James D. Cox
This chapter examines several mechanisms—pretrial hearings, the derivative suit’s demand requirement, and settlements—that exist for screening shareholder suits. As this chapter details, pretrial hearings and the demand requirement often work fairly effectively, providing courts with an early opportunity to assess a suit’s quality. In contrast, approval of settlements is a far less effective approach to screen shareholder suits. Even outside the specific context of disclosure-only settlements, judges are in a poor position to assess the quality of a settlement at a settlement hearing, given the nonadversarial nature of the process and the frequent disconnect between the allegations in the complaint and the terms of the settlement. As a result of these concerns, the author argues that judges should withhold approval of the settlement and deny attorneys’ fees if they have reason to believe that the settlement does not provide tangible benefits to the corporation or the class.