A class must satisfy the following prerequisites in order to be certified to proceed in the form of a class action: numerosity, commonality, typicality, adequacy and it must be demonstrated that a class action is superior to other available methods for adjudication of the controversy (see CPLR 901).

New York County Commercial Division Judge Ostrager recently reinforced the importance of the fourth requirement: Adequacy in the Matter of Xerox Corporation of Consolidated Shareholder Litigation. CPLR 901(a)(4) requires that “the representative parties will fairly and adequately protect the interests of the class.”

You may think, but wait a minute, wouldn’t the very nature of being a class representative compel the representative to act fairly to protect the interests of the class because he or she is in fact a class member that shares in the same injuries alleged by the class? Matter of Xerox Corporation of Consolidated Shareholder Litigation provides a reality check to those of us who are hopeless optimists while also exhibiting how the New York Commercial Division got involved to protect the interests of an entire class—while simultaneously blocking Xerox’s merger with Fujifilm.

Four putative class actions were consolidated, each of which sought to enjoin the Board of Directors of Fujifilm from entering into a transaction with Xerox that would, among other things, make Fujifilm a 50.1% owner of Xerox (the “Transaction”). In addition to the consolidated class actions, Mr. Darwin Deason, the second largest individual shareholder of Xerox, also initiated an action to enjoin the Transaction. The first largest individual shareholder of Xerox, Queens-native Mr. Carl Icahn, soon joined Deason’s position.

Judge Ostrager presided over three motions filed by counsel for the purported class: a motion to certify the class and appointment of class representatives, approval of a class settlement, and an award of attorneys’ fees of $7.5 million.

Following an evidentiary hearing, Judge Ostrager determined that the Xerox Board of Directors and its CEO, Jeff Jacobson, had breached their fiduciary duties in agreeing to the proposed Transaction with Fujifilm. After the decision, the Court was advised in open Court by counsel for one of the plaintiffs of a potential settlement between plaintiffs and Xerox. The Court was presented with a fully executed Memorandum of Understanding between the putative class plaintiffs, Darwin Deason and Xerox and was asked to approve a stipulation of discontinuance of the action initiated by Deason as well as the class actions.

In a nutshell, Deason sought to be appointed the class representative of the four class actions and to have the Court approve a settlement that he had allegedly negotiated on both his, and the purported class’ behalf. However, the Court declined to certify the class and to appoint Deason the class representative because Judge Ostrager determined Deason was not acting in the class’ best interest and that the record was devoid of CPLR 901(a)(4)’s requirement that “the representative parties will fairly and adequately protect the interests of the class.”

In a powerfully worded decision, Judge Ostrager reasoned that pursuant to the Memorandum of Understanding, Deason bound a class, that had not been certified, to major corporate actions such as requiring the resignation of a significant number of the Board of Directors, yet providing broad releases for these individuals which effectively shielded the directors from any potential liability for the claims of breach of fiduciary duties.

Judge Ostrager went on to reason that “the Court must consider whether the proposed settlement is in the best interests of the putative class as a while, and whether the settlement is in the best interest of the corporation.” See Gordon v. Verizon Communications, Inc., 148 Ad3d 146 (1st Dept. 2017).

Applying this test, the Court determined that the proposed settlement was not in the best interests of the shareholders “as it achieves no material benefit for shareholders other than Deason and Ichan. On the contrary, the proposed settlement releases any claims the shareholders may have concerning the change of control orchestrated by Deason and Ichan.” “The purported class members will ‘get’ no financial benefit, and they are being asked to ‘give’ broad releases of any derivative claims they may have . . . at a time when this Court held the directors to be faithless fiduciaries, largely in exchange for fees to the purported class counsel of $7.5 million.”

Judge Ostrager ultimately found that the “net result of the actions of the purported class representative and purported class counsel was to transfer control of a public corporation to Mr. Deason and Ichan via a private agreement that offered no tangible benefit to the interests of the class.” As a result, he disapproved the settlement, Deason and Ichan’s requests to be appointed class representatives and denied their counsel the $7.5 million attorneys fees they sought.

While this lawsuit had all the makings of a major motion pictures—money, greed, fame—as we have learned, commercial division practitioners should nevertheless remember that not even these elements will allow a party to skirt around CPLR 901(a)(4)’s requirement of adequate representation.