The Permissible Scope of Claims to be Released in Settlements of Shareholder Class Actions

May 21, 1996

Virtually all shareholder class actions and derivative suits that survive dismissal or summary judgment are settled. From the defendant's perspective, the release to be given is the most important provision in the settlement of a class action or derivative suit. The release not only resolves the pending suit, but also provides protection against future litigation. Careful attention therefore should be given to drafting the release.

The defendant of course should seek the broadest release possible in terms of the scope of the claims to be released. While in some cases the plaintiff (and plaintiff's counsel) will not oppose a broad release, other times the scope of the release is the subject of heated negotiations. Regardless of the plaintiff's position, however, the derivative or class action settlement embodying the release must pass judicial scrutiny and overcome any objections by shareholders.

Many issues arise in connection with drafting releases of claims in settlements of shareholder class and derivative suits: What claims may be released? Is a "general release" proper? May a release include claims unrelated to the matters that are the subject of the action? May a federal court approve a release of state law claims not asserted in the federal action? May a state court judgment release claims that fall within the exclusive jurisdiction of the federal courts? This article discusses the permissible scope of claims that may be released in settlements of shareholder class actions and derivative suits and discusses the United States Supreme Court's recent decision in Matsushita Electric Industrial Co. v. Epstein, which answers the last question.

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