§ 3.08 Settlement

• Jurisdiction: Washington

§ 3.08 SETTLEMENT

[1] Prerequisites for Settlement

[a] Court Approval

A shareholder derivative action may not be dismissed or settled without court approval. CR 23.1. The purpose of this requirement is to prevent private settlement of a derivative claim where the shareholder-plaintiff and the attorney personally profit to the exclusion of the corporation and other shareholders. See 7C Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, FEDERAL PRACTICE AND PROCEDURE § 1839 (3d ed. 2007) ("Wright & Miller").

Comment: The requirement for court approval potentially collides with a quirk in Washington law that allows an "action" to be commenced by service alone, subject to the defendants' right to demand that the complaint be filed with the court within 14 days. CR 3(a). Although CR 23.1 states that a court must review and approve any derivative action that is "brought," it does not specify whether service alone is considered "bringing" an action or whether to "bring" an action a plaintiff must "file" it with a clerk of court. Therefore, settlements of served-but-never-filed shareholder demands potentially would not require court approval (or notice to other shareholders). This is likely to be an academic concern only, as defendants in a derivative action will want to insist that the complaint be filed so that the settlement (including certification of a class for settlement purposes) will be approved and be binding on other shareholders who might consider pursuing derivative claims.

Washington's CR 23.1 states that a derivative action "shall not be dismissed or compromised without the approval of the court." The Washington rule is "virtually identical" to Federal Rule of Civil Procedure ("FRCP") 23.1. 3A Elizabeth A. Turner, WASHINGTON PRACTICE CR 23.1 (7th ed. 2021). Washington courts therefore look to federal court interpretation of FRCP 23.1 for guidance in interpreting CR 23.1. RCL Nw., Inc. v. Colorado Res., Inc., 72 Wn. App. 265, 271, 864 P.2d 12 (1993).

The WBCA likewise provides that a shareholder derivative proceeding "may not be discontinued or settled without the court's approval." RCW 23B.07.400(3). Unlike CR 23.1, which unequivocally requires notice to shareholders, the statute requires notice only if the court determines that the settlement "will substantially affect the interest of the corporation's shareholders or a class of shareholders." Id.

[b] Notice

In addition to court approval, CR 23.1 requires that notice of a proposed settlement be given to shareholders "in such manner as...