In some situations, the course of action that a board of directors decides to pursue may not be in a corporation's best interests. This often arises when directors breach a fiduciary duty to the corporation. When this occurs, the corporation will have a claim against the directors. The problem with this situation is that the same directors who breached their duty simultaneously control the corporation, so it is unlikely that they will decide to bring an action against themselves. For these special situations the law has created a mechanism that allows a shareholder to instigate an action on behalf of the corporation. Such derivative actions could have major problems. The law has, however, created a mechanism that helps to ensure that settlement agreements are fair and reasonable. Federal Rule of Civil Procedure 23.1 requires the court to approve the settlement and to give notice of the proposed compromise or dismissal to the shareholders. This notice not only informs the shareholders of the pending litigation and terms of the settlement but also provides the shareholders with a chance to object to the settlement at the settlement hearing. When a court approves a proposed settlement over nonparty shareholders' objections, some shareholders may try to appeal that decision. The question then arises whether a shareholder who has not been formally made a party to the action by intervening under Federal Rule of Civil Procedure 24, but who has appeared, pursuant to court notice, to voice his objections to the proposed settlement, may appeal the district court's approval of the settlement reached between the named parties. This note argues that the Seventh Circuit's recent holding in Felzen v. Andreas, which was affirmed by an equally divided Supreme Court, and which requires nonparty shareholders to intervene before they will be allowed to appeal, will result in the most benefit to the corporation. Before reaching this conclusion, however, Part II will review not only Felzen but also the case law leading up to it and one case that was decided after it. Part III then describes the two main problems that result from class and derivative actions and sets forth and explains the argument of this note: that the rule requiring intervention provides the best solution to these problems. Part IV provides further support for this conclusion by illustrating how it will benefit the corporation.
An Intervention Requirement Provides Greater Benefit to the Corporation When Nonparty Shareholders Appeal Derivative Action Settlements: Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998),
79 Neb. L. Rev.
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