As previously reported here, shareholder derivative litigation is currently pending against certain Brocade directors and officers in California state court and in the United States District Court for the Northern District of California. Brocade has now agreed to hire plaintiffs' counsel as co-counsel to represent Brocade's special litigation committee in the derivative litigation. In return, the individual shareholder plaintiffs and their counsel agreed to cede control over the derivative suit to the special litigation committee. For a copy of the agreement, please click here.

Although this is not an unheard of means for a company to address pending derivative suits, it is unusual, given that corporations and their defense counsel are frequently not amenable to working alongside plaintiff's counsel. Another roadblock to such resolution is often that, whereas the plaintiffs' attorneys' fees in a derivative action may be potentially subject to coverage by a corporation's D&O insurance, payments to counsel hired by a corporation’s special litigation committee generally are not. This may not have been an issue in the case of Brocade, if it exhausted its D&O insurance in the defense and $160 million settlement of recent backdating securities class action suits.

This form of resolution has certain advantages for the corporation and the plaintiff's counsel. By teaming up with plaintiffs’ counsel, the Special Litigation Committee has greater control over the litigation. Under the agreement, the Special Litigation Committee retains exclusive authority to determine how to proceed with respect to the derivative actions, including dismissing the actions.

The two plaintiffs' firms retained as co-counsel are provided clear compensation incentives. Subject to court approval, the firms will be paid $8 million for services performed up to the date of the agreement, and a contingency fee on a sliding scale for amounts recovered after that date. The fees could be substantial. For example, a recovery of $350 million could net the two firms about $87.5 million, at the discretion of the Brocade special litigation committee.