IN RE LYFT, INC. DERIVATIVE LITIGATION

Background

This consolidated shareholder derivative action was brought on behalf of Lyft, Inc. against several Lyft officers and directors. In a derivative action, shareholders assert claims for the company. The plaintiffs alleged that the individual defendants breached fiduciary duties and engaged in unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and contribution-related violations under federal securities laws.

The allegations concerned Lyft’s handling of sexual and physical assaults allegedly committed by drivers, its reporting and oversight systems, driver background checks, and statements connected with Lyft’s March 28, 2019 initial public offering. The plaintiffs also alleged that Lyft failed to disclose safety problems involving defective brakes on its electronic bikes and failed to maintain internal controls.

The case combined four federal derivative actions. The court had stayed the consolidated action while a related securities class action proceeded. After that related action settled and was dismissed, the parties negotiated the proposed settlement in this case.

Proposed Settlement

The settlement is primarily nonmonetary. It requires Lyft to keep specified corporate-governance reforms in place for at least three years, including changes to its clawback policy, code of conduct, compensation committee charter, and corporate-governance guidelines. Lyft must also post a link to its compliance and ethics hotline, add a user-safety executive to its ethics and compliance committee, promote specified safety features, and publish another blog post about in-app safety features within the time stated in the agreement.

The agreement releases claims that were asserted or could have been asserted derivatively on behalf of Lyft, or by Lyft, and that concern or relate to the allegations or resolution of this derivative action. Claims alleged in the related federal and state securities actions are excluded from the release.

The proposed notice plan requires publication in the national edition of Investor’s Business Daily and over PR Newswire, along with posting the settlement materials on an Internet page accessible through Lyft’s investor website. Plaintiffs’ counsel may seek $700,000 in attorneys’ fees and expenses from the individual defendants’ insurers. Counsel may also seek service awards of up to $1,500 for each plaintiff, subject to court approval.

Court’s Analysis

Under Federal Rule of Civil Procedure 23.1, a derivative action settlement requires court approval. At the preliminary stage, the court determines whether the settlement is within the range of possible approval rather than making the final decision that it is fair, reasonable, and adequate.

The court found that the settlement’s three-year commitment to the reforms provided a benefit to Lyft, although it was skeptical that many reforms represented new benefits because Lyft had already implemented most of them. The court also considered the risks and costs of continued litigation, including potential difficulties at the pleading and summary-judgment stages.

The court examined possible conflicts and collusion. It treated the proposed agreed-to $700,000 fee as similar to a provision under which defendants do not oppose a fee request and expressed skepticism about whether that amount was appropriate. The court stated that it would scrutinize the fee request carefully at final approval. It nevertheless found no basis at the preliminary stage to invalidate the settlement as a whole, noting the absence of a fee reversion provision and the parties’ assertions that negotiations were conducted at arm’s length.

The court found the release sufficiently narrow because it was tied to the claims and events in the derivative action and excluded claims from the related securities actions. It also found that the possible service awards did not weigh against preliminary approval. The proposed notice was sufficient to inform shareholders about the settlement, the hearing, and the opportunity to object.

Ruling and Next Steps

Judge Haywood S. Gilliam, Jr. granted the plaintiffs’ unopposed motion for preliminary approval of the settlement. The court approved the form of notice, directed the parties to implement the notice plan, and stayed proceedings and deadlines unrelated to settlement. The parties were directed to meet and confer and submit a schedule for the remaining events within seven days of the order.

The court did not make a final determination about the settlement’s fairness, the requested attorneys’ fees and expenses, or the possible service awards. Those matters were reserved for the final approval process. Shareholders were to receive at least six weeks from publication of notice to object to the settlement, and at least two weeks after the deadline for replies concerning fee motions to object to those motions.