Duane Morris Takeaway: This week’s episode features Duane Morris partner Jerry Maatman, senior associate Karla Mardueño, and associate George Schaller with their analysis of a major settlement approved in the Northern District of Illinois to resolve a shareholder derivative suit stemming from public corruption scandal.
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Episode Transcript
Jerry Maatman: Hello, everyone, and thank you for being here again for the next episode of the Class Action Weekly Wire. I’m Jerry Maatman, a partner at Duane Morris, and welcome to Karla Mardueño and George Schaller, who are joining me today. Thank you both for being on this week’s podcast.
Karla Mardueño: Glad to be here, Jerry.
George Schaller: Thanks for having me, Jerry.
Jerry: Today, we’re discussing a very significant shareholder derivative settlement that recently received final approval by the court in the Northern District of Illinois. The case is In Re Exelon Corporation Derivative Litigation, where a federal judge approved a $40 million settlement arising out of a public corruption scandal involving Commonwealth Edison.Karla, let’s start with the background. This litigation stems from one of the most high-profile and newsworthy corporate governance controversies to come out of Illinois in recent years. In essence, what happened?
Karla: The derivative litigation arose from the bribery scandal involving Commonwealth Edison, or ComEd, which is a subsidiary of Exelon. In 2020, ComEd entered into a deferred prosecution agreement with federal prosecutors and admitted that it had arranged jobs, contracts, and other benefits for associates of former Illinois House Speaker Michael Madigan. This was allegedly done in an effort to obtain favorable energy legislation. According to the DPA, those practices occurred over a number of years and resulted in significant scrutiny by regulators, prosecutors, shareholders, and the public. Following those revelations, Exelon shareholders sent demand letters and ultimately filed several derivative lawsuits alleging that the company officers and directors breached their fiduciary duties by failing to prevent or properly oversee the conduct that led to the scandal. Those actions were eventually consolidated into a single derivative case.
Jerry: George, at a 100,000-foot level, these sorts of cases, derivative shareholder actions, are somewhat different, both in purpose and function, from securities fraud class actions that we often discuss and write about in the Duane Morris Class Action Review. How should listeners think about this case in terms of the procedural posture of it?
George: In a derivative action, shareholders seek recovery on behalf of the corporation itself, not directly for individual investors. So, the theory here was that Exelon suffered harm because of the alleged misconduct, including reputational damage, regulatory consequences, legal costs, and the fallout from ComEd’s admitted actions. Importantly, Exelon’s board formed a special litigation committee, commonly called an SLC, to investigate the claims. According to the court filings, the SLC consisted of three independent former general counsels who had no prior connection to Exelon. The committee conducted a nearly two-year investigation, reviewed more than 1 million pages of documents, interviewed numerous witnesses, reviewed grand jury materials, and generated a comprehensive report before recommending that the litigation be resolved through settlement.
Jerry: Well, that’s certainly an extensive process in terms of kicking the tires. Karla, what did this settlement at issue and this ruling actually provide?
Karla: Sure. The settlement had both a monetary and governance component. First, it included a $40 million payment funded by insurers. The parties agreed that from that amount, $10 million would be paid as attorney’s fees and expenses, while the remaining funds would benefit the company. The court ultimately approved the $10 million fee award, and perhaps even more important from a governance perspective, the settlement required substantial reforms designed to prevent similar misconduct from occurring in the future. Those reforms address board oversight, compliance procedures, interactions with public officials and vendors, disclosure practices, audit processes, and board composition. These reforms will remain in effect for at least 5 years. The settlement also required the appointment of at least one new independent director with compliance expertise. Also, the settlement included executive accountability measures. The agreement called for a reduction of more than $4.2 million in compensation otherwise payable to former Chief Executive Officer Christopher Crane and preserved certain potential claims against former executives associated with the underlying conduct.
Jerry: Well, it certainly sounds like the settlement was designed not only to provide compensation, but also to reshape how the company conducts compliance and oversight. George, not everybody, however, supported the settlement. What were the objections that were registered in court?
George: A group of shareholders opposed the deal and argued that they had strong claims in light of the criminal convictions involving former ComEd executives and lobbyists, as well as the admissions contained in the deferred prosecution agreement. They contended that the settlement released potentially valuable derivative claims without providing sufficient consideration in return. They also argued that many of the governance reforms had already been implemented or had become stale over time. The objectors additionally challenged the monetary benefit. They argued that much of the settlement’s value was illusory, because $30 million of the recovery had been earmarked to help fund a separate $173 million securities class action settlement, and according to the objectors, those funds were already expected to be paid by insurance carriers, so the derivative settlement did not generate meaningful additional value.
Jerry: How did the court react to these objections and these concerns?
George: Well, Judge John Blakey rejected the objections and granted final approval. The court found that the settlement was fair, reasonable, and adequate. The judge stated that the settlement resulted from arm’s length negotiations overseen by an experienced mediator and followed a comprehensive investigation conducted by an independent special litigation committee. The court also concluded that the Special Litigation Committee was independent, capable of objective judgment, and conducted its investigation in good faith and with reasonable care. Those findings were important because courts often give significant weight to recommendations made by a properly functioning special litigation committee. Further, the court overruled all objections, approved the settlement in full, dismissed the derivative claims with prejudice, approved the $10 million fee award for settlement counsel, and denied the separate fee request submitted by the non-settling plaintiffs.
Jerry: Karla, what stands out to you about the court’s reasoning in terms of its approval?
Karla: One key takeaway is the court’s focus on litigation risk and certainty of recovery. The SLC argued that continued litigation would be expensive, lengthy, and uncertain. The committee also pointed out that Exelon would continue paying indemnification and defense costs for many defendants while simultaneously pursuing claims against them. The settlement provided an immediate recovery in substantial governance reforms, while eliminating the risk that shareholders might ultimately recover less, or nothing at all. The court accepted that reasoning and repeatedly emphasized the value of resolving a complex derivative case through settlement, rather than forcing years of additional litigation.
Jerry: George, if we rise to the 100,000-foot level, what are the practical lessons learned for companies and corporate boards by this litigation?
George: This case highlights how corporate misconduct can generate parallel proceedings across multiple fronts. Here, the underlying conduct led to criminal investigations, deferred prosecution agreement, securities litigation, derivative litigation, and extensive corporate governance scrutiny. A single compliance failure can create years of exposure and significant defense costs. The court also repeatedly relied on the extensive work performed by the SLC, and companies facing similar claims should recognize the value of creating a credible, independent investigative process that can withstand judicial scrutiny. Finally, derivative settlements increasingly focus on governance reforms rather than the monetary relief alone. Courts continue to view meaningful compliance enhancements as an important component of shareholder recovery, particularly where the goal is preventing future misconduct.
Jerry: Well, that’s certainly the point we see with respect to litigation over corporate governance. The emphasis certainly is no longer in simply just writing a check. Judges and courts reviewing settlement approval motions want evidence that the company has learned its lesson from the underlying events and implemented safeguards to reduce and prevent future risks and problems. As companies continue to navigate heightened scrutiny from shareholders, regulators, enforcement agencies, and plaintiffs class action lawyers. This decision certainly serves as another reminder that strong compliance programs and effective board oversight remain critical risk management tools.
Well, thank you, Karla and George, for your insights, and thank you to our listeners for tuning in.
Karla: Thanks, Jerry. Great to be here.
George: Thank you, Jerry, and thanks to the listeners.