This is an appeal by William Maldonado, a Zapata Corporation stockholder, from a judgment approving settlement of a shareholders' derivative action brought by other shareholders on behalf of Zapata Corporation against several of its past and present officers and directors based upon their alleged violations of the federal securities laws and state corporate law.

The principal questions are whether the district court abused its discretion in approving the settlement where the preclusive effect of the settlement agreement and the judgment rendered thereon could possibly bar the further prosecution of certain claims pending in related derivative actions brought by Maldonado; and whether the notice of the settlement agreement sent to Zapata shareholders was defective because it did not expressly state that the proposed settlement agreement and judgment might preclude the continuation of the claims being asserted in the two related derivative actions. We hold that, in the context of this case, the notice was adequate and sufficiently informed the shareholders of the possible preclusive effects of the proposed settlement, and that the district court's approval of the settlement, with regard to its fairness, was not an abuse of discretion, notwithstanding the possible preclusion. We accordingly affirm.

A. INTRODUCTION.

A somewhat detailed recitation of the complex facts of this case is necessary for an understanding of it and our rulings herein. Our recitation has been made more difficult because three derivative actions, which arise, at least in part, out of a common factual situation, have been proceeding at the same time in three different courts, and various rulings, described below, made by the three courts have affected the progress of each action.1

B. ZAPATA.

Appellee Zapata Corporation ("Zapata" or the "Corporation") was organized in 1954. Although Zapata is incorporated under the laws of Delaware, it is licensed to do business in Texas and has its home office in Houston, Texas. Until 1966, Zapata was engaged primarily in providing drilling services to offshore oil and gas operators. In the late 1960's, however, under the influence of William H. Flynn ("Flynn"), who became a director in 1966 and chief executive officer in 1969, Zapata began to expand and diversify its interests. By September 1978, Zapata had over 100 direct and indirect subsidiaries, the great majority of which were wholly owned by Zapata, over 7,000 employees, 520 million dollars in annual gross revenues, and approximately one billion dollars in assets. As of September 1980, there were about 10,000 Zapata shareholders owning a total of approximately XX-XXX-XXX outstanding shares of Zapata common stock, which was (and is) traded on the New York Stock Exchange and registered under section 12 of the Securities Exchange Act of 1934, 15 U.S.C. § 781 (the "Exchange Act").

C. THE STOCK OPTION PLAN.

On June 13, 1970, Zapata's board of directors established a "nonqualified" stock option plan for senior officers of Zapata and its subsidiaries. The plan provided only for options that were not qualified under the Internal Revenue Code, with the result that when employees exercised their options they would incur taxable income in the amount by which the then fair market value of the stock so purchased exceeded the option price, and Zapata would be entitled to an income tax deduction in the same amount. On July 14, 1970, the Stock Option Committee of the board of directors2 granted options to key officers and employees of Zapata in accordance with the plan.3 The price per share to exercise the options was $12.15, payable in cash. The $12.15 per share option price, which exceeded the market value of the Zapata stock at the time the options were granted, was to remain in effect throughout the existence of options. The options became exercisable in five equal cumulative installments, the dates of the next to last and last of which were, respectively, July 13, 1973 and July 14, 1974, after which latter date all were exercisable.4 However, no options could be exercised more than ten years after the date on which they were granted. The plan was adopted subject to subsequent approval by Zapata shareholders, which occurred on January 11, 1971. Under the terms of the plan, the directors retained the right to make any amendments they chose to it without shareholder approval, except for amendments which either increased the total number of shares subject to option, changed the class of employees eligible to participate, or increased the duration of the option period beyond ten years. There has been no attack in these proceedings regarding the terms and provisions of the stock option plan, or the mechanics of its approval by the directors and shareholders. Nor has there been any attack on the grant of options under the plan to Flynn and the other senior officers (see note 3, supra ).

In late June 1974, Flynn, who was at that time chairman of the board, chief executive officer, and president of Zapata, consulted with representatives of Lehman Brothers, Zapata's investment bankers, about the possibility of Zapata making a cash tender offer for shares of its own common stock. Based on these consultations, which lasted from about June 28 to July 1, 1974, Flynn decided that Zapata would proceed with a tender offer in the open market for its own common stock at a price of $25 to $30 per share. On the morning of July 2, 1974, at the request of Zapata's management, trading in Zapata stock on the New York Stock Exchange was suspended, pending the future announcement of the tender offer. When trading was suspended, Zapata stock was selling for approximately $18.50 per share.

Four of Zapata's eight directors, who were senior officers, held options under the stock option plan.5 By July 1, 1974, these officer-directors were aware of the possibility of a tender offer at a price of between $25 and $30 per share, and each had discussed it informally with Flynn. They realized that if they were to exercise their options after the announcement of the tender offer, they would likely incur a substantial increase in federal income tax liability, but that this additional tax liability could be avoided if the options were exercised before the announcement of the tender offer.6

After trading was suspended on the New York Stock Exchange, a quorum of Zapata's nonoptionee directors7 held a special meeting at 3:00 p.m. on July 2, 1974, where they adopted resolutions authorizing essentially interest-free loans to six senior Zapata officers (Flynn, Harrison, Shiels, Naess, Lassiter, and Wall) to cover the amount they had or would expend in exercising their stock options and the amount of federal income tax liability they would incur on account of such exercise. These resolutions also modified the stock option plan so that the final twenty percent of the shares covered by each of the options granted in 1970 became exercisable on July 2, 1974, instead of not being exercisable until July 14, 1974.8 The modifications to the plan did not affect the price paid for the stock, which remained at $12.15 per share. The optionees exercised their options later that day.9

On July 3, 1974, the board met and formally authorized the tender offer. On July 8, 1974, after obtaining commitments for the necessary financing, Zapata publicly announced its intention to make a tender offer for 2,300,000 shares of its own common stock at $25 per share. Trading on the New York Stock Exchange resumed, and the closing price for Zapata stock on July 8, 1974, was $24.50 per share. By accelerating the exercise date of the options, Zapata was deprived of a potential increased federal tax deduction, which corresponded with the tax savings of the optionees, in an amount equal to the difference in price per share between July 2 and July 14, 1974, multiplied by the number of shares comprising the final twenty percent installment of option shares which would not have been exercisable until July 14 but for the acceleration of the exercise date (this, of course, assumes the optionees would have exercised their final twenty percent installment on or after July 14 had there been no acceleration). Employing an assumed fifty percent tax bracket for both Zapata and the optionees, this would have amounted to an increase in Zapata's tax liability, and a decrease in that of the optionees collectively, of approximately $115,000.10

On March 14, 1975, because of problems with the Federal Reserve Board, each of the notes the six officers had given to Zapata in return for the loans made to them to fund the exercise of their options were entirely repaid using sums borrowed by the officers from the First City National Bank of Houston, Texas. Three days later, on March 17, 1975, Zapata's Compensation Committee passed resolutions authorizing new loans to the six officers to fund their tax liability produced by the exercise of their options in July 1974.11

These 1975 loans were unsecured and interest free, except that if the borrower voluntarily terminated employment with Zapata within five years, an amount equal to ten percent of the original principal would be due as interest; principal was payable by March 1990 or on termination of employment (for any reason), whichever was sooner. They were designed to achieve as many of the objectives of the prior loan arrangements as possible, that is, to provide funds for the payment of the officers' taxes resulting from their exercise of the stock options; to provide an incentive to the officers to remain with Zapata beyond the maturity of their stock options; and to partially compensate the officers for the loss of the benefit of the prior loan arrangements.

In a proxy statement issued March 26, 1975, by Zapata's management, Zapata disclosed the number and value of the options exercised in July 1974. The proxy statement described the terms and amounts of both sets of loans, including their interest-free nature, and their purpose to aid the optionees in exercising the options and paying the resulting taxes. It also referred to the fact that the loans aided the officers in exercising their options when "the differential between the market value of the Common Stock and the exercise price of their options, and therefore the Federal income tax liability resulting from exercise, would be minimized." The proxy statement did not, however, report the acceleration of the exercise date from July 14 to July 2, 1974, and its relationship to the tender offer, nor did it disclose that an amendment to the option plan was required to accelerate the exercise date or permit the exercise on credit. Shareholder approval of the modifications to the stock option plan or of the loans made in connection therewith was neither sought nor obtained.12

D. MALDONADO'S DELAWARE AND NEW YORK ACTIONS.

On June 3, 1975, appellant-objector William Maldonado ("Maldonado") filed a shareholders' derivative action on behalf of Zapata against Flynn, Sam Israel, Jr., A.G. Gueymard, J.B. Harrison, Ronald C. Lassiter, B.J. Mackin, Michael R. Naess, Eugene F. Shiels, Rene R. Woolcott, and Robert B. Wall, in the Chancery Court of Delaware. This suit, which is referred to herein as the Delaware action, was based on the defendants' alleged breaches of fiduciary duties under the common law, particularly in regard to the modifications to the stock option plan in July 1974, the referenced asserted adverse tax consequences to Zapata of the acceleration of the option exercise date, and, possibly, the interest-free loans made in connection therewith.13 Maldonado's counsel asserted below that discovery in this action, including the depositions of four of the defendant directors, was completed prior to June 1977.

