The two pension funds contend a shareholder objecting to a proposed settlement or dismissal of a derivative suit has the right to appeal an adverse decision without joining directly in a suit as a plaintiff.
While the issue sounds esoteric, the case is of tremendous importance, institutional investors say.
CalPERS' and Florida's lawsuit has prompted amicus briefs from the Council of Institutional Investors; the Solicitor General on behalf of the United States; an institutional investor group led by the State of Wisconsin Investment Board and Barclays Global Investors (including the AFL-CIO Retirement Plan, California State Teachers' Retirement System, Los Angeles County Employees' Retirement Association, National Industry Pension Fund, the five funds comprising the New York City Retirement Systems, New York State Common Retirement Fund and the New York State Teachers' Retirement System); and Professors Lawrence Hamermesh and Mary Brigid McManamon from the Widener University School of Law, Wilmington, Del.
The Supreme Court will hear oral arguments Jan. 11.
The appeal is an outgrowth of a derivative lawsuit filed by shareholders against Archer Daniels Midland directors to recover $190 million the company had paid to settle criminal antitrust charges against it in 1996.
The lawsuit, filed in U.S. District Court in central Illinois, alleged ADM directors had breached their fiduciary duty to stockholders by failing to supervise employees properly.
However, the settlement agreed to on May 29, 1997, was for $8 million, less than 4.3% of what the plaintiffs sought. All of that money was spent in attorneys' fees.
As part of the settlement, ADM also agreed to adopt independent director provisions in its bylaws. But the provisions in the settlement were far less stringent than ones that had been approved by 41.6% of shareholders at the 1996 ADM annual meeting. Those provisions had been proposed by CalPERS and the Florida Board.
Before approving the settlement, the court invited written objections. CalPERS, which owned more than 2.9 million ADM shares, and Florida, which owned more than 1.7 million shares, filed objections.
Nonetheless, the court approved the settlement. The pension funds appealed to the 7th U.S. Circuit Court of Appeals, which refused to hear the appeal and left them unable to ever appeal the ADM settlement in its jurisdiction.
CalPERS officials wouldn't comment, but gave a statement by Charles P. Valdes, chairman of its investment committee: "We're pleased that the Supreme Court has agreed to review this case and formally address the rights of shareholders to object to proposed court settlements, regardless of whether they incur the cost of officially intervening in the suit. We believe this review is critical and necessary to achieve much needed clarity and certainty."
Florida officials wouldn't comment on the suit.
A crucial aspect of the case hinges on the "intervention" requirement.
"The question is: Is it enough for shareholders to object to the trial court and have the right to appeal, or do they have to go through another procedural hoop -- intervention?" asked Joseph Grundfest, former SEC commissioner, now a professor at Stanford University Law School. He co-wrote the Barclays-Wisconsin supporting brief.
"An intervention requirement would prevent appeals because intervention imposes unnecessary costs in the circumstances of a settlement challenge and because a variety of practical constraints on institutional investors would prevent them from making a timely decision to intervene in all cases in which they might decide an appeal is warranted," the Barclays-Wisconsin brief said.
The ability of an objecting shareholder to appeal a judicial decision without intervening "has an intuitive appeal," said Andrew Vollmer, a partner in Wilmer, Cutler & Pickering, Washington, who co-wrote the Wisconsin-Barclays brief with Mr. Grundfest.
"Nobody has a good reason why you ought to have to intervene to appeal.
"We explain why intervention is different from just filing an objection and that, as a result, why institutions can't act as quickly when intervention is called for," Mr. Vollmer added.
The brief defines them this way:
"An objector or an appellant generally has a narrow and specific disagreement or set of disagreements with a proposed settlement.
"A decision to intervene has broader purposes and more significant legal consequences. For several reasons, an intervening shareholder assumes more responsibility and faces a considerably greater commitment of time, energy and resources than an objecting shareholder."
In their brief, CalPERS and Florida say requiring an objecting shareholder to intervene adds a significant financial burden.
In its brief, the Council of Institutional Investors says a "ruling that shareholder objectors must intervene to secure the right to appeal a derivative settlement would erect an unnecessary and costly barrier to shareholder participation and undermine the fairness and integrity of derivative settlements, without providing any offsetting benefit."
"If we don't win this case we won't see shareholders objecting in derivative lawsuits," said Sarah Teslik, executive director of the council. "If bad settlements take place, we won't be able to do anything about it."