January 30, 2018

Derivative Suits: “Anywhere But Delaware?”

This Potter Anderson memo discusses the Delaware Supreme Court’s recent decision in CALSTRS v. Alvarez (Del.; 1/18) – in which the Court affirmed an earlier Chancery Court decision holding that derivative claims filed by Walmart stockholders in Delaware were precluded because a federal court in Arkansas had already dismissed a derivative complaint filed by different Walmart stockholders for failure to satisfy the demand requirement.

We’ve previously blogged about this case – and pointed out that some commentators suggested that the Supreme Court might act to prevent derivative plaintiffs in M&A cases from scurrying to other jurisdictions that aren’t as insistent on pre-suit books & records demands as Delaware has been.  But as the memo notes, that didn’t happen:

On appeal, the Supreme Court directed the Court of Chancery to reconsider the Due Process implications of giving preclusive effect to the dismissal by the Arkansas federal court. In answering the question posed by the Supreme Court, the Court of Chancery concluded that the Delaware plaintiffs’ Due Process rights were not violated under existing law, but nonetheless recommended that the Supreme Court adopt a rule that would not give preclusive effect in Delaware to prior dismissals based on demand futility.

In so recommending, the Court of Chancery relied on the then-recent decision in In re EZCORP Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934 (Del. Ch. 2016), which suggested in dicta that, as a matter of Delaware law and Due Process, a derivative plaintiff may not bind a later derivative plaintiff unless and until the first derivative plaintiff survives a motion to dismiss, or the board of directors has given the plaintiff authority to proceed by declining to oppose the suit.

The Supreme Court declined to adopt the Court of Chancery’s recommendation, however, and instead affirmed the Court of Chancery’s original decision to dismiss the Delaware action on the basis of collateral estoppel. The Supreme Court concluded that, under existing federal Due Process law, an exception to the general rule against nonparty preclusion was appropriate because the interests of the plaintiffs in Arkansas and Delaware were sufficiently aligned and the Arkansas plaintiffs were adequate representatives, despite their decision not to seek books and records.

This recent blog from Francis Pileggi suggests one possible result of the Court’s decision:

A cynical wag might conclude that an unintended consequence of this decision will be to encourage some plaintiffs to file stockholder suits in courts “anywhere but Delaware” without the added expenditure of time and money using the tools of Section 220 before filing their plenary complaint.

Count me among the cynical wags – if you’re a plaintiff, why file in Delaware if it will give collateral estoppel effect to a judgment from a less burdensome jurisdiction?

John Jenkins