## Facts

- Tonopah Mining Co. of Nevada owned Tonopah Nicaragua Co. stock and sold it to Mines, Inc. in 1951 and 1953.
- Shareholders alleged the sales were controlled-person transactions at drastic undervalue, exposing the corporation to potential damages in the millions.
- A long-running shareholder derivative/class action in the Southern District of New York challenged the transactions.
- On September 24, 1970, plaintiffs’ counsel negotiated a global settlement for $250,000.
- The settlement was negotiated without prior shareholder approval; shareholders were not informed until November 4, 1970.
- The district court set a settlement hearing for December 1, 1970; multiple shareholders appeared through counsel and objected.
- Objectors argued the amount was inadequate, discovery and factual development were insufficient to value the claims, and counsel’s incentives could conflict with shareholder interests.
- The district court approved the settlement after a fairness hearing under Rule 23/23.1 procedures.
- Defendants later asserted the settlement barred Saylor’s subsequent federal securities and pendent state-law claims by res judicata (and raised limitations defenses).

## Issues

1. Whether the district court used adequate procedures to protect shareholders when approving a derivative/class settlement negotiated without timely disclosure and client consultation.
2. Whether a judgment approving such a settlement may bind objecting or absent shareholders and bar later related federal securities claims under res judicata.
3. What obligations derivative counsel has to inform the client and the court about settlement negotiations, obtain consent, and address conflicts between counsel’s and shareholders’ interests.

## Decision

- The Second Circuit reversed the order approving the settlement and remanded for further proceedings.
- The court held the settlement and approval process did not sufficiently safeguard shareholder interests given late notice, limited consultation, and inadequate information to evaluate fairness.
- Because the prior proceeding’s protections were deficient, defendants could not rely on the settlement judgment as an automatic res judicata bar to Saylor’s later action on the present record.

## Legal Principles

- Derivative and class settlements require searching judicial scrutiny because counsel’s incentives may diverge from shareholders’ interests, especially at settlement.
- Plaintiffs’ counsel in a derivative action must keep the client meaningfully informed about settlement negotiations and should not commit to a settlement without client consent or, at minimum, promptly informing the court of client objection so protective procedures can be considered.
- Adequate notice, an effective opportunity to object, and a record sufficient to assess the merits (including appropriate discovery where needed) are central to a reliable fairness determination.
- A settlement judgment’s binding (preclusive) effect depends on procedures that provide adequate representation and due-process protections for absent and objecting shareholders; procedural defects can defeat or limit res judicata.

## Conclusion

The Second Circuit required stricter court supervision and shareholder-protective procedures for derivative settlements and held that, where approval rests on inadequate disclosure, consultation, and information, the resulting judgment cannot be treated as conclusively precluding related later shareholder claims.


Saylor v. Lindsley, 456 F.2d 896 (2d Cir. 1972)