Opinion
B188228
4-24-2007
FELIX YIP et al., Plaintiffs, v. SAMUEL K. ZIA et al., Defendants and Respondents; CHI LAM et al., Objectors and Appellants. THOMAS LAM et al., Plaintiffs, v. SAMUEL K. ZIA et al., Defendants and Respondents; CHI LAM et al., Objectors and Appellants.
Law Offices of David J. Wilzig and David J. Wilzig for Objectors and Appellants. Klika, Parrish & Bigelow, G. Peter Klika and Franklin T. Bigelow, Jr., for Defendant and Respondent Samuel K. Zia. Law Offices of Uzzell S. Branson III and Uzzell S. Branson III for Defendant and Respondent Allied Physicians of California. Law Offices of Paul A. Beck and Paul A. Beck for Defendant and Respondent Network Medical Management, Inc. Weston, Benshoof, Rochefort, Rubalcava & MacCuish, Jonathan M. Gordon, James D. Sloan and Diana Chen for Defendant and Respondent James Chang.
NOT TO BE PUBLISHED
In these consolidated appeals, Chi Lam, Erlinda Koo, and Wen T. Chiang (Objectors) appeal an order approving the dismissal of two related shareholder derivative actions after the trial court approved a settlement of both actions. Objectors contend the settlement unfairly allows the plaintiffs to gain majority control of both corporations and the court approved the settlement despite a conflict of interest between the plaintiffs and the corporations whose interests they purportedly represent. The defendants refute those contentions and contend Objectors have no standing to appeal and appealed from nonappealable orders. We conclude that the order approving the dismissals is appealable, that Objectors have standing to appeal the order, and that the settlement approval was an abuse of discretion.
FACTUAL AND PROCEDURAL BACKGROUND
1. Parties
Allied Physicians of California (APC) is an independent practice association and a professional medical corporation. APC contracts with health insurers to deliver health care services. Network Medical Management, Inc. (NMM), is a corporation that provides management services to medical organizations. The shareholders of APC formed NMM in 1994. NMM was merged into APC in 1995, and became a separate corporation again in 1996 when shares of NMM were distributed to APCs shareholders.
Samuel K. Zia was chairman of the board of directors and chief executive officer of both APC and NMM, and owned over 30 percent of the shares of each corporation. James Chang was chief operating officer of APC and chief financial officer and a director of NMM, and owned approximately four percent of the shares of NMM. Objectors were directors of NMM until October 2005, each owned shares of both corporations, and they collectively owned approximately eight percent of the shares of each corporation.
2. Management Services Agreements
APC and NMM entered into a Management Services Agreement in 1994 in which NMM agreed to provide management and administrative services to APC for a monthly fee of 10 percent of APCs gross revenues. They entered into a new Management and Administrative Services Agreement in 1997 (1997 MSA) providing for greater compensation to NMM. They entered into an Amended and Restated Management and Administrative Services Agreement in 1999 (Amended MSA) providing for still greater compensation to NMM, including 25 percent of all revenues from contracts with health insurers, a monthly graduated flat fee, a monthly "bonus" payment of five percent of APCs gross revenue, and reimbursement of certain expenses.
3. Yip v. Zia
Eleven APC shareholders, collectively owning approximately 30 percent of APCs shares of stock, filed a verified complaint in December 2004 against Zia, Chang, APC, NMM, and five other individuals (Yip v. Zia (Super. Ct. L.A. County, No. BC325537) (Yip)). The plaintiffs first amended verified complaint filed in December 2004 alleged that the compensation paid to NMM under the Amended MSA was excessive and that the primary beneficiary of the excessive compensation was Zia, that other APC directors also had benefited personally at the expense of the corporation, and that NMMs services to APC were substandard. It alleged 14 counts by the plaintiffs derivatively on behalf of APC, including counts one through seven for rescission of the Amended MSA and 1997 MSA, count eight alleging NMMs breach of the Amended MSA, counts nine and ten alleging Zias breach of fiduciary with respect to both the Amended MSA and over $224,648 in loans by APC to corporations owned by Zia (count ten is also against Chang), count eleven to invalidate a section of APCs bylaws and remove Zia as a director, count twelve to remove Zia and other directors, count thirteen to invalidate the prior APC election of directors and order a new election, and count fourteen to invalidate the Amended MSA, the Shareholder Agreement, and a restriction printed on APCs share certificates. Counsel for the plaintiffs was Nelson E. Brestoff.
The plaintiffs named in the first amended complaint are Felix Yip, Thomas Lam, Paul Liu, Eddie Hu, Lakhi Sakhrani, Dennis Chan, Kenneth Sim, Wing Chan, Terry Lee, Raffi Minasian, and Vincent Yu.
APC moved for an order requiring the plaintiffs to furnish a bond on the ground that there was no reasonable possibility that the action would benefit APCs shareholders (Corp. Code, § 800, subd. (c)). The plaintiffs did not contest the motion and instead voluntarily furnished a $50,000 bond in February 2004. The parties stipulated to a protective order to prevent disclosure of confidential information. The individual defendants other than Zia and Chang jointly demurred to the first amended complaint in February 2005. APC, NMM, Zia, and Chang each separately demurred, and Zia joined in some of the other demurrers. The plaintiffs through discovery obtained approximately 17,000 pages of documents from the auditors of APC and NMM in March 2005. Before the hearing on the demurrers, seven of the Yip plaintiffs commenced a second action.
