                              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-Objector-
                                                         Appellant.
                    ____________________

        Appeal from the United States District Court for the
          Northern District of Illinois, Eastern Division.
          No. 17-cv-01097 — Thomas M. Durkin, Judge.
                    ____________________
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 ade-
quately 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 equip-
ment 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 be-
came 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 im-
plementing (apparently suboptimal) internal controls and re-
porting 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 disclo-
sures, beginning with a revision to its earnings guidance. PSI
No. 19-2755                                                    3

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 recog-
nized millions of dollars in revenue. In early 2017, Winemas-
ter 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 pur-
chase additional common stock up to a majority position. As
part of the deal, Weichai could select two new directors, en-
larging 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 pe-
riod of alleged misconduct.
   In June 2017, PSI’s former chief operating oﬃcer filed a
whistleblower complaint alleging he had been terminated be-
cause he reported PSI’s violation of Generally Accepted Ac-
counting Principles and securities laws. In July 2019, the fed-
eral 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
4                                                   No. 19-2755

behalf of PSI in the same District, alleging fiduciary breach
and unjust enrichment against certain of PSI’s oﬃcers and di-
rectors. 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 de-
rivative 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 con-
tended that the plaintiﬀs had failed to make a pre-suit de-
mand on the board of directors.
    The parties then began mediation and settlement negotia-
tions, executing an agreement in May 2019. The settlement
called for a monetary award of $1.875 million from PSI’s di-
rector and oﬃcer liability insurers, of which plaintiﬀ’s coun-
sel 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 ap-
prove the settlement, but the court asked for further reassur-
ance regarding the corporate reforms. The parties prepared a
No. 19-2755                                                    5

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 even-
tually substituted as lead plaintiﬀ on this state derivative ac-
tion.
    In November 2018, the state court dismissed the McFad-
den 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 go-
ing 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 unaﬃli-
ated with the company during the time in question, any de-
rivative plaintiﬀ would have a serious issue meeting Dela-
ware’s demand futility standard. Determining that the corpo-
rate governance reforms were meaningful, the district court
overruled the objections and granted final approval to the set-
tlement.
6                                                    No. 19-2755

   McFadden timely appealed. While this case awaited argu-
ment 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’ deriv-
ative 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 quota-
tion marks and citation omitted). “[I]n reviewing the appro-
priateness of the settlement approval or disapproval, the re-
viewing 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 probabil-
ities 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 futil-
ity 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 dis-
cuss 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. An-
dreas, 134 F.3d 873, 875 (7th Cir. 1998). Because corporate de-
cisions (such as suing on its behalf) are typically in the hands
No. 19-2755                                                     7

of the board of directors, derivative suits represent an anom-
aly of corporate governance. “Only when the corporation’s
board defaults in its duty to protect the interests of the inves-
tors” 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 plain-
tiﬀs. 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 futil-
ity” requirement.
   The upshot is that derivative plaintiﬀs must show that a
court should usurp the business judgment rule, which nor-
mally 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
8                                                   No. 19-2755

suit, it would have found the demand futility requirement un-
met. 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 plain-
tiﬀs were unlikely to establish that a majority of the directors
were conflicted or lacked independence.
    McFadden does not meaningfully address this point, ar-
guing 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 prec-
edent: “The function of the demand futility doctrine … is a
matter of substance, not procedure.” Westmoreland Cty. Em-
ployee Ret. Sys. v. Parkinson, 727 F.3d 719, 722 (7th Cir. 2013)
(citing Kamen v. Kemper Fin. Servs., 500 U.S. 90, 96 (1991)). Be-
cause derivative actions by their very nature require a show-
ing 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 whistle-
blower 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 ele-
ment of the strength of such an action.
No. 19-2755                                                    9

    McFadden claims that “[a]ll told, whether or not the Fed-
eral 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 cor-
porate governance reforms.
   B. Money Damages
   McFadden claims that the settlement’s $1.875 million in
money damages was insuﬃcient when compared to the po-
tential 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 ad-
       equate, we have repeatedly stated that the most
       important factor relevant to the fairness of a
       class action settlement is ... the strength of plain-
       tiﬀ’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 McFad-
den’s argument is hampered by the fact that, as discussed, the
ability to show demand futility is a substantive component of
10                                                  No. 19-2755

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 settle-
ment, 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 settle-
ment, the figure that the district court found appropriate con-
sidering the defendants’ possible arbitration defense. We de-
clined to hold that the district court abused its discretion in
approving the settlement:
       The Intervenors argue that the district court im-
       properly analyzed this factor by giving too
       much weight to Amex’s potential arbitration de-
       fense. 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 re-
       ceive nothing. Because of that risk, the district
       court concluded that the approximately $1.8
       million the class would receive from the settle-
       ment 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 hear-
ing, the court explained:
No. 19-2755                                                 11

