Shearman & Sterling LLP | M&A Litigation Blog | Central District of California Denies Motion to Set Aside Judgment, Suggesting that Forum-Shopping May Have Motivated Litigants’ Conduct<br >  
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  • Central District of California Denies Motion to Set Aside Judgment, Suggesting that Forum-Shopping May Have Motivated Litigants’ Conduct
     
    08/29/2016
    On August 17, 2016, Judge George H. King of the United States District Court for the Central District of California denied a joint motion to vacate the court’s prior dismissal of a shareholder derivative action so that the court could approve a proposed settlement.  In re CytRx Corp. S’holder Deriv. Litig., 14-6414-GHK-PJW, Dkt. 109 (C.D. Cal. Aug. 17, 2016).  Judge King found no grounds for vacatur and openly questioned whether forum-shopping—specifically, an attempt to avoid the Delaware Court of Chancery’s scrutiny of a proposed settlement—motivated the parties’ attempt to revive the California action.  This ruling highlights the impact of the Chancery Court’s increasing disfavor towards disclosure-only settlements of shareholder actions, and the alertness of other forums to litigants’ efforts to “avoid the glare of the Delaware Chancery Court’s spotlight.”

    Plaintiffs, derivatively and on behalf of CytRx, filed the underlying action against several of the company’s current and former directors, alleging tort and fiduciary causes of action arising from defendants’ purported involvement in an alleged stock pump-and-dump scheme.  Defendants successfully moved to dismiss the California complaint on forum non conveniens grounds, arguing that CytRx’s exclusive forum-selection bylaw barred derivative suits filed in courts other than the Delaware Chancery.  Following dismissal, other CytRx stockholders filed suit in Delaware.  Gordon Niedermayer v. Steven A. Kriegsman, C.A. No. 11800-VCMR.  Plaintiffs appealed the dismissal of the California action but shortly thereafter reached a settlement with defendants and, following dismissal of the appeal without prejudice (at the direction of the appellate court’s mediator), moved the California court for preliminary approval of the proposed settlement.  Defendants, meanwhile, successfully moved the Delaware Court of Chancery to stay the competing case pending the California court’s ruling on the proposed settlement.  However, on May 31, 2016, Judge King denied plaintiffs’ motion for preliminary approval and declined to reinstate the action.  Plaintiffs subsequently moved to set aside the judgment pursuant to Federal Rule of Civil Procedure 60(b)(6) so that the court could evaluate the proposed settlement, and defendants joined the motion. 

    Applying the “equitable balancing test” prescribed by American Games, Inc. v. Trade Products., Inc., 142 F.3d 1164 (9th Cir. 1998), the Court concluded that none of the relevant factors weighed in favor of vacatur.  Most significantly, Judge King rejected plaintiffs’ contention that their motive for setting aside the judgment was the desire to have their proposed settlement evaluated by a court fully familiar with the allegations involved.  Noting that “[t]he Delaware Court of Chancery has gained a reputation for rejecting shareholder class action and derivative settlements that do not have a monetary component yet include a broad release of claims and an award of attorneys’ fees, similar to the proposed settlement here,” the Court inferred that the parties’ motivation for seeking vacatur might instead be forum-shopping.  Judge King found that inference “all the more reasonable” given that plaintiffs’ counsel had recently failed to receive approval from the Chancery Court of a disclosure-only settlement in Acevedo v. Aeroflex Holding Corp., C.A. No. 9730-VCL (Del. Ch. July 8, 2015) (transcript).  Ruling that the balance of the equities weighed in favor of leaving the judgment of dismissal in place, the Court denied plaintiffs’ motion. 

    Pursuant to the Ninth Circuit mediator’s order, plaintiffs may reinstate their appeal of the forum non conveniens dismissal by September 14, 2016.  

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