4. Lam v. Zia
Seven NMM shareholders, collectively owning approximately 30 percent of NMMs shares of stock, represented by Brestoff, filed a verified complaint in April 2005 against Zia, three corporations owned by Zia, Chang, NMM, APC, a subsidiary of NMM known as Physicianquest.com, Allied Professional Networks, Inc., each of the three Objectors, and two other individuals (Lam v. Zia (Super. Ct. L.A. County, No. BC331468) (Lam)). The complaint alleged that the minutes of meetings of NMMs board of directors were falsified to state that the board had approved a $10,488 payment to Zia and had forgiven debts totaling $953,815.25 that Zia owed to the corporation. It also alleged that NMM made $706,773 in unsecured loans to Physicianquest.com and that the losses of Physicianquest.com over a five-year period exceeded $1 million. It alleged that Zia, Chang, and Chi Lam were directors of both NMM and Physicianquest.com and shareholders of Physicianquest.com, that they received $ 273,000 in directors fees from Physicianquest.com during the same five-year period, and that they failed to disclose to NMMs board of directors their financial interests in Physicianquest.com.
The named plaintiffs are Thomas Lam, Felix Yip, Paul Liu, Eddie Hu, Lakhi Sakhrani, Terry Lee, and Vincent Yu. Each of the Lam plaintiffs is also a plaintiff in Yip.
The complaint alleged 11 counts, including counts one, two, and three for rescission of ultra vires actions, relating to the alleged payment to Zia and debt forgiveness; counts four through seven alleging that Zia, Chang, Objectors, and others breached their fiduciary duties owed to NMM in connection with those same transactions and the loans to Physicianquest.com; count eight against fictitious defendants for breach of fiduciary duty, alleging the usurpation of a corporate opportunity involving a joint venture; counts nine and ten for rescission of two agreements between NMM and Zia and rescission of the management services agreements; and count eleven for an accounting of NMM. The plaintiffs alleged all counts other than counts six and seven derivatively on behalf of NMM. The plaintiffs did not serve the complaint on any defendants.
Brestoff later declared, in connection with NMMs motion to disqualify him as counsel for the plaintiffs, that his initial fee agreement with the Lam plaintiffs included a waiver of potential conflicts stating: "Some of the Clients are also shareholders in both APC and NMM. This is an actual conflict of interest, not between individuals but between ones own interests. The shareholder derivative lawsuit, if successful, would benefit APC but harm financially NMM. An individual Client with shareholder interests in both APC and NMM would be benefitted by success for APC but harmed by detriment to NMM. Each such Client hereby acknowledges and WAIVES this conflict of interest."
5. Stay, Mediation, and Motion for Settlement Approval
On April 11, 2005, at the hearing on the demurrers to the plaintiffs complaint in Yip, the court continued the hearing and stayed both actions to allow the parties an opportunity to engage in mediation. The plaintiffs in both actions filed a joint statement of related cases that same day stating that the two actions involved several common plaintiffs and defendants and similar allegations. They stated that both count seven in Yip and count ten in Lam sought to invalidate the management services contract between APC and NMM on the ground that it "has an illegal object, namely to permit NMM to control APC in violation of the ban against the corporate practice of medicine." The court designated the two actions related and ordered the Lam complaint to be sealed pursuant to the defendants request on April 26, 2005.
Some of the named parties attended a mediation on June 1 and 2, 2005. Objectors represent that they attended the second day of mediation at the invitation of the mediator, although they were not represented by counsel. Ten of the eleven plaintiffs in the two actions and Zia executed a Settlement Term Sheet dated June 2, 2005, providing for Zia to convey all of his interests in APC, NMM, and five other entities to the plaintiffs in exchange for monetary payments to Zia. The Settlement Term Sheet also provided for the termination of Zias employment and the termination of contracts with Zia and his companies, and for mutual general releases.
On July 20, 2005, the plaintiffs jointly in both actions moved for court approval of the settlement agreement and for entry of a judgment pursuant to the settlement (Code Civ. Proc., § 664.6). They argued, "The primary reason the Court should approve the [settlement agreement] is that the transaction was sufficient inducement for the Plaintiffs to end the litigation." The plaintiffs stated that after acquiring Zias stock under the terms of the settlement, they would own approximately 65 and 71 percent of shares of stock of APC and NMM, respectively. They argued that the settlement would deprive Zia of control of the corporations and prevent further abuse of powers, and that ending the litigation was in the best interests of the corporations. The plaintiffs requested the dismissal of both actions in their entirety and submitted a proposed judgment stating the terms of the proposed settlement and dismissing the actions. The motion was scheduled for hearing on August 26, 2005.
6. Second Mediation, Motion for Intervention, and Amended Settlement
A second mediation took place on July 20, 2005. Objectors attended the mediation, this time represented by counsel. On August 8, 2005, Objectors moved for leave to intervene as plaintiffs in Yip. They argued that as directors of NMM, they were interested in both Yip and Lam. The plaintiffs in both actions jointly opposed the motion arguing that Objectors had no direct interest in Yip. According to the parties, the court denied the motion but stated that any shareholder of either APC or NMM could file a written opposition to the plaintiffs motion for settlement approval.
No order ruling on the motion for intervention is included in the appellate record or listed in the register of actions.
The plaintiffs amended their motion to approve the settlement agreement on August 12, 2005. They represented that the plaintiffs, Zia, and APC had approved an unsigned Equity Interest Transfer and Litigation Settlement Agreement (Revised Settlement Agreement), and that the plaintiffs would file the signed agreement when it became available. The agreement provided for Zia to convey all of his interests in APC, NMM, and five other entities to the plaintiffs in exchange for $5 million. It also provided for the termination of Zias employment and contracts with Zia and his companies, and his resignation as an officer and/or director of each company. The Revised Settlement Agreement provided that all outstanding shares of NMM stock must be converted to shares of APC stock, except that Changs shares would not be converted because he was not a medical doctor. The agreement provided further that in lieu of conversion, NMM shareholders other than the plaintiffs and Zia could tender their shares for purchase by the plaintiffs within 30 days after court approval of the settlement for between $0.30 and $ 1.00 per share, and required Zia to provide $300,000 to fund the purchase and potentially more. The agreement provided for the mediator to administer this "buyout." The agreement also provided an option for APC shareholders who were not also NMM shareholders to sell their shares to APC for $1.00 per share. The agreement provided for the dismissal of Yip, Lam, and a third action (Zia v. AMG Properties, LLC (Super. Ct. L.A. County, No. GC035125) (AMG Properties)) and provided for mutual general releases between the parties to the agreement. Zia joined in the motion for approval of the Revised Settlement Agreement.
