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Nature of Suit Code: 160
Nature of Suit: Stockholder's Suits
Cause of Action: 

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In the 

United States Court of Appeals 

For the Seventh Circuit ____________________ 

No. 19-2755 

TRAVIS DORVIT and MICHAEL MARTIN,

derivatively on behalf of POWER 

SOLUTIONS INTERNATIONAL, INC., 

Plaintiffs-Appellees, 

v.

GARY S. WINEMASTER, et al., 

Defendants-Appellees, 

and

POWER SOLUTIONS INTERNATIONAL,

INC., 

Nominal Defendant-Appellee, 

APPEAL OF: GARY MCFADDEN,

derivatively on behalf of POWER 

SOLUTIONS INTERNATIONAL, INC., 

Intervenor-ObjectorAppellant.

____________________ 

Appeal from the United States District Court for the 

Northern District of Illinois, Eastern Division. 

No. 17-cv-01097 — Thomas M. Durkin, Judge. 

____________________ 

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2 No. 19-2755

ARGUED FEBRUARY 13, 2020 — DECIDED FEBRUARY 28, 2020 

____________________ 

Before FLAUM, MANION, and BARRETT, Circuit Judges. 

FLAUM, Circuit Judge. The named plaintiff in a failed state 

derivative action seeks to reverse the district court’s approval 

of a settlement in a related federal suit. The court below adequately considered the propriety of the settlement’s terms and 

we now affirm. 

I. Background 

A. Facts 

Gary Winemaster founded Power Solutions International, 

Inc. (PSI) as a private company in 1985. The company designs, 

makes, and distributes engines and power systems to equipment manufacturers around the world. Winemaster served as 

PSI’s Chairman, President, and CEO until resigning in 2017. 

In 2011, PSI merged with an existing corporation and became a publicly traded company. From the time of the merger 

until his resignation, Winemaster and his brother were PSI’s 

majority shareholders. As a public company, PSI began implementing (apparently suboptimal) internal controls and reporting standards. The company’s early annual 10-K filings 

with the Securities and Exchange Commission noted that 

PSI’s “internal controls over financial reporting” suffered 

from “material weakness.” Nonetheless, over the course of 

2013, PSI’s per share price rocketed from $16.18 to $75.10. 

PSI’s shares sustained a high valuation until August 2015. 

At that time, the company began making a series of disclosures, beginning with a revision to its earnings guidance. PSI 

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eventually admitted that it needed to restate two full fiscal 

years’ financial statements. PSI’s auditor resigned, its share 

price plummeted, and the government began investigating 

the company. It became clear that PSI had improperly recognized millions of dollars in revenue. In early 2017, Winemaster resigned from all three of his leadership roles. 

In March 2017, PSI announced that Weichai America Corp. 

(Weichai), a Chinese diesel engine manufacturer, planned to 

buy a 20% equity stake in the company with the option to purchase additional common stock up to a majority position. As 

part of the deal, Weichai could select two new directors, enlarging PSI’s board from five to seven seats. In the aftermath 

of the investment, four existing PSI directors resigned. By the 

time the board’s realignment was complete, six of PSI’s seven 

directors were unaffiliated with the company during the period of alleged misconduct. 

In June 2017, PSI’s former chief operating officer filed a 

whistleblower complaint alleging he had been terminated because he reported PSI’s violation of Generally Accepted Accounting Principles and securities laws. In July 2019, the federal government charged Winemaster with multiple criminal 

fraud counts. 

B. Procedural History 

There were multiple parallel suits in federal and state 

court related to this case. We begin with a summary of the 

federal suits. 

In 2016, PSI was sued for breach of federal securities laws 

in a purported class action in the Northern District of Illinois. 

(The direct lawsuit is not at issue in this appeal.) In February 

2017, plaintiff Travis Dorvit filed a derivative complaint on 

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behalf of PSI in the same District, alleging fiduciary breach 

and unjust enrichment against certain of PSI’s officers and directors. In March 2017, the district court stayed the derivative 

case pending PSI’s motion to dismiss the class action. 

In April 2018, plaintiff Michael Martin filed a second derivative suit in federal court, which was transferred to Judge 

Durkin below. Dorvit and Martin then filed a joint verified 

second amended derivative complaint. It realleged most of 

the same claims as before, with additional claims against PSI’s 

five new directors who had been seated in the interim. 

In July 2018, the parties in the class action settled and the 

district court subsequently lifted the stay in the derivative 

suit. On October 1, 2018, both the individual defendants and 

the company moved to dismiss the derivative suit; PSI contended that the plaintiffs had failed to make a pre-suit demand on the board of directors. 

