This article previews the issues and arguments in California Public Employees’ Retirement Fund v. Felzen, on the Court’s 1998-99 docket. In the second case on the Court's docket this term dealing with class action settlements (see also Ortiz v. Fibreboard Corp.), the Supreme Court will turn its attention to the interesting and technical question whether an objector to a shareholders' derivative class settlement must intervene in order to be heard on appeal. The Court will determine whether a nonparty objector to a shareholder derivative settlement who appears and objects to the settlement and suffers an adverse ruling must formally intervene under Federal Rule of Civil Procedure 24 in order to appeal that adverse ruling.
Federal class actions generally are governed by Federal Rule of Civil Procedure 23. In 1996 the Advisory Committee on Civil Rules carved out a separate provision, Federal Rule of Civil Procedure 23.1, to govern a particular type of class action, the shareholder derivative suit. A shareholders' derivative lawsuit is a class action brought by one or more shareholders to enforce a right of the corporation and to recover for injury to the corporation.
In the past decade, highly publicized shareholder derivative settlements have been under attack for returning little value to class members while awarding significant legal fees to class lawyers. Against this contentious backdrop, the Felzen appeal broadly raises the technical quandary of clarifying who are parties to a class action, as well as who are parties to a shareholders' derivative lawsuit. The appeal more narrowly focuses on the issue of whether the ability, under the rule, for objectors to appear and oppose a derivative settlement also confers a right to appeal an adverse ruling, without requiring the objector to officially seek party designation through intervention.
In the broadest policy sense, the Court will have to determine how seriously it takes the role of objectors in keeping everyone honest in negotiating and approving shareholder derivative settlements. The Supreme Court, in Amchem Products Co. v. Windsor, 117 S. Ct. 2231 (1997) indicated that federal district courts must provide heightened attention to class certification requirements in reviewing proposed class-action settlements. In so doing, the Court tacitly recognized the important role of objectors in presenting an adversarial view of proposed settlements. Under the current shareholder derivative rule, objectors get one free shot at contesting a proposed settlement without having to intervene in the litigation to present those objections.
The Felzen appeal is significant because the Court will determine whether any further participation by objectors will be cabined by requiring technical intervention in the lawsuit in order to pursue an appeal.
Linda S. Mullenix, One Free Shot: Must an Objector to a Shareholder's Derivative Settlement Intervene to Be Heard on Appeal?, 1998-99 Preview of U.S. Supreme Court Cases 179.