When settling a class action, defendants are primarily concerned with achieving a final resolution at a reasonable cost – They are usually not as concerned with the manner in which the settlement funds will be eventually distributed among class members. The recent decision of the Ontario Superior Court of Justice in Zaniewicz v Zungui Haixi Corporation highlights that all parties may want to ensure that there is a fair distribution plan in order to secure smooth court approval of the settlement.

The Decision

In Zaniewicz, the plaintiffs asserted common law tort and statutory claims against Zungui, its former directors and officers, its auditors and a group of underwriters regarding the sale of Zungui’s shares in the primary and secondary markets. Prior to certification, the parties reached separate settlements, each of which was subject to court approval. An experienced class action judge, Justice Perell, approved the settlement agreements on August 27, 2013. However, he did not approve the proposed distribution plan. Instead, he varied the proposed plan and approved the modified version. Significantly, the settlement agreements provided:  

The settlement funds will be distributed in accordance with [a distribution plan] that is in a form satisfactory to the defendants or as fixed by the court.

Justice Perell stated that a distribution plan should be approved if the plan is fair, reasonable and in the best interests of class members. After reviewing the proposed distribution plan (which was objected to by a lone class member), Justice Perell determined:  

Had the settlement agreements…not left it to the court to ultimately determine what is an appropriate plan of distribution, I would not have approved the settlements, because I do not think the proposed [plan of distribution] is fair and reasonable and in the best interest of the class.

Justice Perell’s concern with the proposed distribution plan was that the certified class included individuals who purchased Zungui’s shares on a certain date and those individuals would have been subject to deemed releases. However, the proposed distribution plan excluded those individuals from receiving any benefits. In Justice Perell’s view, in the circumstances of that case, this was inappropriate and unfair. As a result, Justice Perell varied the proposed distribution plan and provided for the distribution of benefits to all class members.

Implications

Although a proposed distribution plan is generally not a primary concern for defendants or their counsel, this case illustrates that it could be a concern since it can prevent the approval of settlement. Factors that defendants and their counsel can consider are:  

  1. whether the entirety of the settlement agreement, in all the circumstances, is fair, reasonable and in the best interest of the class – including the proposed distribution plan; and
  2. how to draft the settlement agreement – do defendants want to agree in advance that a distribution plan may be fixed by the court in order to have a smooth settlement, or do they wish to retain “final say” on who gets their settlement funds.