On June 29, 1977, Maldonado filed another shareholders' derivative action, this one in the federal district court for the southern district of New York against the same individuals that were defendants in the Delaware action, except for Rene R. Woolcott. This action, which is referred to herein as the New York action, asserted claims under the Exchange Act based on alleged violations of section 10(b), 15 U.S.C. § 78j(b); Rule 10-b5, 17 C.F.R. § 240.10b-5; section 14(a), 15 U.S.C. § 78n(a); Rule 14a-9, 17 C.F.R. § 240.14a-9; and section 7, 15 U.S.C. § 78g. Maldonado also asserted, under the court's pendent jurisdiction, the same common law breaches of fiduciary duties alleged in his Delaware action. In March 1978, the district court, Judge Weinfeld, dismissed Maldonado's federal securities law claims under Fed.R.Civ.P. 12(b)(6), and, as there were no federal claims to which the common law claims could be pendent, also dismissed the common law claims. Maldonado v. Flynn, 448 F.Supp. 1032 (S.D.N.Y.1978).

On appeal, the Second Circuit, in an opinion issued in April 1979, reversed Judge Weinfeld's dismissal of a portion of the section 14(a) claim, but affirmed his dismissal of the section 10(b) claim. Maldonado v. Flynn, 597 F.2d 789 (2d Cir.1979). The Second Circuit held there was no deception and hence no violation of section 10(b) in Zapata's sale of the stock to its officers pursuant to their July 2, 1974 exercise of the options, because the board of directors had the authority to amend the stock option plan as it did without shareholder approval (see note 12, supra ), and it acted through fully informed, disinterested directors not shown to have been dominated or controlled in their decision by any of the optionees, id. at 795 col. 1, and accordingly:

"Since the amendments were thus validly enacted by a vote of disinterested board members who had been fully informed of all material facts, their knowledge was attributable to the corporation and no 'deception' occurred ...." Id. at 795 (emphasis added).14

However, the Second Circuit also held that Judge Weinfeld erred by dismissing on motion so much of Maldonado's section 14(a) action as was based on the claim that the 1975, 1976, and 1977 elections for Zapata directors were invalid since the proxy statements failed to disclose the directors' July 1974 amendments to the stock option plan, which was a matter "that a reasonable shareholder ... could have considered ... important, in deciding how to vote his proxy" in the director elections. Id. at 798. Accordingly, as to this section 14(a) claim, it reversed and remanded

"... for further proceedings consistent herewith, including a determination of whether the election of Zapata's directors should be nullified and whether the court should entertain jurisdiction over the pendent common law claims." Id.15

Following the remand, however, Maldonado, amended his New York complaint to delete the common law claims, and asserted a cause of action based solely on a violation of section 14(a). This amended complaint charged that the 1975 through 1978 proxy materials, used to secure the election of directors from 1975 through 1979, were materially misleading because they failed to disclose the circumstances surrounding the July 1974 modifications to the stock option plan.16

E. CORPORATE MISMANAGEMENT; TEXAS ACTION.

Beginning in 1975, the net income of Zapata went into a decline. Yet, the management of Zapata, allegedly under the domination and control of Flynn, remained in power. On February 5, 1979, however, appellee John F. Maher ("Maher") filed this suit, in his own individual behalf, in the federal district court for the southern district of Texas against Zapata and Flynn.17 Maher initially sought a preliminary injunction to prevent the 1979 annual shareholders' meeting, to be held on February 14, 1979, from taking place, on the ground that the proxy solicitation materials for it were materially misleading. Maher's application for an injunction, however, was denied.18

Later, in February 1979, Maher, joined by appellee Robert L. Easton (hereinafter referred to as the "plaintiffs"), converted his original action into a shareholders' derivative suit on behalf of all Zapata shareholders. This suit is referred to herein as the Texas action. Flynn, Gueymard, Israel, Lassiter, Mackin, Shiels, and Wall were made defendants. All claims on behalf of plaintiff Maher individually were deleted.

Plaintiffs' second amended complaint, their final pleading, was based mainly on alleged mismanagement of the Corporation by Flynn, and the claimed failure of Flynn's fellow officers and directors to properly superintend the affairs of Zapata and to exercise their independent business judgment. The allegations concerning Flynn charged that he had set about to and did accomplish diverse self-serving objectives at Zapata's expense, including excessive employment contracts and salary bonus plans; lavish offices; improper use of the company airplane, yacht, and limousines; and improper use of a Zapata subsidiary to construct improvements on his personal residence. The complaint also charged that Flynn engaged in various schemes to perpetuate his domination of the board and his control of Zapata, including the removal of Naess and Harrison from Zapata's top management team and the purchase by Zapata of a large block of its stock owned by Crane Company. The other individual defendants were alleged to have violated their fiduciary duties to Zapata by acquiescing in, and in some cases participating in and benefiting from, Flynn's alleged derelictions. These allegations appeared in the "Background Facts" portion of the second amended complaint, where it was also alleged: that the directors, under the domination of Flynn, made "substantial changes" in the stock option plan "to the benefit of Flynn" (and "incidentally" of other officers and directors), and authorized interest-free loans by Zapata to Flynn and other officer and director optionees to fund their exercise of the stock options (all clearly referring to the July 2, 1974 board resolutions); that the directors also caused Zapata to loan "additional amounts" interest free to Flynn and the other optionees to cover their income tax liability incurred by exercising the options (referring to the March 1975 loans); and that "[t]he changes in the stock option plan and the interest free loans were to the detriment of Zapata" and a "wasting of Zapata's assets." No other Zapata loans to Flynn or other officers or directors were alleged. It was also stated that the 1977 and 1978 Zapata proxy statements failed to disclose several material items, including "[t]he true reasons for the amendments effected during July, 1974 to the company's stock option plan ... [which] permitted beneficiaries to profit at Zapata's expense through the use of inside information" and "[t]hat Zapata had made illegal loans to its officer-directors."

Following its "Background Facts" allegations, the second amended complaint expressly charged five separate and specific "cause[s] of action," each of which incorporated by reference the "Background Facts" allegations, as follows:

(1) Violations of section 14(a) of the Exchange Act based on the failure of Zapata's management to disclose in its 1977 and 1978 proxy solicitation materials for the election of directors in 1977, 1978, and 1979, the lack of independence of the board of directors, the degree of Flynn's domination over Zapata and the board, and the abuse of Zapata's assets permitted thereby.

(2) A violation of section 13(b)(2) of the Exchange Act, as amended by the Foreign Corrupt Practices Act of 1977, in that Zapata through its board and management, failed to comply with the record-keeping and reporting requirements of that section of the Act.

(3) A violation of section 13(a) of the Exchange Act, by failing to disclose material information necessary to make required statements in Zapata's form 10k annual report, filed December 21, 1978, with the Securities and Exchange Commission ("SEC") not misleading in connection with Zapata's impending purchase of a block of its stock (599,672 shares) from Crane Company, which was completed on January 22, 1979.

(4) "In making loans to its officer-directors and officers, Defendants violated Article 2.02A(6) of the Texas Business Corporation Act ('T.B.C.A.'), made applicable to Defendants by Article 8.02A, T.B.C.A."

(5) Violations of fiduciary duties by Zapata's directors because of their failure to diligently superintend the affairs of the Corporation; their failure to exercise their independent business judgment respecting corporate affairs; and their failure and refusal to adopt or implement controls adequate enough to prevent the waste of Zapata's assets.