The parties then began mediation and settlement negotiations, executing an agreement in May 2019. The settlement 

called for a monetary award of $1.875 million from PSI’s director and officer liability insurers, of which plaintiff’s counsel would get half. The rest of the money would be earmarked 

for expenses related to the government’s investigations. The 

settlement also required the formal enactment of seventeen 

corporate governance reforms, primarily focusing on 

strengthening the work and integrity of the company’s audit 

functions. In exchange, the plaintiffs agreed to a release 

against the individual defendants, including Winemaster. 

The plaintiffs moved the district court to preliminarily approve the settlement, but the court asked for further reassurance regarding the corporate reforms. The parties prepared a 

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plain-language explanation of each of the reforms, and in late 

May 2019 the court granted preliminary approval. 

Before discussing the settlement’s final approval, we turn 

to the parallel state cases. In May 2017, two plaintiffs filed 

state derivative actions on behalf of PSI in the Cook County 

Court of Chancery. The state court eventually deemed one 

complaint operative. It was substantively identical to Dorvit’s 

initial federal complaint but included additional claims 

against PSI’s accountants. Intervenor Gary McFadden eventually substituted as lead plaintiff on this state derivative action. 

In November 2018, the state court dismissed the McFadden complaint, ruling that the federal derivative suit sought 

identical relief and the state case was thus duplicative. 

McFadden appealed the dismissal and then intervened in the 

federal case, filing his objections to the settlement between its 

preliminary and final approvals. He argued that the monetary 

component was insufficient, particularly as half would be going to lawyers, and that the proposed governance reforms 

lacked substance. McFadden further objected to the release of 

liability against Winemaster. 

During the approval hearing, the district court considered 

the objections to the settlement plan. The judge took note of 

the fact that, because a majority of PSI’s board was unaffiliated with the company during the time in question, any derivative plaintiff would have a serious issue meeting Delaware’s demand futility standard. Determining that the corporate governance reforms were meaningful, the district court 

overruled the objections and granted final approval to the settlement. 

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McFadden timely appealed. While this case awaited argument here, the Illinois Appellate Court affirmed the dismissal 

of McFadden’s state court derivative action. 

II. Discussion 

McFadden asks us to find that the district court abused its 

discretion in approving the settlement of the plaintiffs’ derivative claims. We expect district courts, in assessing proposed 

settlements, to “weigh the probabilities and possibilities of 

victory or defeat as indicated by the legal or factual situation 

presented and determine whether the compromise, taken as a 

whole, is in the best interest of the corporation and all its 

shareholders.” United Founders Life Ins. Co. v. Consumers Nat. 

Life Ins. Co., 447 F.2d 647, 655 (7th Cir. 1971) (internal quotation marks and citation omitted). “[I]n reviewing the appropriateness of the settlement approval or disapproval, the reviewing court should intervene only upon a clear showing 

that the trial court was guilty of an abuse of discretion.” Id. 

Here, the district court adequately weighed “the probabilities and possibilities of victory or defeat” and it did not abuse 

its discretion. As explored below, it was appropriate for the 

district court to place significant weight on the demand futility issue, which is a critical, substantive aspect of derivative 

suits. 

A. Derivative Actions and Demand Futility 

As a preliminary matter, we find it helpful to briefly discuss the nature of a derivative suit. “A derivative suit is 

brought by an investor in the corporation’s (not the investor’s) 

right to recover for injury to the corporation.” Felzen v. Andreas, 134 F.3d 873, 875 (7th Cir. 1998). Because corporate decisions (such as suing on its behalf) are typically in the hands 

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of the board of directors, derivative suits represent an anomaly of corporate governance. “Only when the corporation’s 

board defaults in its duty to protect the interests of the investors” may a plaintiff pursue a derivative suit. Id.

For this reason, the Federal Rules of Civil Procedure place 

a special pleading requirement on would-be derivative plaintiffs. Rule 23.1(b)(3) requires that derivative plaintiffs plead 

with particularity their reasons for not attempting to compel 

the company’s board to take a desired course of action. We 

refer to this obligation as a derivative action’s “demand futility” requirement. 

The upshot is that derivative plaintiffs must show that a 

court should usurp the business judgment rule, which normally protects directors’ decisions. See In Re Abbott Labs. Deriv. 

S’holders Litig., 325 F.3d 795, 807 (7th Cir. 2003) (“[D]emand 

can only be excused where facts are alleged with particularity 

which create a reasonable doubt that the directors’ action was 

entitled to the protections of the business judgment rule.” 

