Federal Court Requires Derivative Plaintiff Seeking Voluntarily Dismissal to Provide Notice to Shareholders

A federal court made it more difficult for derivative plaintiffs and their lawyers to cheaply exit derivative lawsuits they brought but no longer wish to maintain.  In June 2013, the Delaware Chancery Court dismissed stockholder claims challenging the validity of a forum-selection bylaw adopted by Chevron’s directors (Boilermakers Local 154 Retirement Fund v. Chevron Corp, 73 A.3d 934). Before the decision, a parallel derivative suit Bushansky v. Armacost (2012 WL 3276937), was filed in federal court, but stayed pending the outcome of the Delaware suit. After the decision, the plaintiff in Bushanksy sought court authorization to voluntarily dismiss the suit without providing notice under Fed.R.Civ.P. 23.1(c). Rule 23.1(c) requires court approval and notice of dismissal to voluntarily dismiss a derivative action. There are three exceptions to the notice requirement: the claim is dismissed after litigation on the merits, the claim is moot, or absent class members would not be prejudiced without notice and the expense is unduly burdensome. Bushansky alleged all three exceptions and claimed that because he lacked standing, the court had no jurisdiction to order notice. He also argued that other shareholders were already on notice, excusing any requirement.

The court rejected the lack of standing claim. Standing is irrelevant to the purpose of the rule – discouraging secret settlements and affording absent shareholders the opportunity to continue a potentially meritorious claim, so the lack of standing did not affect notice. The Court then rejected Bushansky’s argument that the Delaware ruling precluded the claims in the instant action. He argued at the stay hearing that fiduciary duty claims in the federal suit were separate and the Court held that those issues were neither litigated nor moot. Next, the Court found the possibility of prejudice, based on statute of limitations concerns barring subsequent suits. Additionally, any concerns of cost were unfounded. Even if notice by mail or publication was unduly burdensome, other means existed. Finally, Bushansky’s argument for prior notice failed. His arguments did not address notice of dismissal, but rather demonstrated notice for the adoption of the bylaw and the decision of the Delaware suit.

The court ordered the parties to file a proposed notice plan. If no shareholder sought to intervene during the notice period, the plaintiff could then file a motion to voluntarily dismiss.