A Fiduciary’s Personal Benefit Can Preclude the Approval of A Settlement Agreement if the Personal Benefit is Not Fair and Reasonable
By: Megan Wotherspoon and Calvin Kennedy
By letter-order dated January 14, 2016, Vice Chancellor John W. Noble found that a fiduciary’s self-dealing and personal benefit may preclude the approval of a settlement agreement. By this order, the court refused to approve the proposed settlement because of the equity buyback provision made available only to the plaintiff fiduciary.
In Smollar v. Potarazu, the plaintiff Marvin Smollar (“Smollar”) brought a derivative action on behalf of nominal defendant VitalSpring Technologies, Inc. (“VitalSpring”) against defendant Sreedhar Potarazu, VitalSpring’s Chief Executive Officer (“Potarazu”). Following litigation of the matter, a settlement agreement was agreed to between the parties and submitted to the court for approval (the “Settlement Agreement”). In addition to the relief sought on behalf of VitalSpring, the Settlement Agreement granted Smollar, but not other VitalSpring stockholders, the right to sell Smollar’s shares in VitalSpring back to VitalSpring for the same amount he had purchased it fifteen years ago (the “Buyback Provision”). Other VitalSpring stockholders accordingly objected to the Settlement Agreement and argued that Smollar engaged in a form of self-dealing while serving as a fiduciary.