(quoting Aronson v. Lewis, 473 A.2d 805, 808 (Del. 1984))). 

In Aronson, as we have explained, the Delaware Supreme 

Court laid out the familiar two-prong test for demand futility, 

holding it is established where “the alleged particularized 

facts raise a reasonable doubt that either (1) the directors are 

disinterested or independent or (2) the challenged transaction 

was the product of a valid exercise of the directors’ business 

judgment.” Abbott, 325 F.3d at 807 (citing Aronson, 473 A.2d at 

814). 

The district court noted that there was a significant chance 

that, had it ruled on PSI’s motion to dismiss the derivative 

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suit, it would have found the demand futility requirement unmet. Because the board in place at the time of the operative 

complaint had a majority of new directors who could not be 

tied to the company’s revenue recognition issues, the plaintiffs were unlikely to establish that a majority of the directors 

were conflicted or lacked independence. 

McFadden does not meaningfully address this point, arguing instead that demand futility is “merely one aspect of a 

shareholder derivative lawsuit” and a “procedural, pleading 

requirement” that is “separate from the substantive merits” of 

the claim. This is incorrect and squarely contradicted by precedent: “The function of the demand futility doctrine ... is a 

matter of substance, not procedure.” Westmoreland Cty. Employee Ret. Sys. v. Parkinson, 727 F.3d 719, 722 (7th Cir. 2013) 

(citing Kamen v. Kemper Fin. Servs., 500 U.S. 90, 96 (1991)). Because derivative actions by their very nature require a showing that the board cannot act as it should, the allegations 

demonstrating this inability are substantive. Contrary to 

McFadden’s argument, the demand futility requirement is 

not a mere technical, procedural hurdle. Demand futility is a 

substantive sine qua non of derivative suits. 

McFadden contends that the district court put too much 

weight on the demand futility issue, and essentially should 

have performed a more “holistic” analysis that gave greater 

consideration to the strength of the underlying breach and 

unjust enrichment claims, particularly in light of the whistleblower and criminal suits against PSI. As discussed above, 

McFadden misunderstands the nature of a derivative suit: the 

ability to demonstrate demand futility is a substantive element of the strength of such an action. 

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McFadden claims that “[a]ll told, whether or not the Federal Plaintiffs could satisfy Rule 23.1’s pleading requirements 

is not –– and cannot be –– dispositive for the purposes of 

weighing the strengths of the derivative claims here.” That is 

incorrect. If a plaintiff cannot show demand futility in a case, 

that disposes of his derivative claim. 

In sum, the district court’s close attention to the demand 

futility weakness in the plaintiffs’ claims was appropriate. We 

now turn to McFadden’s claims that the district court abused 

its discretion in approving the monetary award and the corporate governance reforms. 

B. Money Damages 

McFadden claims that the settlement’s $1.875 million in 

money damages was insufficient when compared to the potential recovery should the derivative suit have proceeded. 

Though we have elucidated several factors to 

guide a district court’s analysis of whether a 

proposed settlement is fair, reasonable, and adequate, we have repeatedly stated that the most 

important factor relevant to the fairness of a 

class action settlement is ... the strength of plaintiff’s case on the merits balanced against the 

amount offered in the settlement. 

Kaufman v. Am. Express Travel Related Servs. Co., Inc., 877 F.3d 

276, 284 (7th Cir. 2017) (internal quotation marks and citations 

omitted). McFadden argues that the total monetary award 

should have been higher, particularly where the plaintiffs’ 

lawyers were going to be awarded over $900,000. But McFadden’s argument is hampered by the fact that, as discussed, the 

ability to show demand futility is a substantive component of 

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the strength of the derivative case. That plaintiffs’ ability to 

show demand futility is doubtful weighs in favor of a smaller 

monetary award. 

Kaufman concerned the approval of a class action settlement, another area (besides derivative suits) where courts 

typically review terms agreed to by private parties. Id. at 279. 

There, intervenors objected to a proposed $1.8 million settlement, the figure that the district court found appropriate considering the defendants’ possible arbitration defense. We declined to hold that the district court abused its discretion in 

approving the settlement: 

The Intervenors argue that the district court improperly analyzed this factor by giving too 

much weight to Amex’s potential arbitration defense. The district court concluded there was a 

significant risk that this court would reverse the 

district court’s decision and send the action to 

arbitration, where the Plaintiffs would likely receive nothing. Because of that risk, the district 

court concluded that the approximately $1.8 

million the class would receive from the settlement was a reasonable recovery. 

Id. at 285. 

