Does A Plaintiff In A Derivative Action Have A Protectable Interest?

Allen Matkins

Allen Matkins

When allegations of corporate misfeasance surface at public companies, derivative actions are sure to follow.  Often, actions will be filed in both state and federal court.  This is what happened when "sexual misconduct" claims were made made public against the former CEO of Wynn Resorts.  In that case, multiple plaintiffs filed derivative claims in federal and state courts.  After the state court plaintiffs' cases were consolidated, a settlement was reached.  The federal plaintiffs  then entered into stipulation for dismissal with prejudice.  When the motion for dismissal was brought before U.S. District Judge Kent J. Dawson, one of the plaintiffs in a related suit, a Mr. Gaj, tried to intervene to oppose the dismissal.  

Rule 24 of the Federal Rules of Civil Procedure provides for intervention as of right when the following four conditions are met:

  1.  the applicant must timely move to intervene;
  2. the applicant must have a significantly protectable interest relating to the property or transaction that is the subject of the action;
  3. the applicant must be situated such that the disposition of the action may impair or impede the party's ability to protect that interest; and
  4. the applicant's interest must not be adequately represented by existing parties.

Judge Dawson's ruling addressed each of these, but today's post focuses on the second - whether Mr. Gaj had a "protectable interest".   Mr. Gaj argued that he did because is a shareholder.  Judge Dawson disagreed:

"The corporation is 'the true party in interest.'  Arduini v. Hart, 774 F.3d 622, 637 (9th Cir. 2014).  Gaj himself does not have a protectable interest.  Gaj represents the corporation, and the corporation has already reached a settlement.  The state court settlement was negotiated by adequate representation that considered the exact claim Gaj is attempting to litigate in his pending federal suit.  The corporation's interests have been met and neither Gaj nor the corporation has a protectable interest here.  Gaj fails to meet this requirement for intervention."

Broussard v. Hagenbuch, 2021 U.S. Dist. LEXIS 5627 (D. Nev.).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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