practical problem the further litigation of the case in that the proceeds of the company’s D&O insurance policies were being eroded by further litigation.
Whereas Judge Marbley’s consideration of the parties’ settlement was focused on benefits from the proposed settlement for FirstEnergy itself, Judge Adams’s refusal to stay the case and insistence on further litigation is based on concerns for the public’s need to know more about the alleged underlying bribery scheme. As I have noted in prior posts about this lawsuit, I am an Ohio resident, and I am every bit as outraged as Judge Adams by the political bribery in which the company allegedly engaged. But the question is whether the derivative lawsuit is the right vehicle for the vindication of the public’s right to know about the corrupt political conduct. There are, in fact, separate pending criminal proceedings, which is in fact an appropriate vehicle to serve the public interest. As the lawyers for FirstEnergy put it in a filing earlier this year, the Court’s “desire for public accountability, while understandable, risks harm to the interests of FirstEnergy and its stockholders, which is exactly the opposite of what a derivative litigation is supposed to do.”
Judge Adams’s June 2 show cause order specified that “the parties are ordered to show cause why the Court should not appoint counsel that will fully and fairly litigate this derivative matter.” On June 10, 2022, the parties filed their responses; among them was a filing by the Special Litigation Committee arguing among other things that the enforcement of the settlement was in the best interests of the company and the further litigation of the case in Judge Adams’s court is contrary to the company’s interests. The special litigation committee also separately moved the court for the dismissal without prejudice of the proceedings in Judge Adams’s court. Counsel for the plaintiffs separately filed a response to the show-cause order, stating that “there is no basis in law or fact, nor any reasonable practical justification, for the appointment of counsel contemplated by the Court’s Order.”
We shall see what happens next. What a ridiculous mess.