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  • Delaware Court Of Chancery Recommends Limiting The Preclusive Effect Of Prior Decisions On Demand Futility In Derivative Lawsuits 
     
    08/15/2017
    On July 25, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery issued a supplemental opinion, responding to a remand order from the Delaware Supreme Court, in which Chancellor Bouchard recommended that the Delaware Supreme Court adopt a new preclusion threshold to determine whether collateral estoppel precludes a new plaintiff from pursuing derivative claims that have already been dismissed.  In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017).  Chancellor Bouchard originally dismissed the Delaware suit (“Wal-Mart I”) after finding that the plaintiff was barred from relitigating demand futility, which the federal court in the District of Arkansas found was inadequately pleaded in an earlier-filed federal suit.  While the Delaware plaintiffs spent the three years litigating a books and records demand under 8 Del. C. § 220, the plaintiffs in the federal suit filed suit (in what Chancellor Bouchard described as a race to the courthouse) without making a Section 220 demand.

    The Delaware Supreme Court remanded the case to ask Chancellor Bouchard to evaluate whether applying issue preclusion to demand futility violated the due process rights of stockholders.  On remand, Chancellor Bouchard found that although the analysis in Wal-Mart I followed the precedent adopted in most jurisdictions, the issue warranted further consideration.  Chancellor Bouchard’s supplemental opinion drew a parallel between derivative suits and class actions, noting that denial of class certification in federal court does not preclude a state court from considering a different plaintiff’s request to certify a class under state law.  Bouchard suggested that a similar standard should apply to dismissal of derivative suits for lack of standing, noting that when a stockholder is denied authority to sue on behalf of the corporation by granting a Rule 23.1 motion to dismiss, the purported derivative action is no more a representative action than a proposed class action that was denied certification.  In drawing this analogy, Chancellor Bouchard advocated that preclusive effect should not be given to demand futility suits unless the corporation’s board has authorized the suit or the suit has survived a motion to dismiss. 

    If the Delaware Supreme Court adopts Chancellor Bouchard’s suggested new approach, the decision is unlikely to stem the current tide of M&A-related cases being filed in federal courts in the wake of Trulia or to drive an increase in Section 220 demands.  If anything, a ruling that dismissal for demand futility (or lack of standing) does not preclude relitigation of the issue by another plaintiff could potentially lead to an increase in filings of derivative suits.
    CATEGORY: Demands on Boards

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