High court deals blow to shareholder suit State class actions can be used to settle federal lawsuits

February 28, 1996|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court gave corporations yesterday the right to turn a narrow settlement in state court into a shield against serious and costly federal stock fraud claims.

By a vote of 7-2, the court ruled that federal courts must generally throw out securities fraud claims that have been forfeited by stockholders in settling a state court "class action" case.

Even though the state court in this case had no power to decide the federal securities issues, the court majority said, state courts do have authority to approve settlements of state cases that include agreements to give up federal claims.

The ruling was a significant victory, but one that may be only temporary, for Matsushita Electric Industrial Co. Matsushita, the Japanese consumer electronics giant, paid $6.6 billion six years ago to buy the stock of MCA Inc., the Los Angeles-based entertainment conglomerate. Matsushita's settlement deal in a Delaware state court may yet be ruled invalid for many MCA stockholders. The Supreme Court voted unanimously yesterday to leave open that possibility, potentially exposing the company to billions of dollars in liability on securities fraud claims.

After the 1990 takeover, Matsushita was sued in two courts: Claims of violation of state law were made in a stockholder lawsuit in Delaware state court. And claims of federal securities violations were leveled by different stockholders in a federal court in California. Both lawsuits targeted the financial arrangements Matsushita made to induce Lew Wasserman, MCA's board chairman, to support the takeover.

While the federal case was still pending, lawyers for the stockholders in the Delaware case and Matsushita's attorneys settled that case. That was a "class action" lawsuit, which claimed that all 7,000 MCA stockholders who sold their shares in the takeover were covered by it because of their parallel legal interests. Its settlement sought to end all disputes over the takeover.

Under the deal, stockholders who did not expressly "opt out" of the deal would forfeit the federal securities claims being pursued in California. Few did opt out.

The different group of MCA stockholders pursuing the California case, however, convinced the 9th U.S. Circuit Court of Appeals that it did not have to honor the Delaware settlement -- thus keeping the federal claims alive.

Yesterday, however, the Supreme Court majority overturned the appeals court ruling. In an opinion written by Justice Clarence Thomas, the seven-member majority said that federal courts are generally bound to respect state courts' decisions in "class action" cases.

That is true, the court said, even when the state decisions approve a settlement of federal claims that normally would be beyond state courts' reach.

That outcome did not end Matsushita's legal difficulties with dissident MCA stockholders. The court majority sent the case back to the appeals court.

At issue when the case returns to the lower court will be whether the Delaware lawsuit should bind stockholders who were not directly involved in it.

That issue involves the stockholders' constitutional right to "due process."

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