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In re American Capital Shareholder Derivative Litigation

United States District Court, Fourth Circuit

June 26, 2013

IN RE AMERICAN CAPITAL SHAREHOLDER DERIVATIVE LITIGATION.

MEMORANDUM OPINION

PETER J. MESSITTE, District Judge.

The parties in this consolidated shareholder derivative litigation involving American Capital, Ltd., ("American Capital") have submitted to the Court a Notice and Motion for Preliminary Approval of Derivative Settlement (Paper No. 38). The Court previously GRANTED the Motion, and preliminarily approved the Proposed Settlement Agreement (Paper No. 45). This Opinion elaborates upon the reasons for the Court's approval.

I.

Maria Saenz Briones and Louis Britt sued the Board of Directors of American Capital for breach of fiduciary duty and unjust enrichment. The Consolidated Verified Shareholder Derivative Complaint accuses the Board of "affirmatively, expressly, and repeatedly" misrepresenting American Capital's ability to pay dividends, which Plaintiffs claim was the " raison d'etre " for the company's existence. As the Board continued to assure investors of American Capital's ability to pay its dividends, the company's share price rose, which Plaintiffs claim triggered multiple rounds of stock sales by various members of the Board. American Capital, it turned out, could not pay some of its dividends; and when the truth came out, the share price plummeted, causing substantial losses to the company and its shareholders. Certain members of the Board, however, had already made substantial sums of money by cashing in on American Capital's artificially inflated price. More importantly, the Complaint alleged that at least some members of the Board knew or should have known about American Capital's inability to pay its dividends.

Although Defendants filed a motion to dismiss to the Complaint, a tentative settlement agreement was reached prior to the filing of Plaintiffs' response. The parties represent that they have engaged in confirmatory discovery and significant arbitration regarding the size of the plaintiffs' fee award.

The instant shareholder derivative litigation is related to a class action direct lawsuit initiated by eligible shareholders against members of the Board; that suit ultimately settled in 2012 for $18 million.

II.

Factual Background

What follows are the key components of the Proposed Settlement Agreement:

• Defendants receive a total release as to all claims that could have been brought against Defendants arising out of the same events;
• Plaintiffs' counsel will be awarded $710, 000 in attorneys' fees by Defendants' insurers;
• Each of the named Plaintiffs will receive an award of $1, 000;
• Defendants admit no fault;
• "Should the Board of Directors fail to be comprised of a majority of independent directors, as such term is defined at the time by the rules of the NASDAQ stock exchange, " American Capital will establish a Dividend ...

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