On December 10, 2021, Justice Borrok of the New York County Commercial Division issued a decision in Matter of Renren Inc. Derivative Litig. v. XXX, 2021 NY Slip Op. 51176(U), rejecting a derivative action settlement that treated similarly-situated shareholders differently, explaining:
Upon the foregoing documents and for the reasons set forth on the record), the motion must be denied. The proposed settlement cannot be approved as a settlement to a derivative action structured with direct payments to certain minority shareholders but excluding relevant injured minority shareholders. The plaintiffs are certain of the minority shareholders that are entitled to payment and cannot exclude them from the settlement. Plaintiff counsel’s argument that only his clients and not all of the minority shareholders who were harmed should be paid fails. In a derivative action, a shareholder sues on behalf of all effected shareholders — here the minority shareholders. Having undertaken to claim on behalf of all minority shareholders, the plaintiffs may not limit the rewards reaped by this action to themselves. Allowing plaintiffs to do this would, in effect, provide a windfall to the company as to the other minority shareholders. This is antithetical to the concept of the derivative action that the plaintiffs brought. Thus, the settlement as structured is not fair and reasonable to the effected shareholders and when taken as a whole is so unfair on its face to preclude judicial approval.
It does not matter that this lawsuit was brought as a derivative action. The nature of the action goes to standing, not the substantive basis for the claim. Here, the substantive basis of the claim was breach of fiduciary duty and fraud on the minority. This requires the court to set a record date to determine the identity of the minority shareholders who were allegedly defrauded. Those shareholders are the record shareholders at the close of business on April 29, 2018 (the Record Date), i.e., the day before the spin-off transaction was announced. These are the shareholders who were given the Hobson’s choice that forms the basis for this litigation when Renren’s most valuable assets were allegedly siphoned off and it is irrelevant whether they have sold their shares. The harm caused to their investment was immediate and at the time of the announcement because the market is efficient. Investors who purchased shares after the Record Date or who increased their positions during the pendency of this litigation, on the other hand, knew exactly what they were purchasing and cannot profit by allocating to themselves the damages due to those harmed.
The settlement proceeds pursuant to the proposed settlement are appropriately not structured to be returned to the company, but they can not exclude, and must only include the Record Date injured minority shareholders as to their record holdings on such Record Date. Plaintiff counsel’s reliance on 17 CFR 240.10b-17 and FINRA 11140(b)(1) to argue that the record date can only be set prospectively and therefore only the current minority shareholders (i.e., their clients) should recover fails. This is not a cash dividend or distribution or stock payment from the issuer. This is a settlement payment from the controlling shareholders to the Record Date minority shareholders to recompense the Record Date minority shareholders for the alleged breach of fiduciary duty and fraud on the minority caused by the controlling shareholders and the relevant minority shareholders must recover. The relevant minority shareholders are the Record Date minority shareholders and their interest in the settlement must correspond with their holdings on the Record Date.
The settlement also can not provide that unclaimed proceeds should be redistributed. These funds belong to the Record Date minority shareholders and, to the extent any are unclaimed, they should be deposited in the names of the relevant Record Date minority shareholders in the amounts owned on the Record Date who do not come forward with the New York State Comptroller’s office unclaimed property funds or otherwise set aside in escrow with Plaintiff counsel to be held until the expiration of the statute of limitations.
Plaintiff counsel’s statement that certain shareholders that he represents have interests that are adverse to the Record Date minority shareholders is both legally untenable and highlights why the court’s role in protecting the injured minority shareholders is sacrosanct. The settlement funds belong to all of the Record Date minority shareholders that were allegedly defrauded — not just his clients. Put another way, his clients never had an interest in the portion of the settlement proceeds that belong to the other Record Date minority shareholders in the interests that such other Record Date minority shareholders held on the Record Date.
(Internal quotations and citations omitted) (emphasis added).