The plaintiffs filed an ex parte application on August 15, 2005, for permission to conduct shareholders meetings for both APC and NMM for the sole purpose of obtaining the shareholders approval of the proposed settlement. Chang opposed the application on the ground that the settlement did not include all parties to the litigation and that as a director of NMM he had insufficient information to evaluate the settlement.
The plaintiffs filed a second amendment to their motion to approve the settlement on August 18, 2005. They stated that some, but not all, of the parties had signed the Equity Interest Transfer and Litigation Settlement Agreement. The agreement provided was substantially the same as the prior proposed Equity Interest Transfer and Litigation Settlement Agreement, but with some changes. We will refer to the amended document as the Second Revised Settlement Agreement. It was signed by all of the plaintiffs in both Yip and Lam except Hu and Lee, by Zia, his wife, and his various companies, and by Liu on behalf of AMG Properties, LLC, and AMG, Inc. Zia joined in the second amended motion to approve the settlement agreement.
On August 18, 2005, the court granted the plaintiffs August 15 ex parte application and directed APC and NMM to give notice by first class mail not later than August 19, 2005, of shareholders meetings to be held on September 1, 2005. The court continued the hearing on the motion to approve the settlement to September 19, 2005.
7. Shareholder Meetings
Shareholder meetings of APC and NMM took place on September 1, 2005. The mediator, a retired federal magistrate judge, was elected by the shareholders to chair both meetings. The mediator filed a declaration on September 6, 2005, describing the history of the parties mediation efforts, the resulting agreements, and the shareholder meetings. A third party presented a letter of interest at the meeting offering to purchase all of the assets or shares of APC and NMM for between $16 million and $17.5 million, and another third party presented a letter of interest offering to purchase "the business and/or assets" of both corporations for a price to be determined based on per-patient multipliers. The mediator reported that the Second Revised Settlement Agreement was approved by votes of 83.28 percent of APCs voting shares and 77.07 percent of its outstanding shares, and 79.90 percent of NMMs voting shares and 75.81 percent of its outstanding shares.
8. Motion to Disqualify Counsel, Election of Directors, and Further Proceedings on the Motion for Settlement Approval
Objectors, NMM, and Chang opposed the motion to approve the settlement arguing, inter alia, that the proposed settlement benefited the plaintiffs and Zia but did not benefit the corporations or their shareholders and that the settlement violated Corporations Code requirements concerning mergers and reorganizations. The same parties also argued that the interests of the Yip plaintiffs as APC shareholders seeking to invalidate the Amended MSA conflicted with the interests of NMM, for which the Amended MSA is an important source of revenue, and that Brestoffs representation of shareholders of both corporations in the two derivative actions was prohibited as a simultaneous representation of parties with conflicting interests.
NMM filed a motion to disqualify the plaintiffs counsel on September 15, 2005, arguing that Brestoff could not simultaneously represent both the Yip plaintiffs in their effort to invalidate the Amended MSA, against the interests of NMM, and NMMs shareholders derivatively on behalf of NMM. NMM sought to disqualify the plaintiffs counsel in both Yip and Lam. The motion was scheduled for hearing on October 19, 2005. The plaintiffs opposed the motion arguing that their counsel represented only the plaintiffs individually and did not represent NMM.
After a hearing on the motion for settlement approval on September 19, 2005, the court took the motion under submission. The plaintiffs filed supplemental papers on September 22, 2005, supporting their valuation of NMMs shares. Zia filed a newly revised settlement agreement (Third Revised Settlement Agreement) the same day. Under the Third Revised Settlement Agreement, the conversion of NMM stock to APC stock is optional rather than mandatory, NMM shares tendered for sale in lieu of conversion are purchased by the corporation and retired rather than purchased for the plaintiffs, Zias $300,000 contribution for the purchase is made nonrefundable, and Zia is required to provide an additional $ 50,000 to each corporation. The Third Revised Settlement Agreement was signed by all of the plaintiffs in Yip and Lam other than Hu, by Zia, his wife, and his various companies, and by Liu, Thomas Lam, and Zia collectively on behalf of AMG Properties, LLC, AMG, Inc., and ZLL, LLC. Objectors, NMM, and Chang filed supplemental responsive papers opposing the amended settlement.
The court in an order filed on October 5, 2005, stated: "The Court has considered the supplemental papers and is preliminarily persuaded that the terms discussed therein support approval of the settlement agreement. The Court finds the financial materials sufficient to show that the corporations and their shareholders, on balance, will benefit from the settlement.
"However, the terms discussed in the supplemental papers amount to new terms, effectually raising a new settlement proposal. The Court will treat the supplemental papers as a new motion for approval of settlement and will decide the motion on shortened notice. In the interests of due process and fair play, the Court grants any party opposing the new proposal an opportunity to file opposition papers that solely address the merits of the agreement—i.e., whether and how the new terms do not benefit the corporations and the shareholders. Any opposition papers shall be filed and served on or before October 12, 2005. The Court is inclined at this time to decide the motion without oral arguments." The court later extended the time to oppose the motion for settlement approval to October 17, 2005, as requested by Objectors. Objectors, NMM, and Chang filed additional papers opposing the settlement.