Plaintiffs prayed for injunctive relief, actual damages of at least $XX-XXX-XXX, punitive damages also of at least $XX-XXX-XXX, and attorneys' fees. Various depositions, including those of Flynn, Lassiter (president and director), and Maher, and other discovery (including several weeks of extensive document examination at Zapata's offices) ensued.

F. THE OUSTER OF FLYNN.

On February 5, 1979, the same day that plaintiff Maher's original suit was filed, the board of directors placed Flynn on involuntary leave of absence. He was terminated for cause, effective April 15, 1979, and resigned from the board of directors on May 21, 1979. An executive committee composed of Mackin, Gueymard, and Lassiter performed Flynn's management responsibilities from February 5, 1979 until March 8, 1979, when Mackin became chairman of the board and chief executive officer.

After his termination, Flynn filed suit in the Delaware Chancery Court seeking an injunction against arbitration of matters respecting his employment contract with Zapata. On July 2, 1979, the parties settled this lawsuit. The settlement required present repayment of Flynn's loan (and certain other, relatively minor, advances) and settled for a discounted sum Flynn's claim on his employment contract which had some four more years to run. It discharged all other claims of the parties against each other except claims of Zapata not then known to its board of directors and claims asserted and which might be reduced to judgment on Zapata's behalf in the pending derivative suits, as well as claims Zapata might assert against Flynn as a result of a particular nonderivative suit against Zapata.19

Flynn's loan was repaid in full on or before July 31, 1979. He died on October 31, 1981, and his executor was made a party to the Texas action.

G. THE INDEPENDENT INVESTIGATION COMMITTEE.

On June 25, 1979, Zapata's board of directors created an independent Investigation Committee ("the Investigation Committee") to review and investigate the three derivative actions to determine whether they should be pursued against some or all of the defendants or terminated in whole or in part. As authorized by Delaware law,20 the Investigation Committee was delegated the full power and authority of the board of directors to act for the Corporation in making the investigation and consequent determinations, including the authority to formally request, in the name of the Corporation, total or partial dismissal of any or all of these derivative suits. The Investigation Committee's actions and determinations were not subject to review by the board, and were binding on the Corporation. This Committee consisted of two disinterested directors, F. Arnold Daum and George A. Lorenz. Daum had become a director on May 25, 1979, and Lorenz on June 25, 1979. Neither Daum nor Lorenz were concerned in any of the transactions which were, in any way, the subject of the three derivative actions.

The Investigation Committee's investigation occurred between June 25, 1979 and September 21, 1979. In its Report and Determination of September 21, 1979, the Investigation Committee recommended that, in the best interest of Zapata, all three (Texas, New York, and Delaware) derivative actions against all the defendants should be terminated. Thereafter, at the direction of the Investigation Committee, Zapata's counsel filed motions for summary judgment, based upon the Committee's recommendation, in the Texas, New York, and Delaware actions. Discovery, including depositions of the members of the Investigation Committee and of the attorneys retained by the Committee to assist in its investigation, was then promptly undertaken jointly in the Texas, New York, and Delaware actions respecting the independence and good faith of the Committee, the nature and extent of its investigation, and the bases for its recommendations.

H. DISPOSITION OF THE NEW YORK AND DELAWARE ACTIONS.

In Maldonado's New York action, following the 1979 remand by the Second Circuit, Judge Weinfeld, on January 24, 1980, granted Zapata's motion for summary judgment based on the Investigation Committee report. Maldonado v. Flynn, 485 F.Supp. 274 (S.D.N.Y.1980). Judge Weinfeld held that "under Delaware law a committee of disinterested directors, properly vested with the power of the board, may in the exercise of their business judgment require the termination of a derivative suit brought on the Corporation's behalf ...." 485 F.Supp. at 279. Judge Weinfeld then determined that the Investigation Committee had acted, after appropriate investigation, in the good-faith exercise of its independent business judgment, and he dismissed the action.21 Maldonado appealed the dismissal to the Second Circuit.

In the Delaware Court of Chancery, however, Zapata's motion for summary judgment was denied on March 18, 1980. Maldonado v. Flynn, 413 A.2d 1251 (Del.Ch.1980). There, Vice Chancellor Hartnett held that the business judgment rule had no application to the termination of a derivative action brought against the Corporation's directors and officers. He therefore did not reach the question of the Investigation Committee's good faith and independence, or the propriety of its investigation and recommendation. Zapata appealed this ruling to the Supreme Court of Delaware.

However, shortly thereafter, on May 29, 1980, the Vice Chancellor granted Zapata's motion to dismiss the Delaware action based on Maldonado's failure to assert his common law theories of recovery in the New York action. Maldonado v. Flynn, 417 A.2d 378 (Del.Ch.1980). The Vice Chancellor held that the causes of action asserted by Maldonado in the New York and Delaware actions arose out of the same underlying transaction; that Maldonado had impermissibly split his claim; and that the dismissal in the New York action precluded his prosecution of the common law theories of recovery in the Delaware courts. See note 13, supra. The Vice Chancellor, however, stayed the dismissal pending the outcome of Maldonado's appeal to the Second Circuit.

On May 13, 1981, the Supreme Court of Delaware sustained Zapata's interlocutory appeal from the Vice Chancellor's denial of its motion for summary judgment based on the recommendation of the Investigation Committee. Zapata Corporation v. Maldonado, 430 A.2d 779 (Del.1981). The Supreme Court held that a corporation, acting through an independent committee, could cause the termination of litigation brought on its behalf, subject to court approval. In passing on such a motion to terminate, the trial court should apply a two-step test, first determining whether the committee was truly independent and acted in good faith on reasonable investigation, and, second, whether in the court's own independent business judgment the motion should be granted.22

The Delaware Supreme Court therefore reversed the Vice Chancellor's order denying Zapata's motion for summary judgment and remanded the case for further proceedings consistent with its opinion.

I. THE TEXAS SETTLEMENT.

Meanwhile, in the Texas action, on May 27, 1980, Zapata's motion for summary judgment was also denied by Judge Black. The denial was based upon Vice Chancellor Hartnett's March 1980 ruling in the Delaware action. Maher v. Zapata Corporation, 490 F.Supp. 348, 351-53 (S.D.Tex.1980). No appeal by Zapata was taken from this ruling. Thereafter, additional discovery was pursued in the Texas action, including the depositions of Israel (outside director) and Wall (Zapata's chief financial officer). Before the Supreme Court of Delaware rendered its decision respecting the business judgment rule, but after Judge Black had denied Zapata's motion thereon in the Texas action, the parties to the Texas action entered into settlement negotiations, which resulted in a Stipulation and Agreement of Compromise and Settlement on September 15, 1980. Notice of the settlement was given all Zapata's shareholders pursuant to Fed.R.Civ.P. 23.1, and Judge Black held a hearing where Maldonado appeared individually as an objector and presented his objection to the settlement agreement, the principal basis of which was the potential res judicata effect of the settlement on the claims respecting the July 1974 modifications to the stock option plan pending in his Delaware action.23

Judge Black, however, held that the potential preclusive effect of the settlement was not a determining factor. He found that there were no signs of bad faith or collusion between the parties, and that the settlement was fair, reasonable, and in the best interest of Zapata. The settlement agreement was approved on June 12, 1981, and Maldonado alone then brought this appeal.J. THE SECOND CIRCUIT.

While the events described above were taking place in Delaware and in Texas, the Second Circuit was considering Maldonado's appeal from Judge Weinfeld's January 1980 dismissal of the New York action based on the Investigation Committee's recommendation. After the Texas action was dismissed with prejudice by Judge Black pursuant to his approval of the settlement agreement, Zapata, as Maldonado feared, argued to the Second Circuit that the continuation of the New York action was barred by the judgment in the Texas action. In its February 1982 decision, the Second Circuit, however, after noting the approval of the settlement agreement by Judge Black and the Supreme Court of Delaware's decision respecting the business judgment rule, remanded the case to Judge Weinfeld to address the res judicata effect of the Texas settlement judgment and, to the extent it did not have preclusive effect, to determine in his business judgment whether Zapata's motion to terminate the case should be granted. It specifically affirmed Judge Weinfeld's findings (see note 21, supra ) that the Investigation Committee acted "truly independently and in good faith" in recommending termination. Maldonado v. Flynn, 671 F.2d 729 (2d Cir.1982). Apart from res judicata, "all that remains" for Judge Weinfeld on remand will be the second step in the Delaware two-step process (see note 22, supra ), namely, application of his own independent business judgment to whether the Committee's recommendation should be granted. The first step in that two-step process, establishing the Committee's independence, good faith, and reasonable investigation and bases for its conclusions, has already been satisfied.24

K. POSTURE OF THE ACTIONS.

The present posture of the several actions is accordingly as follows. When the instant appeal is decided, Judge Weinfeld, in accordance with the Second Circuit's remand, will proceed to determine first, whether any, all, or part of the New York action is precluded by the Texas settlement judgment, providing it is upheld by this Court, and then, if necessary, whether, in his own independent business judgment, it is in the best interest of the Corporation to grant Zapata's motion for summary judgment based on the Investigation Committee's recommendation (already established to have been independent and appropriately arrived at in good faith) that the New York action be terminated.

