This Proskauer memo addresses a recent Delaware Chancery Court decision recommending to the Supreme Court that Delaware to change its approach to the preclusive effect of judgments in derivative litigation. Here’s the intro:
The Chancellor of Delaware’s Court of Chancery yesterday urged the Delaware Supreme Court to revise Delaware law on preclusion in shareholder derivative actions. The court’s July 25, 2017 decision in In re Wal-Mart Stores, Inc. Delaware Derivative Litigation recommended that the Supreme Court adopt a rule that a judgment in one derivative action cannot bind the corporation or its stockholders in another derivative action unless either
– the first action has survived a motion to dismiss because a pre-suit demand on the corporation’s board of directors would have been futile or
– the board has given the plaintiff authority to proceed on the corporation’s behalf by declining to oppose the derivative suit.
In other words, preclusion would not apply unless the stockholder in the first case had been empowered by either a court or the board to assert the corporation’s claims.
So what’s going on here? According to this blog by Prof. Ann Lipton, the court’s moves are ultimately about responding to the threat posed by multi-forum litigation:
Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones.
Delaware’s latest proposal to deal with the problem came in the form of a suggestion from its Supreme Court: perhaps when derivative actions are dismissed for failure to allege demand futility, it would violate the constitutional due process rights of subsequent plaintiffs to bind them to that decision. The theory is that until the demand requirement is satisfied, a plaintiff represents only him or herself, and not the corporate entity; therefore, any dismissal only extends to that plaintiff. In January, the Supreme Court remanded to Chancery to make a determination of the constitutional law issues. See Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017).
Well, a few days ago, Chancellor Bouchard came back with an answer. He concluded that an Arkansas court’s dismissal of a derivative case on the grounds that those plaintiffs failed to show demand futility should not bar similar claims by Delaware plaintiffs.
As we’ve previously blogged, Delaware has seen a dramatic decline in the percentage of deal litigation that has been filed in its courts in recent years. Although there are lots of reasons for the decline, making it harder to use out of state settlements of weak derivative claims to preclude stronger claims from being brought in Delaware courts may help to at least slow, if not stop, the bleeding.
– John Jenkins