APC filed an ex parte application on October 11, 2005, for permission to conduct shareholder meetings on October 25, 2005, to elect new directors for both APC and NMM. APC argued that the directors of both corporations were elected on October 7, 2004, for a one-year term that had expired, and that several directors had resigned. Zia joined in the application. The court granted the application.
The court granted the motion to disqualify plaintiffs counsel in an order filed on October 24, 2005. The court concluded that rescission of the Amended MSA, NMMs principal source of income, as requested in both Yip and Lam, would benefit APC but harm NMM. It therefore concluded that the interests of APCs shareholders actually conflicted with the interests of NMMs shareholders. It concluded further that Brestoff as counsel for the plaintiffs in these shareholder derivative actions owed a fiduciary duty to the corporations and the unnamed shareholders, and that the Lam plaintiffs written conflict waiver did not waive the conflict on behalf of the two corporations and their unnamed shareholders. The court stayed the order for 10 days to allow counsel an opportunity to seek extraordinary writ review.
The court also filed a minute order on October 24, 2005, approving the proposed settlement. The order stated: "[T]he court has considered the supplemental papers filed pursuant to the courts order of October 5, 2005. The court finds the arguments unavailing and insufficient to show that the corporations and shareholders, as a whole, will not gain from the settlement. As noted in the courts previous order, the new settlement terms and the financial materials in the record demonstrate that the corporations and shareholders will benefit. [¶] Therefore, the court hereby grants the motion and approves the new settlement proposal."
Objectors were voted out as directors of NMM on October 25, 2005, and several of the Yip plaintiffs were elected as directors at that time. The results of the APC board election do not appear in the appellate record.
9. Dismissals and Further Proceedings
The plaintiffs, still represented by Brestoff, filed an ex parte application requesting an order exonerating the plaintiffs bond, modifying the protective order, appointing the mediator as NMMs buyout administrator, and approving the entry of dismissals. Objectors opposed the application and objected to Brestoffs continued representation of the plaintiffs. The court in a signed order filed on November 3, 2005, granted the relief requested, with the exception of the requested modification of the protective order. The court concluded that dismissal was appropriate based on the approved settlement, regardless of the disqualification of the plaintiffs counsel. A minute order in Yip filed together with the signed order stated, "Pursuant to the terms of the order entered this date, dismissals of the above entitled action and related case BC331468 are entered this date." The clerk entered a dismissal in each action against all defendants on November 3, 2005, on request for dismissal forms submitted by the plaintiffs. The court did not enter a formal judgment.
NMM, represented by new counsel, filed a notice of withdrawal of its motion to disqualify plaintiffs counsel in December 2005. The notice stated that the motion was still pending when the actions were dismissed on November 3, 2005, because the 10-day stay had not expired. Objectors and Chang objected to the notice as an effort to purge the record after the court had heard and ruled on the motion to disqualify. Brestoff filed a declaration in response to the objections stating that he had been unfairly vilified, that Objectors had threatened separate litigation against him based on his dual representation of the plaintiffs in these actions, and that the court had determined that the settlement was in the best interests of both APC and NMM. No party filed any motion with respect to the notice of withdrawal, and the court made no ruling with respect to the notice.
10. Appeals
Objectors filed a single notice of appeal on December 21, 2005. The notice of appeal bears a double caption identifying both the Yip and Lam actions and states that the appeals are from both the order filed on October 24, 2005, approving the settlement and the dismissal of Lam ordered by the court on November 3, 2005. We consolidated the two appeals.
Objectors moved to disqualify Brestoff as plaintiffs appellate counsel, citing his disqualification by the superior court based on his concurrent representation of parties with conflicting interests. We granted the motion and disqualified Brestoff as appellate counsel for the plaintiffs in both actions. The plaintiffs have not obtained replacement appellate counsel and did not file a respondents brief.
Zia moved to dismiss the appeals. He argued that the actions were voluntarily dismissed and a voluntary dismissal is nonappealable, that Koo and Chiang accepted the benefits of the settlement by selling some of their shares of NMM pursuant to the buyout provision and therefore waived the right to challenge the order approving the settlement, and that Objectors had no standing to appeal. We denied the motion, but stated that the issues raised by the motion should be considered in light of the entire record and full briefing.
11. Other Litigation
Chi Lam and Koo filed a complaint against Zia on November 12, 2005 (Lam v. Zia (Super. Ct. L.A. County, No. GC035933)) alleging counts for breach of fiduciary duty and an accounting pertaining to their investments in APC, NMM, and other business entities. NMM, represented by Brestoff, filed a complaint against Chang on November 18, 2005 (Network Medical Management, Inc. v. Chang (Super. Ct. L.A. County, No. BC325537)), alleging counts for declaratory relief, breach of fiduciary duty, and restitution. Chi Lam filed a complaint against Brestoff, Brestoffs law firm, Zia, and the Lam plaintiffs on May 23, 2006 (Lam v. Brestoff (Super. Ct. L.A. County, No. BC352812)), and filed an amended complaint on August 1, 2006, alleging counts against the attorneys for legal malpractice and breach of fiduciary duty, a count for breach of fiduciary duty against Zia, and a count for breach of fiduciary duty against the Lam plaintiffs. Chi Lam alleges in that action that the settlement in the present actions was not in the best interests of NMMs shareholders, that Brestoff committed malpractice and breached his fiduciary duty owed to NMMs shareholders, and that Zia and the Lam plaintiffs colluded in the settlement against the interests of NMMs shareholders.
We previously granted Zias request for judicial notice of the complaint in Lam v. Zia, supra, No. GC035933.
We previously granted Zias request for judicial notice of the first amended complaint in Lam v. Brestoff, supra, No. BC352812 and Objectors request for judicial notice of a special motion to strike filed by the Lam plaintiffs as defendants in that action.