If the New York action is dismissed, then the Vice Chancellor will dismiss the Delaware action on the basis of res judicata. If, however, the New York action is not dismissed, then the Vice Chancellor, in accordance with the Supreme Court of Delaware's remand, will determine whether Zapata's motion for summary judgment, based on the Investigation Committee's recommendation that the Delaware action be terminated, should be granted or denied.

With the actions in this setting, we now turn to consider whether the judgment approving the settlement of the Texas action should be affirmed.

Nonparty shareholders must be given notice of the proposed settlement of a shareholders' derivative action. Papilsky v. Berndt, 466 F.2d 251, 258 (2d Cir.), cert. denied, 409 U.S. 1077, 93 S.Ct. 689, 34 L.Ed.2d 665 (1972). Rule 23.1, Fed.R.Civ.P., provides that the district court shall direct the manner in which this notice should be given, and that the derivative action shall not be dismissed without the district court's approval of the settlement agreement.

Here, the district court, on September 15, 1980, approved the form of the notice sent to all Zapata shareholders of record as of September 5, 1980. The notice advised the shareholders that a hearing to determine whether the proposed settlement should be approved would be held on October 8, 1980.25 The shareholders were told that they could appear at this hearing and show cause why the settlement agreement should not be approved, and "why all claims asserted or which could be asserted on behalf of Zapata should not be dismissed according to its terms ...." The notice summarized the parties' contentions, the issues involved in the case, and the terms of the settlement agreement, including the fact that "[a]ll claims on behalf of Zapata which were or could have been asserted against the individual-defendants are to be dismissed with prejudice." The effect of the settlement agreement, should it obtain the court's approval, was stated in the notice as follows:

"If a final judgment is entered approving the Settlement Agreement, such judgment will bar any further actions against any of the defendants arising out of or related to the matters set forth in the Second Amended Complaint on file with the Court or which could have been raised in this action."

The notice cautioned the shareholders that the references to the settlement agreement, the pleadings, and other documents were "only summaries," and also informed them that copies of the entire settlement agreement were available upon request, and that the pleadings, documents, and depositions on file with the court, or in the parties' possession, were open for examination.

In response to the notice, the district court and counsel for the parties received objections from several shareholders, all, except for Maldonado, basing their objections primarily on the provision of the settlement agreement respecting attorneys' fees to be paid plaintiffs' attorneys. Maldonado, however, was the only objecting shareholder to appear, in person or through counsel, at the settlement hearing to argue his objections to the district court. One of his objections concerned the sufficiency of the notice of settlement sent to the shareholders. The district court, however, rejected this objection by finding that the shareholders "were provided adequate notice of the proposed settlement, its terms and its legal effects."

Maldonado contends here that the notice was defective, concerning his own New York and Delaware derivative actions, because it failed to disclose: (1) their existence and the claims asserted therein; and (2) that Zapata and the individual defendants would use the release provision of the settlement to attempt to bar their continuation. Maldonado further contends that the notice was defective, concerning the Texas action, because it failed to inform the shareholders of the grounds for the claims asserted therein and the circumstances under which they arose, of the relief sought or of the possibility of successful prosecution of the action, and of the benefits which had accrued to Zapata as a result of it. We disagree with all of Maldonado's contentions for the following reasons.

First, the notice sent to the shareholders was sufficient, and did not violate their due process rights. The notice as given was plainly within the bounds of the district court's discretion. In re Four Seasons Securities Laws Litigation, 525 F.2d 500, 503 (10th Cir.1975). Valerio v. Boise Cascade Corp., 80 F.R.D. 626, 636 (N.D.Cal.1978), aff'd, 645 F.2d 699 (9th Cir.), cert. denied, 454 U.S. 1126, 102 S.Ct. 976, 71 L.Ed.2d 113 (1981). The notice adequately described the nature of the pending action, the claims asserted therein,26 and the general terms of the proposed settlement. It informed the shareholders that additional information was available from the court's files. It also informed them of the time and place for the settlement hearing and their right to participate therein. Miller v. Republic National Life Insurance Company, 559 F.2d 426, 429 (5th Cir.1977); Reynolds v. National Football League, 584 F.2d 280, 285 (8th Cir.1978). See also Pearson v. Ecological Science Corp., 522 F.2d 171, 176-77 (5th Cir.1975), cert. denied, sub nom., Skydell v. Ecological Science Corp., 425 U.S. 912, 96 S.Ct. 1508, 47 L.Ed.2d 762 (1976); Brucker v. Indian Head, Inc., 424 F.Supp. 679, 688 (S.D.N.Y.1976), aff'd, 559 F.2d 1202 (2d Cir.), cert. denied, sub. nom., Rome v. Indian Head, Inc., 434 U.S. 897, 98 S.Ct. 277, 54 L.Ed.2d 183 (1977). In view of this information, it is clear that the essential purpose of the notice, with regard to the shareholders' due process rights, "namely, to fairly apprise the prospective members of the class of the terms of the proposed settlement and of the options that are open to them ..." was satisfied.27 Greenspun v. Bogan, 492 F.2d 375, 382 (1st Cir.1974), quoting Philadelphia Housing Authority v. American Radiator & Standard Sanitary Corp., 323 F.Supp. 364, 378 (E.D.Pa.1970), aff'd, sub nom., Ace Heating & Plumbing Company v. Crane Company, 453 F.2d 30 (3d Cir.1971). And, in any event, the notice provided the shareholders with sufficient information for them to make a "rational decision whether they should intervene in the settlement approval procedure." Wright & Miller, Federal Practice & Procedure: Civil § 1839 (1972).

Second, as concerns the res judicata implications of the settlement, we feel that the notice was so worded as to make reasonably clear to the "minimally sophisticated layman," Milstein v. Werner, 57 F.R.D. 515, 518 (S.D.N.Y.1972), that approval of the settlement would bar claims beyond those asserted in the Texas action.28 The notice is not required to eliminate "all occasion for diligence on the part of the stockholders." Haudek, The Settlement and Dismissal of Stockholders' Actions--Part II: The Settlement, 23 Sw.L.J. 765, 787 (1969) (footnote omitted). See Braun v. Fleming-Hall Tobacco Company, 33 Del.Ch. 246, 92 A.2d 302, 309 (1952). See also Prince v. Bensinger, 244 A.2d 89, 92 (Del.Ch.1968), and cases cited therein. The notice to the shareholders need not explain to them all the consequences involved in the settlement. It is not required to provide a complete source of settlement information, In re Gypsum Antitrust Cases, 565 F.2d 1123, 1125 n. 1 (9th Cir.1977), and the shareholders are not expected to rely on it as such. Grunin v. International House of Pancakes, 513 F.2d 114, 122 (8th Cir.), cert. denied, 423 U.S. 864, 96 S.Ct. 124, 46 L.Ed.2d 93 (1975); Rubenstein v. Republic National Life Insurance Company, 74 F.R.D. 337, 348 (N.D.Tex.1976), aff'd sub nom., Miller v. Republic National Life Insurance Company, 559 F.2d 426 (5th Cir.1977). By telling the shareholders that the descriptions were "only summaries" and the court files were open for inspection, the notice implicitly invited them to conduct a further investigation, if they so desired, on the basis for, the background of, and the legal implications of the settlement. In re Four Seasons, 525 F.2d at 503.

