Fletcher v. A.J. Industries, Inc.

Shareholders (plaintiffs) filed a derivative action against A.J. Industries, Inc. (AJ), directors Ver Halen and Malone, and other board members (defendants). The shareholders alleged that Ver Halen had “dominated” company management and caused substantial harm. Ver Halen also allegedly breached his employment contract. The shareholders also argued that Malone had been excessively compensated. The shareholders sought damages of $134,000 from Ver Halen and $1,000,000 from the other named defendants, as well as equitable relief. During settlement negotiations, the parties agreed to a deal that included amendments to Ver Halen’s employment contract and limitations on his voting power, Malone’s ouster, the insertion of four new directors on the board, and the employment of a new operations officer. The specific instances of mismanagement by Ver Halen were to be referred to a future arbitration, which would be empowered to award attorneys’ fees to the shareholders’ attorneys only if AJ received a monetary award. The parties knew that the shareholders’ attorneys would apply for fees and costs from the trial court. The trial court awarded $64,784 in attorneys’ fees and $2,179.26 in costs after determining that (1) the shareholders hired the attorneys in good faith to prosecute the suit, (2) the company could pay the fees, and (3) AJ received substantial benefits from the settlement. The award of attorneys’ fees was appealed to the California Court of Appeal.