CONTENTIONS
Objectors contend (1) the settlement was tainted by the plaintiffs conflict of interest in their dual capacities as representatives of two corporations with conflicting interests and by their common counsels representation of plaintiffs with conflicting interests, the plaintiffs, rather than the corporations they represented as fiduciaries, received the principal benefits of the settlement, and the settlement was not fair and reasonable to the corporations; (2) the court approved the dismissal of both actions in its orders on October 24, 2005, and November 3, 2005, so the dismissals were "ordered by the court" (Code Civ. Proc., § 581d) and are appealable judgments; and (3) Objectors are aggrieved by the judgment and participated in the action below by opposing the motion for settlement approval, and therefore have standing in these appeals.
Zia disputes those contentions and contends (1) the dismissals were not "ordered by the court" (Code Civ. Proc., § 581d), and the voluntary dismissal of the two actions is not an appealable order; (2) Objectors sought no affirmative relief, are not aggrieved by the dismissals, were not parties of record in Yip, and have no standing to appeal in either action; (3) two of the three Objectors accepted the benefits of the settlement by participating in the buyback of NMMs shares and therefore waived the right to challenge the order approving the settlement; and (4) the appellate record is inadequate to demonstrate error because there is no reporters transcript of oral proceedings in connection with the settlement approval.
APC in its respondents brief makes some of the same arguments as Zia in support of the courts settlement approval and with respect to the lack of an appealable order or judgment, Objectors lack of standing to appeal, and inadequacy of the appellate record. NMM joins in the respondents briefs of Zia and APC.
Chang takes no position on the merits of order approving the settlement, but seeks to preserve his separate peace. Chang contends Objectors appeals are limited to challenging the fairness of the settlement as it relates to Zia and the consideration received by Objectors. Chang contends these appeals therefore cannot upset the finality of the dismissal of the actions against him.
The parties also assert other contentions that we need not address.
DISCUSSION
1. Court Approval of a Settlement in a Shareholder Derivative Action
A shareholder derivative action is an action brought by one or more shareholders to enforce the rights of the corporation against third parties when the corporation fails to enforce its own rights. Although shareholders nominally are the plaintiffs and the corporation is named as a defendant, the corporation is the real plaintiff and owner of the cause of action. "Because a corporation is a legal entity separate from its shareholders (Merco Constr. Engineers, Inc. v. Municipal Court (1978) 21 Cal.3d 724, 729 [147 Cal.Rptr. 631, 581 P.2d 636]), when a corporation has suffered an injury to its property the corporation is the party that possesses the right to sue for redress. (Gagnon Co., Inc. v. Nevada Desert Inn (1955) 45 Cal.2d 448, 453 .) If a corporation fails to pursue redress of an injury, a shareholder may file a derivative action on behalf of the corporation. The `derivative action is so called because the rights of the plaintiff shareholders derive from the primary corporate right to redress the wrongs against it. (Ibid.)" (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 183.)
"A shareholders derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, `the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock and property without any severance or distribution among individual holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets. [Citations.] `A stockholders derivative suit is brought to enforce a cause of action which the corporation itself possesses against some third party, a suit to recompense the corporation for injuries which it has suffered as a result of the acts of third parties. The management owes to the stockholders a duty to take proper steps to enforce all claims which the corporation may have. When it fails to perform this duty, the stockholders have a right to do so. Thus, although the corporation is made a defendant in a derivative suit, the corporation nevertheless is the real plaintiff and it alone benefits from the decree; the stockholders derive no benefit therefrom except the indirect benefit resulting from a realization upon the corporations assets. The stockholders individual suit, on the other hand, is a suit to enforce a right against the corporation which the stockholder possesses as an individual. [Citation.]" (Jones v. H. F. Ahmanson & Co. (1969) 1 Cal.3d 93, 107.)
A shareholder plaintiff in a derivative action sues on behalf of the corporation and in that capacity owes a fiduciary duty to the corporation and its shareholders. (Whitten v. Dabney (1915) 171 Cal. 621, 630-631; Heckmann v. Ahmanson (1985) 168 Cal.App.3d 119, 128-129; see Cohen v. Beneficial Loan Corp. (1949) 337 U.S. 541, 549 .) "He is a trustee pure and simple, seeking in the name of another a recovery for wrongs that have been committed against that other. His position in the litigation is in every legal sense the precise equivalent of that of the guardian ad litem. The guardian a[d]litem stands as the representative of some person incompetent to sue or be sued directly. He is appointed by the court to represent that incompetents interests; to prosecute or defend with the highest diligence and good faith. . . . The principles governing the conduct of a guardian ad litem are in full strictness applicable to the conduct of such a plaintiff stockholder." (Whitten, supra, at pp. 630-631; accord, Hogan v. Ingold (1952) 38 Cal.2d 802, 809-810.) Whitten stated further that a shareholder plaintiff in a derivative action acts in a "fiduciary capacity." (Id. at p. 631; accord, Hogan, supra, at pp. 810, 812.) Similarly, the United States Supreme Court in Cohen v. Beneficial Loan Corp., supra, 337 U.S. at page 549 stated, "a stockholder who brings suit on a cause of action derived from the corporation assumes a position, not technically as a trustee perhaps, but one of a fiduciary character."
A shareholder plaintiff in a derivative action must obtain court approval before settling and dismissing the corporations cause of action. (Whitten v. Dabney, supra, 171 Cal. at pp. 631-632; Ensher v. Ensher, Alexander & Barsoom (1960) 187 Cal.App.2d 407, 410.) A court must not approve such a settlement unless and until, "after scrutiny and examination, it shall be determined by that court that the corporations rights are fully protected." (Whitten, supra, at p. 632.) As in a class action, court approval of a settlement in a shareholder derivative action is required to ensure that the settlement is fair and reasonable to the corporation and its shareholders and that the settlement is not a product of fraud, overreaching, or collusion by the settling parties. (Robbins v. Alibrandi (2005) 127 Cal.App.4th 438, 449; cf. Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1800-1801 [class action].)