      I have to determine whether or not the settle-
      ment is fair, reasonable, adequate, and should
      be approved.
      The amount of the defendants’ settlement oﬀer
      compared to the strength of the case, it is some-
      thing versus nothing. This case could have …
      been dismissed. Not saying it would, but it
      could have been dismissed. And I think the par-
      ties recognized—especially the plaintiﬀs recog-
      nized—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 in-
      evitable—even more expenses going against the
      insurance policy, which ultimately would harm
      the company when that policy had been com-
      pletely eroded, all for a result which probably
      wouldn’t be any better than what we have,
      which is a number of substantive corporate gov-
      ernance reforms.
      So for all those reasons, I believe the settlement
      is fair, reasonable, adequate, and should be ap-
      proved.
    McFadden has not proposed an alternate monetary figure,
let alone provided a reasonable justification for one. In these
12                                                  No. 19-2755

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 gov-
ernance reforms—which would be formalized under the set-
tlement—lack substance. Specifically, McFadden insists that
PSI already undertook a number of these reforms prior to set-
tlement, so their formalization is mere window dressing.
   This claim fails because, as the district court recognized,
many of the proposed seventeen reforms had been under-
taken prior to the settlement but after the company’s investi-
gation into its revenue recognition problems began. McFad-
den fails to distinguish between these timeframes. The de-
fendants 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 re-
quirements written and formalized.
   Moreover, McFadden failed to properly object to fifteen of
the reforms, limiting his criticisms below to two of the seven-
teen. The following colloquy at the approval hearing is illu-
minating.
       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 noth-
       ing from you proposing new corporate govern-
       ance 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?
No. 19-2755                                              13

      MR. CHANG: Yes, that’s correct.
   Turning to the substance of the reforms themselves, they
go beyond mere window dressing. Below is the plain-lan-
guage description of each reform and the practice that pre-
ceded 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 sen-
      ior vice president (or higher).
       (Formerly) No prior requirements for the Di-
      rector 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 ex-
      isted.

      4. The Audit Committee must meet quarterly
      with the Company’s Auditors, without manage-
      ment present, to discuss candidly any audit
      problems or diﬃculties and management’s re-
      sponses to the Auditor’s eﬀorts to resolve such
      problems.
14                                              No. 19-2755

      (Formerly) Although the Charter currently
     requires the Audit Committee to conduct such
     meetings, it did not specify the number or fre-
     quency of these meetings.

     5. The Audit Committee must discuss and re-
     view with management quarterly the Com-
     pany’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 com-
     pliance with laws and regulations, the Com-
     pany’s code of conduct and other policies relat-
     ing 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 Char-
     ter on the Company’s website and keep it up to
     date.
      (Formerly) None of these requirements ex-
     isted.

     8. The Director of Internal Audit must: (a) re-
     port directly to the Audit Committee, (b) com-
     municate at least quarterly with the Chief Fi-
     nancial Oﬃcer, Chief Executive Oﬃcer and Au-
     dit Committee, (c) attend all Audit Committee
No. 19-2755                                              15

      meetings, and (d) meet at least quarterly with
      the Audit Committee.
       (Formerly) None of these requirements ex-
      isted.

      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, in-
      cluding which findings may relate to the eﬀec-
      tiveness and adequacy of the Company’s inter-
      nal controls, risk management and governance
      processes.
       (Formerly) No formal policy about the Di-
      rector 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 re-
      solve and improve the control environment.
       (Formerly) No formal policy for the Director
      of Internal Audit’s reports to the Audit Commit-
      tee existed.
16                                               No. 19-2755



     12. The Internal Audit Department must keep a
     log tracking analysis, proposals, and recom-
     mendations provided to other departments or
     management regarding internal controls and
     accounting and auditing procedures, including
     the time and place (if applicable) that such in-
     formation was provided, and any deadlines re-
     lated thereto.
      (Formerly) None of these requirements ex-
     isted.

     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 previ-
     ously committed to a timetable for holding its
     next annual meeting.

     14. Revise the Company’s Bylaws and Corpo-
     rate 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 com-
     mittees, and the Corporate Governance Guide-
     lines 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
No. 19-2755                                                17

      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 oﬃc-
      ers or a listing of the members of each Board
      Committee on its website.

      16. The Company must adopt a formal claw-
      back policy covering specified incentive com-
      pensation 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 require-
      ment 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 au-
dit team, outside auditors, and senior leadership. Further,
they increase transparency regarding PSI’s board of directors,
18                                                  No. 19-2755

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 sharehold-
ers. As to the fees, the district court analyzed the basis and
propriety of the amount in extensive detail during the ap-
proval hearing. The judge determined that the requested at-
torneys’ fees represented “excellent” work done for two me-
diation sessions, multiple complaint drafts, motion to dismiss
briefing, and pre- and post-complaint research and investiga-
tion. 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 inappropri-
ate.
   McFadden raises another point: that the federal plaintiﬀs
do not meet contemporaneous ownership requirements. The
No. 19-2755                                                  19

district court found that, because plaintiﬀs alleged a continu-
ing oﬀense, “they are plaintiﬀs who can claim damages for
owning stock during a period when the company was alleg-
edly 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.
