## Facts

- Shareholders filed a derivative action in 1964 on behalf of a corporation against certain officer-directors, alleging domination of the board, breaches of fiduciary duty, and related misconduct across multiple transactions.
- Plaintiffs sought substantial monetary recovery against the insiders, including a large damages claim against several individual defendants.
- Before trial, the parties entered a court-approved settlement that did not resolve monetary damages immediately but restructured corporate governance and provided for later arbitration of mismanagement and potential monetary liability.
- The settlement produced nonmonetary corporate changes, including reconstituting board composition with new directors, reducing an officer’s ability to control the board and voting power, removing an executive from an operational role, and modifying an employment contract to limit control and financial advantages.
- After approving the settlement and ordering performance, the trial court ordered the corporation to pay plaintiffs’ counsel $64,784 in attorneys’ fees and $2,179.26 in costs, finding plaintiffs acted in good faith, the corporation could pay, and the action conferred substantial benefits.
- The trial court denied requests by two officer-director defendants for reimbursement of their own attorneys’ fees.
- The corporation appealed the fee-and-cost award to plaintiffs’ counsel; the two officer-directors appealed the denial of their fee requests.

## Issues

1. May a court in a shareholder derivative action order the corporation to pay plaintiffs’ attorneys’ fees and costs when the litigation confers substantial benefits on the corporation, even without a present monetary recovery?
2. Does a settlement provision authorizing an arbitrator to award fees for future arbitration deprive the trial court of authority to award fees for the derivative litigation and settlement that already produced corporate benefits?
3. Are officer-director defendants accused of wrongdoing entitled to have their defense fees reimbursed by the corporation based on claimed partial success?

## Decision

- The Court of Appeal affirmed the order requiring the corporation to pay plaintiffs’ attorneys’ fees and costs.
- The court held that substantial, nonmonetary benefits to the corporation from the derivative action and settlement supported a fee award, even without a current cash recovery.
- The court rejected the argument that the arbitration fee provision displaced the trial court’s authority to award fees for the litigation and settlement; it applied to arbitration-related fees and did not bar a court award.
- The Court of Appeal affirmed the denial of fee reimbursement to the officer-director defendants because they were alleged wrongdoers sued on the corporation’s behalf and were not entitled to shift their defense costs to the corporation on these facts.
- The court applied abuse-of-discretion review to the trial court’s fee determinations and found no abuse.

## Legal Principles

- In a shareholder derivative action, a court may award reasonable attorneys’ fees and costs payable by the corporation when the action confers a substantial benefit on the corporation.
- A “substantial benefit” may be nonmonetary, including meaningful corporate governance reforms, management changes, or reductions in improper control.
- A trial court may award fees for benefits already obtained through litigation and settlement even if related monetary claims are reserved for later arbitration.
- Settlement language authorizing an arbitrator to award fees for arbitration does not, without clear limitation, eliminate the court’s equitable power to award fees for the derivative litigation itself.
- Officer-director defendants accused of wrongdoing are not entitled to reimbursement of their defense fees merely because they claim partial success, particularly where the suit is brought on the corporation’s behalf to remedy their alleged misconduct.
- Fee awards and determinations of corporate benefit in derivative suits are committed to the trial court’s discretion and are reviewed for abuse of discretion.

## Conclusion

The court upheld a fee-and-cost award to derivative plaintiffs’ counsel because the litigation and settlement produced substantial nonmonetary corporate benefits, and it refused to shift defense fees to officer-director defendants accused of wrongdoing, affirming the trial court’s discretionary rulings.


Fletcher v. A.J. Indus., Inc., 266 Cal. App. 2d 313 (Cal. Ct. App. 1968)