Here, the district court similarly discounted the strength 

of the plaintiffs’ case because of the risk of dismissal for lack 

of demand futility. The court’s detailed analysis of this factor 

tracked our precedent’s requirements. In the approval hearing, the court explained: 

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I have to determine whether or not the settlement is fair, reasonable, adequate, and should 

be approved. 

The amount of the defendants’ settlement offer 

compared to the strength of the case, it is something versus nothing. This case could have ... 

been dismissed. Not saying it would, but it 

could have been dismissed. And I think the parties recognized—especially the plaintiffs recognized—the shaky grounds by which this case 

could have proceeded. 

To extract any money in a derivative case I agree 

is unusual. And in this case, it is—it is real 

money. It is $937,000 or more, depending on the 

amount of fees I approve, if I lower the request 

for fees. 

... 

Had the settlement not occurred, there’d be inevitable—even more expenses going against the 

insurance policy, which ultimately would harm 

the company when that policy had been completely eroded, all for a result which probably 

wouldn’t be any better than what we have, 

which is a number of substantive corporate governance reforms. 

So for all those reasons, I believe the settlement 

is fair, reasonable, adequate, and should be approved. 

McFadden has not proposed an alternate monetary figure, 

let alone provided a reasonable justification for one. In these 

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circumstances, the district court did not abuse its discretion 

by approving the $1.875 million in money damages. 

C. Corporate Governance 

McFadden next asserts that the proposed corporate governance reforms—which would be formalized under the settlement—lack substance. Specifically, McFadden insists that 

PSI already undertook a number of these reforms prior to settlement, so their formalization is mere window dressing. 

This claim fails because, as the district court recognized, 

many of the proposed seventeen reforms had been undertaken prior to the settlement but after the company’s investigation into its revenue recognition problems began. McFadden fails to distinguish between these timeframes. The defendants and plaintiffs convincingly argue that these reform 

efforts began after the malfeasance, and the district court was 

correct to acknowledge that there is value in having such requirements written and formalized. 

Moreover, McFadden failed to properly object to fifteen of 

the reforms, limiting his criticisms below to two of the seventeen. The following colloquy at the approval hearing is illuminating. 

THE COURT: Well, are there—I saw nothing 

from you with a proposal—other proposals for 

corporate governance, which is typically one of 

the remedies in a case like this. But I saw nothing from you proposing new corporate governance proposals that go beyond what are here, 

just an objection to two of the 17, saying they’re 

already doing it. Have I correctly summarized 

your objection? 

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MR. CHANG: Yes, that’s correct. 

Turning to the substance of the reforms themselves, they 

go beyond mere window dressing. Below is the plain-language description of each reform and the practice that preceded it: 

1. The Audit Committee must meet at least six 

times per year. 

 (Formerly) The Audit Committee must meet 

quarterly. 

2. The Director of Internal Audit must be a senior vice president (or higher). 

 (Formerly) No prior requirements for the Director of Internal Audit existed. 

3. The Audit Committee Charter will require 

the Director of Internal Audit to communicate at 

least quarterly with the Chief Financial Officer, 

Chief Executive Officer, and Audit Committee, 

attend all Audit Committee meetings, and meet 

at least quarterly with the Audit Committee. 

 (Formerly) None of these requirements existed. 

4. The Audit Committee must meet quarterly 

with the Company’s Auditors, without management present, to discuss candidly any audit 

problems or difficulties and management’s responses to the Auditor’s efforts to resolve such 

problems. 

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 (Formerly) Although the Charter currently 

requires the Audit Committee to conduct such 

meetings, it did not specify the number or frequency of these meetings. 

5. The Audit Committee must discuss and review with management quarterly the Company’s major financial risk exposure and the 

steps management takes to implement plans to 

monitor and mitigate such risks. 

 (Formerly) The Charter previously did not 

specify the frequency of these reviews. 

6. The Audit Committee must annually review 

the Company’s procedures for monitoring compliance with laws and regulations, the Company’s code of conduct and other policies relating to compliance with laws and regulations. 

 (Formerly) The Charter previously did not 

specify the frequency of these reviews. 

7. The Audit Committee must publish its Charter on the Company’s website and keep it up to 

date. 

 (Formerly) None of these requirements existed. 

8. The Director of Internal Audit must: (a) report directly to the Audit Committee, (b) communicate at least quarterly with the Chief Financial Officer, Chief Executive Officer and Audit Committee, (c) attend all Audit Committee 

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meetings, and (d) meet at least quarterly with 

the Audit Committee. 

 (Formerly) None of these requirements existed. 

9. The Director of Internal Audit must have full 

and free access to the Audit Committee and vice 

versa. 