Third, as concerns the failure of the notice to discuss Maldonado's New York and Delaware derivative actions, we think Maldonado's arguments ignore the other information made available to the shareholders regarding those actions. Since January 1976, proxy solicitation materials sent to the shareholders by Zapata's management have contained sections discussing first the Delaware action, and then, after December 1977, the New York action. Furthermore, after notice of the settlement had been sent to the shareholders in September 1980, but before the settlement hearing was reconvened in May 1981, the shareholders were sent Zapata's proxy solicitation materials (dated February 20, 1981), which summarized the nature of, and the events which had taken place in, all three derivative actions; described the terms of the proposed settlement in the Texas action; and stated that the settlement hearing had been continued pending resolution of Zapata's appeal to the Supreme Court of Delaware respecting the denial of its summary judgment based on the recommendation of the Investigation Committee. While we do not hold that such information can displace or perform the function of a shareholders' notice issued pursuant to Rule 23.1, we do recognize that pertinent information received from other sources may, as here, supplement the shareholders' knowledge regarding the settlement and thus render certain omissions or deficiencies less serious, misleading, or harmful. See Milstein v. Werner, 57 F.R.D. at 517-18; Boggess v. Hogan, 410 F.Supp. 433, 443 (N.D.Ill.1975). See also Bernstein v. Mediobanca Banca di Credito Finanziario-Societa Per Azioni, 78 F.R.D. 1, 3 (S.D.N.Y.1978).

Further, we feel that Maldonado's attendance at the settlement hearing substantially fulfilled another important purpose of the notice provision of Rule 23.1, namely, affording the district court the opportunity to receive the benefit of "that broader information which comes from receiving advice as to the views of all parties concerned and from considering evidence proffered by them upon the relevant points of the case." Cohen v. Young, 127 F.2d 721, 725 (6th Cir.1942). See also Papilsky v. Berndt, 466 F.2d at 258.

Here, Maldonado appeared as an objector in the settlement proceeding. Represented by capable counsel, he filed two briefs in opposition to the settlement and appeared at the settlement hearing where he voiced his objections, emphasizing primarily the res judicata problems with the settlement. Thus, the shareholder in the strongest position to apprise the district court of the res judicata implications and problems with the settlement agreement actually appeared and pressed his objections, both orally and in writing, upon the district court. See In re Equity Funding Corporation of America Securities Litigation, 603 F.2d 1353, 1361-62 (9th Cir.1979). Clearly, Maldonado adequately served as a spokesman for the views of potentially objecting absent shareholders in this proceeding, at least with respect to the possible effect of the settlement on the New York and Delaware actions.

Moreover, there is no indication that any shareholder, including Maldonado himself, has suffered any prejudice because of the alleged deficiencies in the notice. See Masterson v. Pergament, 203 F.2d 315, 330 (6th Cir.), cert. denied, 346 U.S. 832, 74 S.Ct. 33, 98 L.Ed. 355 (1953). We recognize that a shareholder-objector in the position of Maldonado, who because of his related actions is more interested than other shareholders in the settlement proceedings, may raise the objection that the notice sent to all shareholders is defective, see Greenfield v. Villager Industries, Inc., 483 F.2d 824, 833 (3d Cir.1973); Birnbaum v. Birrell, 17 F.R.D. 409, 412 (S.D.N.Y.1955). We nevertheless hold that the absence of any claim of prejudice is a circumstance favorable to the sufficiency of the notice where, as here, no claim of prejudice has been made, especially in view of the length of time between the notice and the hearing, and the other information made available to the shareholders by the proxy solicitation materials and the like. See Miller v. Republic National Life Insurance Company, 559 F.2d at 430; Milstein v. Werner, 57 F.R.D. at 517-18.

In summary, while perhaps the contents of the notice here could have been enlarged to reflect those matters Maldonado insists it should have included, we conclude that the notice imparted information to the Zapata shareholders which, under all the circumstances, was sufficient to satisfy "the demands of due process" and the purposes of Rule 23.1. Airlines Stewards and Stewardesses Association, Local 550 v. American Airlines, Inc., 455 F.2d 101, 108 (7th Cir.1972).

The terms of the settlement agreement were as follows:

(1) That "all claims on behalf of Zapata asserted or which could have been asserted in this lawsuit against the individual defendants are to be dismissed with prejudice";

(2) That Maher's individual action against Zapata in the Texas state court, and Zapata's actions against him and several other defendants in the New York federal district court, were to be dismissed;29

(3) That plaintiff's counsel would apply for attorneys' fees not to exceed $400,000 plus $26,000 in expenses, and that Zapata would not oppose an award of $250,000, plus $18,560 in expenses.

The district court's judgment states that "the proposed settlement agreement is approved as being fair, reasonable, and adequate and in the best interest of Zapata Corporation" and "[t]his action is dismissed with prejudice as to all defendants."30

The burden of showing that a proposed settlement of a shareholders' derivative action is fair, reasonable, and adequate, and that acceptance of its terms is in the best interest of the Corporation and its shareholders, is on the proponents of the settlement, as Judge Black explicitly recognized in his approval order. Greenspun v. Bogan, 492 F.2d at 378; Berger v. Dyson, 111 F.Supp. 533, 535 (D.R.I.1953). In discharging their burden here, the proponents of the settlement (plaintiffs, Zapata, through its independent Investigation Committee, and defendants) filed affidavits of Mr. Jess Hall, counsel for plaintiffs, and Mr. F. Arnold Daum, the chairman of the Investigation Committee.

Hall's affidavit recited the extensive discovery and investigation that had taken place in connection with the prosecution of the Texas action, and the benefits which had resulted to Zapata from its commencement and maintenance. It also discussed the legal and factual obstacles facing plaintiffs in connection with each of their five causes of action. Daum, in his affidavit, also set forth the factors, both legal and factual, which militated against continuation of the action. Both Hall and Daum concluded, in effect, that the plaintiffs' chances for recovery were poor, and that, in any event, the monetary damages that might be recovered after a trial on the merits would not justify the attendant legal and business costs to Zapata.

In opposition to the settlement, with regard to fairness, Maldonado, in an affidavit filed by his counsel, maintained that it was "nothing more than a voluntary dismissal without any consideration to be received by Zapata in exchange for the relinquishment of its claims asserted on its behalf against the defendants." Maldonado also objected to the proponent's failure to "come forward with any evidence as to the possibility of recovery in [plaintiffs'] causes of action, or the amount of such recovery that will enable [the district court] to weigh the fairness of such settlement."

The district court, in its June 12, 1981 Memorandum and Order approving the settlement, after reciting that it had considered all the pleadings, briefs, affidavits, letters from objectors, and the argument of counsel for all parties and for Maldonado, made the following findings:

"(2) The settlement agreement was the result of arm's length negotiation, after extensive discovery on the merits and intelligent evaluation of the lawsuit by the parties and their counsel. The lawsuit was vigorously prosecuted by the plaintiff. There are no signs of bad faith or collusion between the parties.

"(3) The Independent Investigation Committee endorses and supports the settlement.

"....

"(5) This lawsuit was at least a contributing factor in several major beneficial changes in Zapata Corporation, including the removal of William H. Flynn on February 5, 1979, as Chairman of the Board and Chief Executive Officer of Zapata; a new emphasis on maximization of presently owned businesses rather than the acquisition of increasingly diverse businesses; an advantageous settlement of Mr. Flynn's employment contract dispute; the implementation of stricter policies regarding the use of Zapata property and facilities; and the development of new accounting and internal control procedures. Zapata stock increased in price from $12 in January 1979 to $55 in August 1980. After a stock split early in 1981, it is still selling at about $23 per share.

"(6) The parties' conclusion, that any possible benefit to Zapata from pursuing the remaining causes of action could be more than offset by the additional cost of litigation, is based on an intelligent and prudent evaluation of their case.

"(7) Based on the above-listed factors, this Court finds that the proposed settlement of this case is reasonable, adequate and fair to all parties and in the best interests of Zapata Corporation."

The court specifically noted that the proponents of the settlement had met their burden of proving, and had demonstrated to the court's satisfaction, that the proposed settlement was fair, adequate, and in the best interest of Zapata Corporation.