A court determining whether to approve a settlement in a shareholder derivative action must consider all of the relevant circumstances, including, without limitation, (1) the probability of success on the plaintiffs claims, (2) the difficulty and expense of enforcing those claims and likely duration of further litigation, (3) the stage of the litigation and extent of discovery completed, (4) the amount offered in settlement to the corporation and its shareholders, (5) the experience and views of competent counsel, and (6) the reaction of the corporation and its shareholders to the settlement. (cf. Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1801 [class action]; see Polk v. Good (Del. 1986) 507 A.2d 531, 536 [shareholder derivative action].) Although experienced and competent counsel can help to ensure that a settlement is fair and reasonable to the corporation, a settlement negotiated by a plaintiffs counsel affected by a conflict of interest cannot be presumed to be in the best interests of the corporation and its shareholders. (Cf. Robbins v. Alibrandi, supra, 127 Cal.App.4th at p. 449 [requiring careful consideration of a negotiated attorney fee provision in a shareholder derivative settlement due to the potential for abuse by plaintiffs counsel]; see In re Pacific Enterprises Securities Litigation (9th Cir. 1995) 47 F.3d 373, 378 ["If, however, the settlement negotiations are biased, or skewed by a conflict of interest, we cannot presume that the attorneys have reached a fair settlement"].) A settlement negotiated by a plaintiffs counsel who concurrently represents parties with conflicting interests is inherently suspect, and the court should subject such a settlement to heightened scrutiny.
Apart from calling into question the role of the plaintiffs attorney in the settlement, the conflict of interest here also raises serious doubts as to the plaintiffs ability to fairly and adequately act as representatives of the two corporations and the plaintiffs incentive to enter into a settlement on terms that are fair and reasonable to the corporations and all of the shareholders. A representative seeking class certification must show that he or she adequately represents the class and that the representatives interests are typical of, and not antagonistic to, those of the other class members. (Richmond v. Dart Industries, Inc. (1981) 29 Cal.3d 462, 470; J. P. Morgan & Co., Inc. v. Superior Court (2003) 113 Cal.App.4th 195, 212.) A court considering settlement approval before class certification, and before a determination is made as to the adequacy of representation, must scrutinize the settlement more carefully to guard against unfairness. (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 240; Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1803, fn. 9.) Although there is no express statutory requirement in California that a plaintiff in a shareholder derivative action must adequately represent the corporation and its shareholders (see Corp. Code, § 800, subd. (b) [stating, generally, that the plaintiff must be a shareholder or holder of voting trust certificates]; see also DeMott, Shareholder Derivative Actions Law and Practice (2003) Procedural Considerations, § 4:4, pp. 4-68 to 4-86 [discussing adequacy of representation in shareholder derivative actions under federal and state laws]), and no established procedure in California to make that determination in a shareholder derivative action comparable to a class certification hearing in a class action, we find the similarities between the courts role approving a settlement in a class action and its role approving a settlement in a shareholder derivative action compelling. Accordingly, we conclude that the adequacy of the plaintiffs representation of the corporation and its shareholders is an important consideration for the court in determining whether a settlement in a shareholder derivative action is fair and reasonable.
In contrast to Corporations Code section 800, subdivision (b)(1), Rule 23.1 of the Federal Rules of Civil Procedure (28 U.S.C.), governing federal shareholder derivative actions, expressly states, "The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association."
2. The Order Approving the Dismissals Is Appealable
The court approved the settlement in its order of October 24, 2005, and approved the entry of dismissals of both actions in its order of November 3, 2005. The clerk then entered dismissals on the request for dismissal forms provided by the plaintiffs. "`[T]he question, as affecting the right of appeal, is not what the form of the order or judgment may be, but what is its legal effect. " (Daar v. Yellow Cab Co. (1967) 67 Cal.2d 695, 698-699.) Although the court did not formally dismiss the actions in a signed order (see Code Civ. Proc., § 581d) and entered no formal judgment, we conclude that absent a formal judgment, the legal effect of the November 3 order granting the required approval to dismiss the actions was to dismiss the actions. We therefore conclude that the November order is in legal effect an appealable order of dismissal.
Code of Civil Procedure section 581d states, in pertinent part, "All dismissals ordered by the court shall be in the form of a written order signed by the court and filed in the action and those orders when so filed shall constitute judgments . . . ."
Rule 3.769 of the California Rules of Court establishes procedures for court approval of a class action settlement. Subdivision (h) states: "If the court approves the settlement agreement after the final approval hearing, the court must make and enter judgment. The judgment must include a provision for the retention of the courts jurisdiction over the parties to enforce the terms of the judgment." Although there is no comparable court rule requiring entry of a formal judgment with a provision for the retention of jurisdiction upon settlement of a shareholder derivative action, a formal judgment is appropriate to reflect the courts ruling and terminate the action, and the retention of jurisdiction to enforce the settlement would be advisable.
Objectors notice of appeal states that they appeal the order of October 24, 2005, approving the settlement as to both Yip and Lam and appeal the order of November 3, 2005, as to Yam only. We liberally construe the reference to the nonappealable October 24 order to encompass the later appealable order of November 3. (Cal. Rules of Court, rule 8.100(a)(2); Luz v. Lopes (1960) 55 Cal.2d 54, 59 ["notices of appeal are to be liberally construed so as to protect the right of appeal if it is reasonably clear what appellant was trying to appeal from"].) We therefore conclude that Objectors timely appealed the order of dismissal as to both Yip and Lam.
