Norman v. Strateman

Summary

The California Court of Appeal held that a settlement resolving derivative claims on behalf of a limited liability company required judicial review and approval. Because the trial court did not independently determine whether the settlement was fair and reasonable and free from fraud, overreaching, or collusion, the court reversed and remanded for the required review, with notice to shareholders to the extent practicable.

Holdings

1. At least the claims alleging mismanagement of Intersango, self-dealing with company assets, and failure to monetize company assets were derivative claims. Because the settlement purported to resolve all claims, those derivative claims were included in the settlement.
2. A shareholder plaintiff may not settle and dismiss a corporation's derivative cause of action without judicial review and approval. The court must determine whether the settlement is fair and reasonable to the corporation and its shareholders and is not the product of fraud, overreaching, or collusion.
3. Neither the settlement judge's participation in recording or mediating the agreement nor the trial judge's abbreviated consideration of the enforcement and set-aside motions constituted the required independent judicial review and approval.
4. The failure to conduct meaningful judicial review was not harmless, and Norman did not forfeit or invite the error by failing to raise the approval requirement when the settlement was placed on the record.

Questions Presented

1. Whether the complaint included derivative claims requiring judicial approval of any settlement and dismissal.
2. Whether the settlement was judicially reviewed and approved as required for a derivative action settlement.
3. Whether the trial court's failure to conduct the required review was harmless error or was forfeited by Norman's failure to raise the issue when the settlement was placed on the record.

Disposition

vacated