A. STANDARD OF REVIEW.

Settlements of shareholder derivative actions are particularly favored because such litigation is "notoriously difficult and unpredictable." Schimmel v. Goldman, 57 F.R.D. 481, 487 (S.D.N.Y.1973); Republic National Life Insurance Company v. Beasley, 73 F.R.D. 658, 667 (S.D.N.Y.1977); Haudek, 23 Sw.L.J. at 793. The courts, therefore, do not lightly reject such settlements. See Florida Trailer & Equipment Company v. Deal, 284 F.2d 567, 571 (5th Cir.1960). Before approving the settlement of a shareholders' derivative action, however, the district court must determine that there has been no fraud or collusion in arriving at the settlement agreement, and that it is fair, reasonable, and adequate. Young v. Katz, 447 F.2d 431, 433 (5th Cir.1971); Miller v. Republic National Life Insurance Company, 559 F.2d at 428-29. In making these determinations, the district court enjoys wide discretion, and in exercising its discretion, the court should not decide the merits of the action or attempt to substitute its own judgment for that of the parties.31 Lewis v. Newman, 59 F.R.D. 525, 527 (S.D.N.Y.1973). The district court's approval of a settlement agreement is not therefore to be disturbed unless the court "clearly abused its discretion." Young, 447 F.2d at 432; Miller, 559 F.2d at 429.

However, the court, upon consideration of a proposed settlement, must state its reasons for approving it and should examine a proposed settlement in light of the objections raised to it, and set forth with sufficient detail a reasoned response to them, including supportive findings of fact and conclusions of law as may be necessary, so that an appellate court, in the event of an appeal, will have a basis for conducting a meaningful review of the exercise of the district court's discretion. Cotton v. Hinton, 559 F.2d 1326, 1330-31 (5th Cir.1977).

Before discussing Maldonado's various particular contentions, we note at this point certain factors specially applicable to this case which in combination weigh significantly in favor of affirmance of Judge Black's approval of the settlement.

To begin with, important aspects of this case have already been ruled on by Judge Weinfeld and the Second Circuit. While we do not find it necessary to definitively determine the point, it would seem most likely that these rulings in the New York action are binding in the Texas action under principles of res judicata, collateral estoppel, or law of the case.32 At the very least, they are extremely persuasive. And, Maldonado, though afforded ample time and opportunity, presented no evidence compelling conclusions contrary to those reached in the New York action (nor anything of substance not available to Judge Weinfeld). Central to Maldonado's claims is his complaint of the July 2, 1974 board action accelerating the exercise date for the final twenty percent installment of the stock options. The same resolution approved the interest-free loans to exercise the options and to cover the optionees' resulting tax liability. Judge Weinfeld and the Second Circuit have ruled, following Maldonado's completion of discovery, that the resolution accelerating the exercise date was legally enacted by fully informed disinterested board members not acting under the control or domination of the optionees (see text at note 14, supra ). In such circumstances, the "business judgment rule" stands as a most formidable barrier to successful resolution on the merits of a cause of action based on the option acceleration.33 Moreover, Judge Weinfeld and the Second Circuit have likewise ruled that the Investigation Committee was disinterested and acted independently, in good faith, and upon proper investigation and bases in its recommendation that continuation of the derivative actions was not in the best interest of Zapata, so as to fulfill "step one" of the two-step process mandated by the Delaware Supreme Court (see notes 21, 22, and 24, supra ). The recommendation of such a Committee is indeed most persuasive and entitled to great weight.34 To be sure, it is not controlling, for the district court is to furnish "the fresh view of a judicial outsider" and apply "its own independent business judgment." Zapata Corp. v. Maldonado, 430 A.2d at 788-89. The "second step is intended to thwart instances where corporate actions meet the criteria of step one [independent Committee recommendation], but the result does not appear to satisfy its spirit, or where corporate actions would simply prematurely terminate a stockholder grievance ...." Id. at 789. But this does not suggest that the independent Committee's views are not of great significance; rather, that they are not beyond judicial control. Such control, in turn, is committed to the trial court's "independent discretion." Id. at 788.

Other factors favoring approval of the settlement here are the minimal nature of shareholder objection35 and the district court's finding, adequately grounded in the record, that the settlement was the result of arm's-length negotiation, after extensive discovery and intelligent evaluation of the lawsuit by the parties and their capable counsel.36

We also note that Maldonado had ample time and opportunity to make a full evidentiary presentation in support of his objections. However, he chose not to do so, and relied instead almost entirely upon a 1979 affidavit of his counsel submitted in the Delaware action. He brought nothing of factual substance to the district court's attention not otherwise available to it and the parties to the Texas action. He made no evidential contravention of the submission on behalf of the settlement's proponents.

Finally, there is the long pendency not only of the New York and Delaware actions, but also of the Texas action. The district court's findings and conclusions in this case are bolstered by Judge Black's long and intimate acquaintance with the lawsuit from its inception, first as a United States magistrate and then as district judge. On several occasions, more often than one might suppose would normally be the case, he was called upon to rule on diverse discovery and ancillary matters, as well as on motions more closely related to the merits. He was quite familiar with the action and in a unique position to evaluate the context, process, and nature of the settlement.37 See United Founders Life Insurance Co. v. Consumers National Life Insurance Co., 447 F.2d 647, 655 (7th Cir.1971).

B. COLLUSION.

A district court must reject a settlement agreement no matter how acceptable it may otherwise be, if it is not free from collusion or fraud. Saltzman v. Technicolor, Inc., 51 F.R.D. 178, 186 (S.D.N.Y.1970); Haudek, 23 Sw.L.J. at 772. As noted above, the district court here found, in effect, that the settlement was free from collusion between the parties.

Maldonado's main contention respecting collusion is that, as stated in the objection he filed below, "the proposed settlement is a fraudulent means by which defendants are attempting to obtain a 'blanket release' from all claims asserted in stockholders' derivative actions brought on behalf of Zapata against directors and former directors for no consideration."38

Maldonado's concern is, as it has consistently been, that the settlement might possibly bar those portions of his own derivative actions which are based on the circumstances surrounding the 1974 modifications to the stock option plan. As above-noted, plaintiffs' second amended complaint plainly charges in its "Background Facts" section that the July 1974 changes in the stock option plan and the interest-free loans then extended, as well as the additional amounts loaned without interest in 1975 to cover the optionees' tax liability from exercise of the options, were detrimental to Zapata and a wasting of its assets, and that the 1977 and 1978 proxy statements failed to disclose the illegal loans and the reasons for the July 1974 stock option amendments. The "Background Facts" allegations were all incorporated by reference in each of the specific causes of action asserted, including the first, regarding section 14(a) violations in the 1977 and 1978 proxy statements, the second, regarding loans in violation of article 2.02 A(6), Tex.Bus.Corp. Act, and the fifth, regarding failure to superintend, exercise independent judgment, and employ adequate controls. However, before the initiation of settlement negotiations, plaintiffs, in a brief filed in August 1979 in opposition to a motion to dismiss, took the position that the Texas four year statute of limitations applied to the loan transactions, and inferentially admitted that it barred their suit as to the 1974 loans and option amendments.39 We believe that those matters were indeed barred by limitations, a conclusion which Maldonado does not dispute. Moreover, as we have indicated, recovery on the stock option acceleration (and the loans, apart from article 2.02 A(6)), was problematical, even apart from limitations considerations, in light of the determination by Judge Weinfeld and the Second Circuit that this was accomplished by the valid action of fully informed, disinterested directors. And, as noted hereafter, the probabilities additionally strongly favored the 1975 loans also being barred by limitations and the inapplicability of article 2.02 A(6). Further, the Investigation Committee had recommended dismissal of the action as in the best interest of Zapata, a recommendation determined in the New York action to have been made independently, in good faith, and upon proper investigation. Under these circumstances, plaintiffs and Zapata were not obliged to further litigate these claims when, had they done so, it was virtually inevitable that no recovery would have been obtained.

Further, what we are dealing with here is not a release but rather a judgment rendered pursuant to a settlement agreement. The settlement agreement calls for a dismissal with prejudice of all claims on behalf of Zapata against the individual defendants "asserted or which could have been asserted in this lawsuit." This language calls for a court judgment, and uses language typically employed to describe the res judicata effects of a judgment. See Restatement (Second) of Judgments § 24(1) (1982)40; Nilsen v. City of Moss Point, 701 F.2d 556, 560 (5th Cir.1983); Aerojet-General Corporation v. Askew, 511 F.2d 710, 715 (5th Cir.), appeal dismissed and cert. denied sub nom. Metropolitan Dade County v. Aerojet-General Corp., 423 U.S. 908, 96 S.Ct. 210, 46 L.Ed.2d 137 (1975) ("... all claims and defenses that were actually raised or could have been raised"). See also Maldonado v. Flynn, supra, 417 A.2d 378. The judgment called for by the settlement agreement--and it would appear that any preclusion must rest on the judgment, not the agreement per se --decrees that "[t]his action is dismissed with prejudice as to all defendants." This, again, is the customary formulation. Even if a judgment of dismissal is expressly based on limitations, this does not necessarily mean it is not on the merits or that it lacks the normal full preclusive effect. Nilsen, 701 F.2d at 562-63. We do not find any improper "broadening" of the settlement or judgment.41

Moreover, even broad releases, though not to be encouraged, do not necessarily render settlements of derivative actions improper. "It is not uncommon for general releases to be granted in settlements of derivative suits." Ruskay v. Waddell, 552 F.2d 392, 394-95 n. 4 (2d Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). See also In re Corrugated Container Antitrust Litigation, 643 F.2d 195, 221 (5th Cir.1981), cert. denied, 456 U.S. 998, 102 S.Ct. 2283, 2308, 73 L.Ed.2d 1294 (1982) ("a court may release not only those claims alleged in the complaint and before the court, but also claims which 'could have been alleged by reason of or in connection with any matter or fact set forth or referred to in' the complaint").