3. Objectors Have Standing to Appeal
Only a party aggrieved by the judgment or appealable order has standing to appeal. (Code Civ. Proc., § 902 ["Any party aggrieved may appeal in the cases prescribed in this title"].) A party who has an interest recognized by law that is adversely affected by the judgment or order is an aggrieved party. (County of Alameda v. Carleson (1971) 5 Cal.3d 730, 737; Cesar V. v. Superior Court (2001) 91 Cal.App.4th 1023, 1035.) The interest must be immediate and substantial, and not nominal or remote. (County of Alameda, supra, at p. 737; In re L. Y. L. (2002) 101 Cal.App.4th 942, 948.) Although standing ordinarily is limited to parties of record either named in the complaint or made parties through intervention, other persons aggrieved by the judgment or order also have standing to appeal in some circumstances. (County of Alameda, supra, at p. 736 [an aggrieved nonparty denied the right of intervention can appeal from the order denying intervention]; Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 235 [an unnamed class member who objected to a settlement has standing to appeal in a class action]; Trotsky v. Los Angeles Fed. Sav. & Loan Assn. (1975) 48 Cal.App.3d 134, 139-140 [same]; Marsh v. Mountain Zephyr, Inc. (1996) 43 Cal.App.4th 289, 295 [a nonparty who is bound by res judicata has standing to appeal]; see Devlin v. Scardelletti (2002) 536 U.S. 1, 6-11 [an unnamed class member who objected to a settlement in a class action is a party for purposes of appeal].)
Trotsky v. Los Angeles Fed. Sav. & Loan Assn., supra, 48 Cal.App.3d 134 held that an unnamed plaintiffs class member who appeared at the settlement approval hearing and objected to the settlement had standing to appeal the judgment approving the class action settlement. The court concluded that the appellant was aggrieved by the settlement approval over his objections, and stated that if the appellant were denied standing there would be no appellate review of the settlement approval. (Id. at pp. 139-140.) Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th 224 followed Trotsky and held that class members who objected to the settlement in the trial court had standing to appeal the judgment approving the class action settlement. (Id. at pp. 235-236.)
A shareholder derivative action seeks redress for an injury to the corporation, but affects the interests of the individual shareholders as well through their ownership of the corporation. The settlement of a derivative action presents unusually strong incentives toward settlement and a significant potential for collusion in settlement at the expense of the corporation and its shareholders. (See Bell Atlantic Corp. v. Bolger (3d. Cir. 1993) 2 F.3d 1304, 1310 & fn. 10; Coffee, Understanding the Plaintiffs Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions (1986) 86 Colum. L.Rev. 669, 714-716.) Careful judicial review of the fairness and reasonableness of a settlement is warranted to guard against this potential. The ability of unnamed shareholders to object to a settlement helps to protect against collusive settlements and, when an objection is made, encourages more careful judicial review of the settlement. The only meaningful opportunity for appellate review of the courts approval of a settlement in which both the plaintiffs and the defendants concur is in an appeal by an objecting shareholder. In these circumstances, to require an objecting shareholder to seek leave to intervene solely for the purpose of creating appellate standing would be a pointless formalism. (See Bell Atlantic, supra, at p. 1310 [so concluding]; Kim, Conflicting Ideologies of Group Litigation: Who May Challenge Settlements in Class Actions and Derivative Suits? (1998) 66 Tenn. L.Rev. 81, 132 [same]; but see Felzen v. Andreas (7th Cir. 1998) 134 F.3d 873, 876 [contra], affd. by an equally divided court sub nom. California Public Employees Retirement System v. Felzen (1999) 525 U.S. 315 (per curiam).)
In our view, a shareholder who objects to a settlement in the trial court is aggrieved by the courts approval of the settlement over the shareholders objection. The settlement and dismissal of the corporations claim has an immediate and substantial effect on the objectors interests as a shareholder. Moreover, allowing an appeal by an objecting shareholder facilitates appellate review of an important decision by the trial court that should not be immune from appellate review. Accordingly, although Objectors were named as parties only in Lam and not in Yip, we conclude that Objectors as shareholders who objected to the settlement are aggrieved parties with standing to appeal the order of dismissal in both actions. (Cf. Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 235; Trotsky v. Los Angeles Fed. Sav. & Loan Assn., supra, 48 Cal.App.3d at pp. 139-140.)
Continental Vinyl Products Corp. v. Mead Corp. (1972) 27 Cal.App.3d 543, cited by Zia, is not on point. Continental Vinyl Products held that the interest of a shareholder in the value of his shares of stock was not sufficiently direct to justify his intervention in an action by a bankruptcy trustee against debtors of the corporation. Continental Vinyl Products involved neither a shareholder derivative action, nor a motion for settlement approval, nor the question of standing on appeal, and therefore is distinguishable.
4. Chi Lam Did Not Voluntarily Accept the Benefits of the Judgment and Is Not Barred from Challenging the Order Approving the Settlement
The voluntary acceptance of the benefits of a judgment ordinarily bars a challenge to the judgment on appeal. An appellant is barred, however, only if the appellants acquiescence in the judgment was "clear and unmistakable," meaning the appellants acceptance of the fruits of the judgment was " ` "unconditional, voluntary, and absolute," " and only if the appellant would not be entitled to the benefits accepted in the event of a reversal. (In re Marriage of Fonstein (1976) 17 Cal.3d 738, 744.) An appellant is not barred if the appellant accepted the benefits of the judgment due to legal or economic compulsion. (Norco Delivery Service, Inc. v. Owens-Corning Fiberglas, Inc. (1998) 64 Cal.App.4th 955, 961-962; see Mathys v. Turner (1956) 46 Cal.2d 364, 366.)
Zia argued in his motion to dismiss the appeals that Koo and Chiang, but not Chi Lam, voluntarily sold some of their shares of stock of NMM pursuant to the settlement and therefore waived the right to challenge on appeal the order approving the settlement. Zia filed a declaration by the mediator stating that he served as administrator of the NMM buyout and that Koo and Chiang tendered 140,000 shares of stock for repurchase by NMM pursuant to the settlement. Koo and Chiang argued that they acted under economic compulsion.
