Corporate Law

7th Circuit Nixes 'Feeble' Sears Class Action, Says Its 'Only Goal' Is Fees for Plaintiffs Lawyers

Saying that a shareholder derivative suit’s “only goal” appeared to be generating fees for the plaintiffs counsel, a federal appeals court on Wednesday not only held that a federal district judge had erred in refusing to permit an objector to intervene in a shareholder derivative suit but directed the judge to dismiss the case on remand.

In a victory for the objecting shareholder, Theodore H. “Ted” Frank, of the Center for Class Action Fairness, the Chicago-based 7th U.S. Circuit Court of Appeals not only put him back in the ballgame but nixed the suit, Reuters reports.

“The suit serves no goal other than to move money from the corporate treasury to the attorneys’ coffers, while depriving Sears of directors whom its investors freely elected,” wrote Chief Judge Frank Easterbrook in the three-judge panel’s unanimous opinion (PDF).

Explaining the court’s decision, he notes that “[t]he theory in a derivative suit is that a corporation’s board has been so faithless to investors’ interests that investors must be allowed to pursue a claim in the corporation’s name. Sears is incorporated in Delaware, whose law determines whether investors may litigate derivatively on its behalf.”

The plaintiffs in this suit contended that antitrust law was violated by having two directors sit on competing boards of other companies following the 2005 merger of Sears, Roebuck & Co. with Kmart Corp. However, as Sears pointed out to the district court in a motion to dismiss, “Delaware usually allows investors to sue derivatively only if, after a demand for action, the board cannot make a disinterested decision.” The plaintiffs made no such demand prior to suit, the 7th Circuit says, although they argued it would have been futile to do so.

Antitrust suits are notoriously expensive, and Sears was willing to settle for $925,000 in attorney’s fees to opposing counsel rather than likely pay over $1 million in defense costs. But, Easterbrook says, shareholders would derive no benefit from this and neither the Department of Justice nor the Federal Trade Commission, which ordinarily enforce antitrust violations, have shown any interest in pursuing enforcement action here.

“We could stop at this point and leave the parties to slug it out in the district court, with an appeal by whoever loses (or objects to a settlement),” he writes. “But this litigation is so feeble that it is best to end it immediately, as both Sears and Frank unsuccessfully asked the district judge to do. The only goal of this suit appears to be fees for the plaintiffs’ lawyers. It is impossible to see how the investors could gain from it—and therefore impossible to see how Sears’s directors could be said to violate their fiduciary duty by declining to pursue it.”

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