In In re Hewlett-Packard Co. Shareholder Derivative Litigation, No. 15-16688, 2017 BL 425301 (9th Cir. Nov. 28, 2017), the United States Court of Appeals for the Ninth Circuit affirmed the district court’s approval of Hewlett-Packard Company’s (“Defendant”) settlement, despite objections from two shareholders, A.J. Copeland and Harriet Steinberg, (“Plaintiffs”). The Ninth Circuit held the district court did not abuse its discretion in approving the settlement.

After extensive due diligence, Defendant failed to acquire Autonomy Corporation which resulted in a derivative suit by shareholders. In response, the board created a demand review committee (“DRC”) to investigate the actions of Defendant’s officers. The DRC concluded the officers were not grossly negligent and recommended settling the suit. The board members voted to accept the DRC’s settlement recommendation, which only included votes by those members that did not participate in the decision to acquire Autonomy.

The settlement required Defendant to implement corporate governance reforms, in exchange for a waiver of claims related to the failed acquisition. Plaintiffs objected to the proposed settlement, and the district court held a hearing to address the objections. The district court found Plaintiffs’ case was unlikely to withstand a motion to dismiss, and the settlement agreement was fair, reasonable, and did not involve fraudulent negotiations. Accordingly, the district court approved the settlement. On appeal, Plaintiffs alleged the district court abused its discretion, and Defendant gave insufficient notice of the settlement by not sending it by direct mail.

The relevant factors for determining fairness, adequacy, and reasonableness of a proposed settlement include “strength of the plaintiff’s case, the risk, expense, complexity, likely duration of further settlement, stage of the proceedings, experiences and views of counsel, and the reaction of class members.” Courts will approve nonmonetary settlements when a causal connection exists between the corporate benefit and the derivative lawsuit. Additionally, the business judgment rule governs the strength of shareholder claims. Under the rule, shareholders can withstand dismissal by showing the directors were 1) not disinterested and independent, and 2) did not make a valid business judgment.

The court agreed that Plaintiffs’ claims lacked merit. First, Defendant’s board of directors consisted mostly of outside directors, who were exempted from the duty of care by Defendant’s corporate charter. Second, the directors’ actions were likely valid under the business judgment rule, and no evidence existed that any directors knowingly violated their duties. Specifically, Defendant hired outside advisors to review the proposed acquisition and no evidence indicated any director benefited from the transaction. Further, the DRC conducted an extensive investigation before making the settlement recommendation, and the directors did not participate in the vote to accept the DRC’s recommendation.

The court held the settlement agreement was reasonable and fair because it included detailed guidelines for Defendant to follow in future business acquisitions and gave shareholders the right to enforce the terms. Additionally, Defendants admitted the lawsuit influenced reform, which indicates a causal connection exists between the lawsuit and corporate benefit. The court determined no evidence of fraud existed. Finally, the court found that three months advance notice, publishing in relevant newspapers, filing an 8-K, and displaying notice on Defendant’s website, was sufficient to appraise Plaintiffs of their rights to object.

For the reasons above, the court affirmed the district court’s approval of the settlement.

The primary materials for this case may be found on the DU Corporate Governance website.