In a pair of related decisions issued on the same day, June 29, 2016, the Court of Chancery in Smollar v. Potarazu (here and here) made the unusual move of disqualifying a derivative plaintiff and his counsel, and granting a motion to intervene brought by another stockholder who sought to become the representative plaintiff.
Key Issues Addressed
The memorandum opinion denied an interim fee request made by Smollar’s counsel and granted a motion to disqualify Smollar and his counsel made by other stockholder objectors.
The interim fee request followed what the Court termed a “botched settlement” proposal by Smollar in which he would have obtained benefits not shared by others in the class, which was rejected by the Court. Despite having his proposed settlement rejected, Smollar’s counsel made a motion for an interim fee award, anticipating withdrawal from the matter. In rejecting that request, the Court emphasized that Smollar had not conferred upon the class any lasting benefit that was not capable of reversal, examining both the standard for granting an interim fee award and the Sugarland factors. The Court also found that counsel for a derivative plaintiff who has lost standing to serve as the class representative is not entitled to an award of fees.
Other stockholder Objectors opposed the motion for an interim fee award, and moved to disqualify Smollar as a representative plaintiff, arguing that his attempt to secure a personal benefit through the rejected settlement rendered him an inadequate representative. The Court granted the Objectors’ motion, and discussed the eight factors it considers to assess whether a proposed derivative plaintiff will adequately represent the class:
Factors to Determine Adequacy of Plaintiff
(1) economic antagonisms between the representative and the class;
(2) the remedy sought by plaintiff in the derivative litigation;
(3) indications that the named plaintiff was not the driving force behind the litigation;
(4) plaintiff’s unfamiliarity with the litigation;
(5) other litigation pending between plaintiff and defendants;
(6) the relative magnitude of plaintiff’s personal interests as compared to her interest in the derivative action itself;
(7) plaintiff’s vindictiveness toward defendants; and
(8) the degree of support plaintiff was receiving from the shareholders she purported to represent.