*1 WOLF, Plaintiff-Appellant, Miriam J.
v. al., et BARKES Defendants- Curtis Appellees. 434, Docket No. 29488. Appeals States Court of United Second Circuit. Argued April 1965. Decided June 1965. Ross, City (Wolf, L.
Paul York New Ross, Jones, Henry Popper, H. Wolf & counsel), Wolf, City, for New York appellant. City (Ber- Kenny, Peter P. York New City), ap- Buchwald,
nard York New pellees Kantor and Blair. City Fraiman,
Arnold New York G. Bushby, (Dewey, Ballantine, & Palmer Wood, Sherry, York Edward New N. City, counsel), appellee Curtis Publishing Co. City (Cahill, Hyde, R. York
David New City), Gordon, Ohl, York Reindel & New Culligan appellees Mills. and WATERMAN, FRIENDLY Before Judges. ANDERSON, Circuit Judge: FRIENDLY, Circuit
Appellant’s
pend-
contention is that
ency in
of a stockholder’s
a federal court
arrange-
challenging
action
its
ments between a
deprives
officers
power
out-of-
make
officers
is, one
court settlement —that
quiring
action
the court
once the suit
rivative suit —and that
brought,
be notice
there must
pro-
approval as
stockholders and court
though
23(c), even
in F.R.Civ.P.
vided
judicial
for no
the settlement
itself calls
Although
is in-
contention
action.
teresting
no means
*2
go
subsidiary
force,
that
we think the rule does
dian timberlands owned
of
far.
Curtis which would result
in an in-
crease in
of
un-
the value
Curtis’ stock
May, 1964, plaintiff
In
Miriam J.
any
Culligan,
related to
efforts of
Clif-
Publishing
Wolf, a stockholder of Curtis
recipients
options.
ford or other
of stock
brought
Company,
Dis-
ah action
upon
Demand
to sue was
directors
District of
trict Court
the Southern
alleged
par-
to be futile because of their
Company
New York
and
ticipation
complained
in the transactions
individuals,
various
who were said to
liability;
consequent
of and their
directors, officers,
both,
or
at
upon
mand
claimed
stockholders was
support
dates.
In
of federal
relevant
unnecessary
to be
and futile. The com-
viola-,
alleged
jurisdiction
complaint
plaint prayed
at
that
the actions taken
14(a)
tion of
of the
Ex-
§
Securities
annulled;
meeting
the 1963 annual
change
27;
Act,
doctrine
see
and the
§
Culligan’s,
that
Clifford’s and Kantor’s
pendent
jurisdiction
upon
of
was relied
options
cancelled;
stock
the Ee-
that
bring
alleged wrongdoing
further
be-
Option
stricted Stock
Incentive Plan and
complaint
fore the district court. The
rescinded;
options
all
thereunder
alia,
alleged* inter
that
in 1962 Curtis
any
options
that holders of
surrender
Culligan
employed
had
defendants
options
stock obtained
the exercise of
Culligan being
Clifford,
President
elected
any profits;
and account for
and that
President;
and Clifford Executive Vice
any
the directors be held liable for
dam-
agreements
employment
that
their
con-
age
suffered
as
of the
Curtis
a result
(save
options
tained common stock
alleged.
acts
15,500
Culligan’s case)
shares in
contingent upon approval
were
an in-
of
Various extensions of the time to an-
crease in Curtis’
common
stipulation
authorized
swer were obtained. The
cov-
stock;
proxy
ering
period
that the
statement
for the
from November 3 to
meeting
stockholders,
16, 1964,
given
annual
of
at November
after
management sought approval
attorneys
which the
promised plaintiff’s
Curtis
primarily
agreements
for such an
any
increase
to meet
to enter into
with execu-
requirements
settling
employees
of these contracts and
tives or
claims under
general
Option
any
agreements
of a
Eestricted
In-
employment
Stock
of the
misleading
Plan,
centive
complaint.
was false and
ferred
into
Curtis
When
respects;
proposal
in various
and other defendants refused to renew
undertaking
increase the
newspaper
authorized common stock
this
and a
article
did not receive a two-thirds vote of the
indicated that Curtis was about to make
prior
preferred stock
this was
settlements with four
defendant-em-
required;
ployees
resigned,1 plaintiff
ratification of the Ee-
who had
Option
stricted
enjoining
Stock
Incentive Plan was
moved for an order
com-
unlawfully
promise
obtained because of the lack
or
settlement
favor
separate approval
complaint
of the additional
of Curtis asserted in the
save
preferred;
prior
approval
common stock
of the district court on
options
of stock
stockholders,
provided
to Culli-
notice to all
as
gan
Judge
F.E.Civ.P.
Palmieri de-
and Clifford
to the
defendant
opinion,
nied the motion
wrongful
respects;
Kantor was
in other
plaintiff appeals,
1292(a) (1).
28 U.S.C. §
Culligan’s salary
that an increase in
agreed to in 1963 constituted a waste of
23(c) provides
Rule
that “[a]
corporate assets;
proxy
class action shall not be dismissed or
statement had concealed facts the de-
compromised
approval
without the
fendants knew or should have known as
court,”
requires
and also
such
that when
to the
right
value of mineral
in Cana-
an action seeks to enforce a
defined
these,
Blair,
1. Two of
Kantor and
Curtis in the New York Su
brought
preme
an action for breach of contract
Court.
did,
other,
prejudice
23(a) (1),
one
on
as the instant
will bind
the class
in rule
brought.