We therefore hold that the asserted breadth of the settlement agreement and judgment thereon does not, of itself, establish that the settlement was collusive or fraudulent.

C. FAIRNESS.

1. Res Judicata.

Nor do we think that the possible res judicata effects of the settlement rendered it so unfair as to prevent approval by Judge Black. In the circumstances of this case, including the above-referenced prior determinations of Judge Weinfeld and the Second Circuit and the recommendation of the Investigation Committee that all three derivative actions be terminated, we agree with Judge Black that, upon his finding that the settlement as a whole was reasonable, adequate, and fair to all parties, and in the best interest of Zapata, its possible res judicata effects need not be "a determining factor" in, or preclude, the court's decision to approve the settlement.

Judge Black had before him adequate information as to the matters complained of in the New York and Delaware actions, including all that which Maldonado saw fit to present in support of his position that it would not be in Zapata's best interest to prejudice those actions, and the report of the Investigation Committee recommending their dismissal. See note 37, supra. The allegations of the second amended complaint embraced the matters complained of in the New York and Delaware actions, and we reject Maldonado's assertion that Judge Black did not take those matters into account merely because he refused to make his decision wholly dependent on how the settlement might affect those lawsuits. See Shlensky v. Dorsey, 574 F.2d at 144 col. 1.

Under these circumstances, we agree with Shlensky that

"... the district court was not precluded from approving the settlement of this shareholders' derivative action because it included an agreement by the parties to release claims other than those pleaded in the complaint where it found, as it did here, that the settlement as a whole was fair and reasonable. See 3B Moore's Federal Practice p. 23.1-141. See also Winkelman v. General Motors Corp., 48 F.Supp. 490, 495-496 (S.D.N.Y.1942). We think that the question of the actual effect of the general releases on the District of Columbia suit is one to be resolved in that proceeding. See Delahanty v. Newark Morning Ledger Co., 26 F.Supp. 327, 328-329 (D.N.J.1939). We are not persuaded to the contrary by the opinion of the district court in Herbst v. International Tel. & Tel. Corp., 72 F.R.D. 85, 91-92 (D.Conn.1976), cited by the [party appealing approval of the settlement]." Id. at 144 col. 2.42

We also observe that with respect to the Delaware action, preclusion is a distinct possibility wholly apart from settlement in the Texas action. See Maldonado v. Flynn, supra, 417 A.2d 378.

2. The Range of Possible Recovery.

In In re Corrugated Container Antitrust Litigation, supra, a class action antitrust damage suit, this Court held that, before exercising its discretion in passing on the fairness, reasonableness, and adequacy of a settlement agreement, the district court must first "establish the range of possible damages that could be recovered at trial, and, then, by evaluating the likelihood of prevailing at trial and other relevant factors, determine whether the settlement is pegged at a point in the range that is fair to the plaintiff settlors." 643 F.2d at 213. See also In re Corrugated Container Antitrust Litigation, 659 F.2d 1322, 1327 (5th Cir.1981), cert. denied, 456 U.S. 998, 102 S.Ct. 2283, 73 L.Ed.2d 1294 (1982). Relying on the Corrugated Container cases, Maldonado argues that the district court erred in failing to conduct an analysis of the claims asserted in the Texas action so as to arrive at estimates of the range of possible recovery that plaintiffs would realize if they prevailed at trial on each claim.

The proponents of the settlement agreement herein provided the district court with their arguments and positions respecting the merits of the claims being asserted and compromised, the risks of litigation, and the benefits of the compromise. They did not, however, provide the court with an express estimate of the range of possible monetary recovery should plaintiffs prevail at trial. Nor did the court insist on being provided with such an estimate or expressly make such an estimate itself. Yet, it is apparent from the court's Memorandum and Order approving the settlement agreement, that it accepted the proponents' contentions that there were serious legal and factual obstacles to recovery on each cause of action, and that this being the case, the probable recovery did not outweigh the costs, both legal and otherwise, that would be incurred by Zapata, should the action be prosecuted to a successful conclusion.

Although our Corrugated Container decisions plainly establish that a proper evaluation of a proposed settlement agreement should include an estimate of the range of possible monetary recovery on the claims being compromised, we hold that the district court's failure to expressly make such an estimate here, though perhaps erroneous, under the circumstances does not require reversal, especially in view of the relevant factors favoring approval of the settlement and since the analysis actually conducted by the court was sufficient, in the context of this case, to allow it to discharge its function of passing on the fairness of the settlement. See Desimone v. Industrial Bio-Test Laboratories, Inc., 83 F.R.D. 615, 619, 620 (S.D.N.Y.1979); Weiss v. Drew National Corp., 465 F.Supp. 548, 551 (S.D.N.Y.1979). Moreover, in his challenges to the settlement below, Maldonado did not assert that it was inconsistent with some likely range of recovery espoused by him.

We also observe in respect to this matter that a derivative suit of the type before us presents certain considerations not involved as significantly in a class action suit for money damages such as Corrugated Container. We have previously adverted to one such differentiating factor (see note 42, supra ). Further, and perhaps of more significance, where, as here, the derivative suit is largely an attack on past corporate management practices, as well as on some present officers and directors, the dollar amount of a possible judgment, which is essentially the sole goal in the class action damage suit, is not the sole, and may well not be the most important, matter to be considered, for the effects of the suit on the functioning of the corporation may have a substantially greater economic impact on it, both long- and short-term, than the dollar amount of any likely judgment in its favor in the particular action. While this is certainly not invariably the case, we believe Judge Black concluded that it was in this instance (as in substance did the Investigation Committee and the plaintiffs), and that such a conclusion was not an abuse of his discretion under these circumstances. The evaluation of such an economic impact is necessarily judgmental and imprecise and normally does not lend itself to meaningful quantification.43

(a) Section 14(a).

Respecting plaintiffs' cause of action under section 14(a) of the Exchange Act, relating to misleading omissions in the 1977 and 1978 proxies for election of directors, their complaint sought injunctive relief only,44 thus, no estimate of the range of possible recovery in regard thereto was even required since no damages for its violation were sought. The district court noted that Zapata had disclosed the substance of the allegations pertaining to the alleged section 14(a) violation, namely, the complaints respecting the conduct of Flynn, in its February 1981 proxy statement. Moreover, by the time of the settlement, Flynn had long been removed from the management of Zapata. According to the plaintiffs, the problem that this cause of action sought to correct therefore no longer existed.45

(b) Sections 13(a) and 13(b).

As to the causes of action asserted under sections 13(a) and 13(b) of the Exchange Act, plaintiffs' complaint again sought only to enjoin defendants from violating their provisions. No damages were sought, and an analysis of the range of possible recovery therefore was not required. The district court stated that it was unknown whether private litigants had standing to seek injunctive relief under either section. See Abbey v. Control Data Corp., 603 F.2d 724, 730-31 (8th Cir.1979) cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980) (section 13(a)). See also Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) (no implied cause of action for violations of reporting requirements of section 17(a)). With regard to section 13(b), in Hall's affidavit, and at the settlement hearing, plaintiffs conceded that they had found no evidence that Zapata had made any illegal foreign payments, and that given the substantive corrective accounting and control procedures and practices that had been instituted after the commencement of their lawsuit, further violations were unlikely, thus rendering moot their request for injunctive relief. Respecting section 13(a), which concerned a failure to make a disclosure on Zapata's 1978 form 10-k, filed with the SEC, in connection with Zapata's impending purchase of a substantial block of its own stock from the Crane Company, plaintiffs conceded that this had also been subsequently disclosed.46

(c) Article 2.02 A(6).