 (Formerly) No formal policy regarding the 

Director of Internal Audit’s access to the Audit 

Committee existed. 

10. The Director of Internal Audit must report 

the audit findings to the Audit Committee, including which findings may relate to the effectiveness and adequacy of the Company’s internal controls, risk management and governance 

processes. 

 (Formerly) No formal policy about the Director of Internal Audit’s reports to the Audit 

Committee existed. 

11. The Director of Internal Audit must keep the 

Audit Committee informed of emerging trends 

in relevant internal control issues and internal 

audit matters and provide the Audit Committee 

with a report of outstanding audit issues and 

the current status of management’s efforts to resolve and improve the control environment. 

 (Formerly) No formal policy for the Director 

of Internal Audit’s reports to the Audit Committee existed. 

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12. The Internal Audit Department must keep a 

log tracking analysis, proposals, and recommendations provided to other departments or 

management regarding internal controls and 

accounting and auditing procedures, including 

the time and place (if applicable) that such information was provided, and any deadlines related thereto. 

 (Formerly) None of these requirements existed. 

13. The Company must hold an annual meeting 

of stockholders within forty-five (45) days after 

the filing of its proxy statement. 

 (Formerly) The Company had not previously committed to a timetable for holding its 

next annual meeting. 

14. Revise the Company’s Bylaws and Corporate Governance Guidelines to require that the 

Board maintain standing Audit, Compensation, 

and Nominating and Governance Committees. 

 (Formerly) The Bylaws did not require the 

Board to maintain any specific standing committees, and the Corporate Governance Guidelines only required that the Board maintain an 

Audit Committee. 

15. The Company must publish on its website 

all Board committee charters, biographies of the 

Company’s Directors and Officers, and a chart 

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or list identifying the members of each Board 

committee publicly available. 

 (Formerly) The Company published only 

two of the three Board Committee charters 

(with the Nominating and Governance Charter 

not currently published) on its website. It does 

not publish biographies of the directors or officers or a listing of the members of each Board 

Committee on its website. 

16. The Company must adopt a formal clawback policy covering specified incentive compensation of Officers. 

 (Formerly) No claw-back policy existed. 

17. The Company must ensure that the contact 

information for its whistleblower hotline and 

website is conspicuously displayed and widely 

posted on its website, at the Company’s offices 

and elsewhere, so as to be available to not only 

employees but also to customers, vendors, and 

other third parties. 

 (Formerly) There was no formal requirement that the whistleblower hotline be posted 

on the Company’s website or that information 

be widely posted and displayed. 

These reforms strike us as substantive and meaningful: 

they mandate an increased frequency of activity, meetings, 

and reporting among the company’s audit committee, its audit team, outside auditors, and senior leadership. Further, 

they increase transparency regarding PSI’s board of directors, 

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create a claw-back policy, and enhance the visibility of its 

whistleblowing mechanisms. It was not an abuse of discretion 

to approve these measures. 

D. Federal Plaintiff Adequacy 

Finally, McFadden briefly posits that the existing federal 

plaintiffs are inadequate. Federal Rule of Civil Procedure 

23.1(a) states that a “derivative action may not be maintained 

if it appears that the plaintiff does not fairly and adequately 

represent the interests of shareholders or members who are 

similarly situated in enforcing the right of the corporation or 

association.” 

Because half of the monetary damages went to plaintiffs’ 

counsel, and because the federal plaintiffs stayed the case 

while a direct class action was in briefing, McFadden claims 

the plaintiffs failed to adequately represent PSI’s shareholders. As to the fees, the district court analyzed the basis and 

propriety of the amount in extensive detail during the approval hearing. The judge determined that the requested attorneys’ fees represented “excellent” work done for two mediation sessions, multiple complaint drafts, motion to dismiss 

briefing, and pre- and post-complaint research and investigation. The judge also cited the settlement’s endorsement by the 

well-regarded mediator. We find no basis to overturn the 

judge’s thorough review and conclusion, and McFadden does 

not point to any analytical error. As to the stay of the federal 

derivative case, McFadden neglects to identify any authority 

showing that such a delay was unusual, let alone inappropriate. 

McFadden raises another point: that the federal plaintiffs 

do not meet contemporaneous ownership requirements. The 

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district court found that, because plaintiffs alleged a continuing offense, “they are plaintiffs who can claim damages for 

owning stock during a period when the company was allegedly engaging in accounting malfeasance.” Again, McFadden 

does not identify any error in the district court’s analysis and 

thus forfeited any relevant argument. 

III. Conclusion 

For the foregoing reasons, we AFFIRM the judgment of the 

district court. 

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