Zia does not contend Chi Lam voluntarily accepted the benefits of the settlement or challenge the appeals by Chi Lam on this ground. We need not decide whether Koo and Chiang voluntarily accepted the benefits of the settlement because regardless of whether Koo and Chiang can prosecute these appeals, Chi Lam as a shareholder of both APC and NMM can do so. A dismissal of the appeals as to Koo and Chiang would in no way limit Chi Lams ability to prosecute these appeals, so the question of dismissal as to Koo and Chiang is moot.
5. The Settlement Approval Was Error
A trial courts approval of a settlement in a shareholder derivative action based on its consideration of the relevant factors involves an exercise of discretion. (Cf. Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1801.) Our task on appeal is not to reweigh those factors or substitute our own notions of fairness for those of the trial court. Rather, we only determine whether the record shows an abuse of discretion. (Cf. Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245; Dunk, supra, at p. 1802.) To the extent the courts ruling is based on improper criteria or incorrect legal assumptions, we review those questions of law de novo. (Linder v. Thrifty Oil Co. (2000) 23 Cal.4th 429, 436; Wershba, supra, at p. 235.)
The record clearly shows that the primary consideration under the settlement for release of the claims against Zia is not a monetary payment or other benefit in favor of the corporations, but the sale of Zias blocks of shares to the plaintiffs. In this manner, the plaintiffs through settlement of the corporations causes of action gain majority control of both APC and NMM. Regardless of whether the shares are sold to the plaintiffs at fair value or at a discount, the opportunity to purchase the shares and gain control of both corporations is a valuable benefit that is denied to other shareholders under the terms of the settlement. The amounts payable by Zia to the corporations and for the NMM buyout are modest compared to the valuable rights of corporate control bestowed on the plaintiffs. Thus, the settlement clearly favors the plaintiffs over the corporations and other shareholders.
The plaintiffs also acquire Zias interests in five other companies under the settlement. Although there is no meaningful information in the record about the value of those interests, the settlement excludes APCs and NMMs other shareholders from the opportunity to purchase those interests. The settlement also provides for the dismissal of Zias lawsuit against AMG Properties, LLC. Although there is no information in the record about that action, it appears that the dismissal of the action benefits Liu and Thomas Lam personally (both of whom, together with Zia, signed the settlement agreement on behalf of AMG Properties, LLC, and two other entities that apparently are involved in that action) but does not benefit APC or NMM.
The plaintiffs counsel acknowledged in his retainer agreement with the Lam plaintiffs the actual conflict of interest between the plaintiffs acting on behalf of APC and those acting on behalf of NMM. In light of counsels divided loyalties resulting from his concurrent representation of parties with conflicting interests, the settlement is inherently suspect, and counsels views on the benefits of the settlement to the corporations are unreliable and provide no assurance against unfairness to the corporations or collusion. The plaintiffs own conflict of interest in their dual capacities as representatives of the two corporations with conflicting interests also creates a significant and perhaps insurmountable risk of unfairness to one or both of the corporations. In our view, the conflict of interest affecting both the plaintiffs and their common counsel severely undermines any confidence in the fairness of the settlement to the corporations and other shareholders.
We conclude based on the present record that the other relevant factors cannot overcome the fundamental deficiencies that we have identified, and that the record discloses no reasonable basis to conclude that the settlement is fair and reasonable to the corporations and their shareholders. The defendants arguments as to the benefits of ending this costly litigation do not justify ending the litigation on terms so favorable to the plaintiffs, without adequate shareholder representatives, and with conflicted plaintiffs counsel. We conclude that the courts approval of the settlement was error.
We reject the defendants argument that the appellate record is inadequate to demonstrate error due to the absence of a reporters transcript of oral proceedings in connection with the motion for settlement approval. The absence of a reporters transcript of an evidentiary hearing precludes effective review of the sufficiency of the evidence. In those circumstances, the judgment is conclusively presumed correct as to all evidentiary matters. (Estate of Fain (1999) 75 Cal.App.4th 973, 992.) This rule is inapplicable here, however, because there is no indication that any oral testimony was presented at the hearings in connection with the motion for settlement approval.
Our conclusion that the courts approval of the settlement was error compels the conclusion that the dismissals must be reversed as to all parties, including Chang. Chang was dismissed pursuant to the settlement, which provided for the dismissal of the complaints against all defendants in both actions. He has not shown either that Objectors appealed from only a severable part of the order of dismissal not including the dismissal as to him (e.g., Gonzales v. R. J. Novick Constr. Co. (1978) 20 Cal.3d 798, 804-805) or that either the settlement or the dismissals were severable as to him and unaffected by error.
We will therefore reverse the judgment with directions to the superior court to vacate the order approving the settlement. Objectors do not request any other relief on appeal. In light of events that may have occurred pursuant to the settlement, however, including the sale of Zias shares of stock in APC and NMM to the plaintiffs, the conversion of shares of NMM stock to shares of APC stock, and the repurchase of shares of NMM stock by NMM or APC, further relief may be appropriate to prevent the settlement from becoming a fait accompli and to ensure the effectiveness of the relief we order. The superior court in the first instance should consider the evidence and argument that may be presented by the parties as to the scope of any further relief, and act accordingly. In light of our conclusions, we need not address the parties other contentions.
DISPOSITION
The order of November 3, 2005, dismissing the two actions is reversed with directions to the superior court to (1) vacate the order of October 24, 2005, approving the settlement; (2) enter a new order denying the motion for settlement approval; and (3) conduct such further proceedings to determine the scope of any further relief as may be appropriate and consistent with the views expressed herein. Objectors are entitled to recover their costs on appeal.
We concur:
KLEIN, P. J.
ALDRICH, J.