The options backdating-related shareholder derivative action against several current and former board members of Glenayre Technologies Inc., settled for certain corporate governance changes at the company and the defendants' agreement not to challenge a plaintiff's counsel fee award request of $775,000. However, as with all shareholder derivative settlements, the settlement was subject to court approval. Plaintiff's counsel urged to the court to approve the settlement and the $775,000 fee award because the litigation against Glenayre's current and former board members led the company to adopt a number of significant corporate reforms and, in any event, Glenayre's D&O insurers, and not Glenayre itself (or Glenayre's current and former board members), would pay for the fee award.

NY Supreme Court Justice Herman Cahn in Gusinsky v. Bailey, 603126/06, approved the settlement but rejected plaintiff's counsel's request for any fee award. Justice Chan held that while attorneys' fees "may be appropriately awarded" for substantial nonmonetary benefits, "here ... there are insufficient benefits obtained for the corporation or its shareholders to warrant an award" of counsel fees. Justice Cahn noted that the only benefits secured by the class "appear to be some minor changes in corporate governance.." and that "there are insufficient benefits obtained for the corporation or its shareholders to warrant an award" of fees.

Interestingly, Justice Cahn refused to approve any fee award to plaintiff's counsel even though it was agreed to by the parties and Glenayre's D&O insurer was expected to pay the fee award. Justice Cahn explained that even thought the D&O insurer would pay the fee award, "the Court is not unmindful of the fact that insurance payments are ultimately paid for by the premiums of the insured, and other insureds." Because the company received no real benefit from the shareholder derivative action, Justice Cahn found that any payment that would ultimately come from the company or the shareholders would not be justified.

This decision is good news for corporations and their D&O insurers, who often receive significant plaintiff fee award demands from plaintiff's counsel to settle shareholder derivative actions. With the courts acting as gatekeepers in approving the shareholder derivative settlements, corporations and their D&O insurers can take some comfort that the fee award that is approved will bear some relationship to the merits of the case and the consideration ultimately received by the company as a direct result of the shareholder derivative action.