Concerning the alleged violation of article 2.02 A(6) of the Texas Business Corporation Act, which concerns the interest-free loans made to Zapata senior officers in connection with their 1974 exercise of the options and resultant taxes,47 the district court stated that it was unclear whether Texas law, which did not authorize such loans to a domestic corporation's officers and directors, or Delaware law, section 143 of the Delaware Corporation Law,48 which permitted such loans, applied to a Delaware corporation with its headquarters in Texas. Although neither the parties nor the district court made an express estimate of the range of possible recovery in connection with this cause of action, we feel that the court's failure to do so was harmless, in view of the strength of defendants' arguments that no recovery was available respecting the loans. See Corrugated Container, 659 F.2d at 1325.

As previously mentioned, the July 1974 loans were all repaid in March 1975, and in any event it is clear that recovery in respect to them was barred by limitations. Of the sums loaned in 1975, about seventy percent had been repaid prior to the settlement.49 We believe the probabilities likewise most strongly favored any recovery in respect to these transactions also being barred by limitations.50

Additionally, it would seem highly likely that in this action, which concerns the strictly internal affairs of a Delaware corporation, section 143 of the Delaware Corporation Law which authorizes such loans (see note 48, supra), rather than article 2.02 A(6) of the Texas Business Corporation Act (see note 47, supra) which is a limitation on powers granted Texas corporations, would be applicable. In this connection, it is important to note that article 2.02 A(6) has been authoritatively construed not to render loans by a Texas corporation to its officers or directors either "illegal" or "against public policy," and not to constitute "a positive prohibition" of such loans but, rather, merely "a limitation on a specific power granted." Whitten v. Republic National Bank of Dallas, 397 S.W.2d 415, 418 (Tex.1966). While Zapata was headquartered in Houston, Texas, it was certainly not a "de facto" or local Texas corporation; it was a sprawling giant with extensive operations, facilities, and properties in numerous states as well as diverse overseas locations, whose stock was traded on the New York stock exchange. De facto it was plainly a national, or international, not simply a Texas, entity. Under these circumstances we believe it most unlikely that Zapata's loans to its directors and officers, despite having been made in Texas, would be held to be "intrastate" in Texas under articles 8.01 or 8.02(A), Tex.Bus.Corp. Act,51 so as to be governed by article 2.02 A(6), rather than Delaware law, at least for purposes other than defining the rights of third parties. While there seem to be no Texas decisions directly in point, general expressions in Texas opinions have long given recognition to the primacy of the state of incorporation respecting internal corporate affairs.52 Under these circumstances, a federal court in Texas would assume that Texas courts would follow the general rule. Glazer v. Glazer, 374 F.2d 390, 407 (5th Cir.), cert. denied, 389 U.S. 831, 88 S.Ct. 100, 19 L.Ed.2d 90 (1967). As reflected in Restatement (Second) of Conflict of Laws § 302, this recognizes the undesirable lack of uniformity, frustration of expectations, and impracticality in having matters "which involve a corporation's organic structure or internal administration, governed by different laws," id. comment e, and that as to such matters "the local law of the state of incorporation should be applied except in the extremely rare situation where a contrary result is required by the overriding interest of another state in having its rule applied." Id. comment g. See Glazer v. Glazer, supra; National Lock Co. v. Hogland, 101 F.2d 576, 587 (7th Cir.1938).53

(d) Fiduciary Duties.

Finally, with regard to plaintiffs' cause of action based on the defendants' alleged breach of fiduciary duties to Zapata, the district court noted plaintiffs' contentions that after a lengthy and thorough investigation, there was no concrete evidence that any of the directors were aware of Flynn's alleged wrongful and improper actions,54 and that, in view of the strength of the Delaware "business judgment rule," recovery from them in connection with their decisions respecting Flynn's compensation and the 1974 amendments to the stock option plan was highly questionable.55 As to Flynn, the settlement between him and Zapata respecting his employment contract took into consideration many of the questionable items on past expense accounts and use of the Corporation's assets.56

Given the clear, acknowledged weaknesses, and in some respects, lack of evidentiary and legal support, on which to base a recovery by the Corporation on this cause of action,57 the failure of the district court to arrive at an estimate of the range of possible recovery was harmless, especially in light of the difficulty in relating Flynn's misconduct to any injury suffered by Zapata, and in placing a damage figure on any such injury. See Weiss, 465 F.Supp. at 551; Desimone, 83 F.R.D. at 620.

(e) The Benefits of Compromise.

As to the benefits of the settlement, the district court noted that continuation of the action would result in additional fees and costs to Zapata, and that the benefits facilitated by its commencement and maintenance would not be further enhanced by its continued prosecution. The court noted that "the parties' conclusion that any possible benefit to Zapata from pursuing the causes of action would be more than offset by the additional cost of litigation was based on an intelligent and prudent evaluation of their case."

(f) Conclusion.

In view of the above, we feel that the analysis conducted by the district court was sufficient under all the circumstances, especially in view of the fact that the assertions made regarding the difficulties as to maintenance of the plaintiffs' lawsuit were largely uncontradicted, and in the absence of any evidence or argument offered by Maldonado on which a more detailed analysis or estimate of the range of possible recovery could be made.58

3. Lack of Monetary Consideration.

Maldonado's next argument is that the settlement is unfair because its terms do not provide for any direct monetary consideration to be paid Zapata in exchange for the relinquishment of its claims against the defendants. Parties to the settlement of a shareholders' derivative action are, however, permitted great freedom in shaping the form of the settlement consideration. Levin v. Mississippi River Corporation, 59 F.R.D. 353, 367 n. 38 (S.D.N.Y.), aff'd sub nom., Wesson v. Mississippi River Corporation, 486 F.2d 1398 (2d Cir.), cert. denied, 414 U.S. 1112, 94 S.Ct. 843, 38 L.Ed.2d 739 (1973). "The fact that the form of the settlement decided upon is somewhat unusual in that it includes some benefits which cannot be evaluated in financial terms does not militate against its acceptance ...." Levin, 59 F.R.D. at 367 n. 38. Thus, a settlement may fairly, reasonably, and adequately serve the best interest of a corporation, on whose behalf the derivative action is brought, even though no direct monetary benefits are paid by the defendants to the corporation. See Goldman v. Northrop Corporation, 603 F.2d at 108-09; Lewis v. Anderson, 81 F.R.D. 436, 438-39 (S.D.N.Y.1978); Milstein v. Werner, 57 F.R.D. at 521-23. See also Hill v. Art Rice Realty Co., 66 F.R.D. 449, 453 (N.D.Ala.1974), aff'd, 511 F.2d 1400 (5th Cir.1975) ("[i]t does not follow as a matter of course, that money must be paid to make every settlement a reasonable one"). Moreover, as noted, much of the relief sought was nonmonetary in nature.

Here, before the settlement hearing was held, a stipulation of benefits signed by Zapata, the independent Investigation Committee, and the plaintiffs was submitted to the district court. This stipulation, which listed numerous benefits that the institution and maintenance of plaintiffs' action had facilitated, was relied upon by the district court in approving the settlement. (See district court's finding No. (5), supra). Moreover, it is plain that one of the principal purposes of the settlement was to terminate the litigation to avoid any further legal expense to Zapata, and, of at least as great importance, to take its management "out of the courtroom and restore them fulltime to the corporate board room and business." Milstein, 57 F.R.D. at 521. The avoidance of this expense, both monetarily in the form of litigation fees and expenses, and nonmonetarily in the form of disruption and distraction of management, and threatened impairment of the Corporation's credit and goodwill, are important and valid reasons for seeking a settlement, Lewis, 81 F.R.D. at 439, and may warrant its approval. As the court stated in Goldman:

"Instead of choosing the course of securing the greatest possible money judgment from the [individual defendants], the parties and the court chose the course of terminating litigation and taking steps to assure that such conduct as had been disclosed could not occur in the future." 603 F.2d at 109.

We hold that, under the circumstances here, the district court did not abuse its discretion in approving the settlement agreement, even though it provided for no monetary consideration to be paid Zapata.

Under the circumstances of this case, it has not been demonstrated that Judge Black's approval of the settlement constituted an abuse of his discretion, or that there were deficiencies in the notice requiring reversal. Accordingly, the judgment below is affirmed.

AFFIRMED.