February 1, 2017

Delaware: Due Process & Dismissal of Derivative Claims

This Business Law Prof blog discusses the Delaware Supreme Court’s recent decision in Cal. State Teachers Ret. Sys. v. Alvarez, & notes that it may have important implications Delaware derivative litigation:

Delaware encourages derivative plaintiffs to seek books and records under Section 220 before bringing a lawsuit, but that takes time. A plaintiff in another jurisdiction might simply file a lawsuit right away, and if that suit is dismissed, the dismissal can preclude the Delaware plaintiff– which only gives the Delaware plaintiff less incentive to seek books and records in the first place.

Well, until now. In Cal. State Teachers Ret. Sys. v. Alvarez, (Del. 2017), that exact scenario occurred in the long-running action against Wal-Mart for violations of the foreign corrupt practices act in Mexico. While the Delaware plaintiffs sought books and records to bolster a derivative claim, federal plaintiffs in Arkansas ploughed ahead using public information, only to see their suit dismissed for failure to plead demand futility. And Delaware Chancery concluded that the Arkansas ruling was res judicata against the Delaware plaintiffs.

The Supreme Court expressed concern that constitutional due process required that – until demand futility is established – any single group of plaintiffs represents only their own interests, & not the interests of the corporation. The Court remanded the case back to the Chancery Court to consider the issue that it raised in its order –  whether due process prohibits the pre-demand futility dismissal of a derivative claim from being res judicata with respect to subsequent plaintiffs.

John Jenkins