To
proposed dismissal
com
behalf
suit was
whose
“notice
guard against
given
obviously proper
members of
is an
promise
to all
this
shall be
rule-making.
the court
There would
manner as
class in such
ground for
author-
doubt that
be
ity
whether the
There can be little
doubt
directs.”
rule,
Supreme
on
conferred
Court
look
letter
if we
*3
sought
apply.
support
to
28
2072
rule
No one has
U.S.C.
would
a
does not
§
it
invalidating
compromise
an
or
the class suit.
out-of-court settlement
dismiss
by
Eisenlohr,
Kalodner,
corporation simply
a
was
Inc. v.
it
Cf. Webster
because
1944),
316,
(3
cert.
a defendant in a federal court derivative
145 F.2d
320
Cir.
vigilance”
“great
867,
1404,
denied,
89 action. The
325 U.S.
65
exercised
Advisory
S.Ct.
go
by
Supreme
(1945).
the
1986
If we
behind
the
Court and its
L.Ed.
observing
prime
prohibition
and de
“in
to
“mischief
Committee
the
letter
the
against
prevent,
rule-making
in
to
the rule was intended
the
statute
fect”
modifying
wit,
abridging, enlarging,
“private
under which
the
settlements
or
to
any litigant,”
plaintiff
3
his attor
the
stockholder and
substantive
of
got
settlement,
ney
Moore,
jf
[1],
paid
26
the
in
1.04
at
sum
Federal Practice
against construing
got
(2d
argues
corporation
nothing,”
1964),
the
Craftsman
ed.
Brown,
Mortgage
23(c)
F.
&
64
rule
raise
Finance
Co. v.
in a manner that would
168,
(S.D.N.Y.1945),2
Supp.
question
score,
the in
the
178
on this
when neither
language
purpose
it. But
stant case likewise is not
nor
com-
within
the evident
pels.
plaintiff
it to be anomalous that
insists
compromise
not
the
she could
practical standpoint
From a
also
complying
23(c),
suit without
with
important
there are
differences between
corporation
what she
the
should have
hypothesized
here be
cases
greater liberty,
to
considers
be a
con
fore
a
of
domi
us. While
directors
board
point
her
tends that various decisions
by
set
with
nated
the defendants
whom
favor.
hard to
tlements are
would find it
made
argues
plaintiff
that a settlement
provide a release
would survive
by
officers
with the
will
charges
self-dealing,
or com
dismissal
give
presumptively
them a
defense
valid
stockholder,
promise by
independent
an
being pressed
to the claims now
standing
corporation simply
suit;
derivative
and that if the settle-
easy
idle,
subject
would
to such
general release,
fn.
ment includes a
see
against
A new derivative suit
attack.
may extinguish
corporation’s
this
management for
in re
or waste
fraud
defendants,
claims
inadequate
leasing corporate
recipients
corporate property
as
but
payment
improper settle
can- redress
directors,
neatly
also as
as
if a de-
as
aside;
setting
even
ments
finding
plaintiff
his
rivative
had dismissed
own
management target
a
when
secretly
suit
after the statute
limi-
or
shareholder has terminated
derivative
run,
if
tations
an unfavorable
corporate
as
be harder
claim
a
judgment had
consent
been rendered— signment.
acquiescence of a
When the
against,
23(c)
schemes
which rule
or a
to a dismissal
clearly
But the
directed.
situations dif-
judgment
pur
has in
consent
effect been
many important respects.
fer in
defendants,
supposed
chased
vigorous champion
cases,
hypothesized
In the
the court’s
of the shareholders
being
retired;
large
process
a
own
is
used to obtain
has been
far
which,
way
policing
disposition
corporate
in one
or an-
determination
of the
objective
Note,
indicated
2. That
this was the
is
Settlement of Share-
Control over
Advisory
Suit,
(1941);
citation of
54
Committee’s
holder’s
Harv.L.Rev. 833
Hornstein,
McLaughlin, Capacity
Corporation
of Plaintiff-Stock
2
Law
Prac-
a
Suit,
(1959).
to
a
§
holder
Terminate
Stockholder’s
tice
(1936).
See also
46 Yale L.J.
seeing
claim, may
corporation’s power
he
well assist
elude that
to
settlements,
the news does not leak out to stir other make its own out-of-court
redress,
inquiry.
is
shareholders
to
No such
to normal shareholder
silencing
procedural
of the derivative
oc-
rule that
not abolished
a
out of
curs when the
settles
in its lan-
does not embrace these either
primary
In-
court with
deed,
defendants.
rationale.
some
in its
guage
likely
very person
expand
he is the
most
Whether it would not be well to
challenge
settlement,
23(c)
principle
case
either
cover a
of rule
original
pursuing
attempt-
presented,
action and
like that here
and how
ing
done,
lawfully
to overthrow the settlement or
here before
can be
are not
bringing
di-
new action
us.4
rectors
settlement itself is
by plaintiff do not
The authorities cited
gravamen
complaint.
them.
the reach
attributes to
she
*4
No
a
one would contend that
in
This court’s decision
Certain-Teed
negotiate
corporation could not
a release
Corp.
Topping,
F.2d 241
Prods.
v.
171
claims,
against
corporate
in
even
(2
1948),
simply that a sum
Cir.
was
siders, before a derivative suit was
paid
attorney
the
for a stockholder
to
corporation’s
started.
in
interest
plaintiff
in district
in a derivative suit
a
achieving a
does
favorable settlement
knowledge,
court,
in
the
court’s
litigation
not cease because derivative
consenting
the
to
consideration for his
begun; especially
has
is this so when
for sum
of a
motion
defendant’s
some of
in
the defendants
the derivative mary
recouped
judgment,
the
to
could be
suit have taken
initiative —as in
attor
a reasonable
extent
it exceeded
present
bringing
case—in
their own ac
ney’s
Anglo California
fee. In Denicke v.
corporation
tions
and settle
Cir.),
(9
Bank,
cert.