Louisiana Municipal Police Employees' Retirement System, No.
380, 2012 (Del. Supr., April 4, 2013) [an enhanced version of this opinion is available to lexis.com
(1) Whether or not a prior ruling by a California court dismissing a derivative
suit served as a bar to subsequent Delaware derivative suits; and (2) Whether
the failure to use Section 220 before filing suit created a presumption that
the plaintiff was an inadequate representative.
(1) Collateral estoppel prevented the second derivative suit; and (2) There is
no irrebuttable presumption that applies simply because Section 220 was not
used before the derivative suit was filed.
This 12-page Delaware Supreme Court decision reversed an
80-page decision by the Court of Chancery. The trial court decision was
highlighted on these pages here. This decision also diminishes the impact
of a separate decision by the Court of Chancery in South v. Baker,
highlighted on these pages here, which had questioned the adequacy of
plaintiffs who filed derivative cases with Caremark claims that had not
used Section 220 beforehand.
The issue on appeal was whether the Court of Chancery was
required to dismiss a Delaware derivative complaint after a California federal
court entered a final judgment dismissing essentially the same complaint
brought by different stockholders.
The Court of Chancery held that it was not required to
give preclusive effect to the California judgment for two reasons. First,
the Court of Chancery held as a matter of law that the stockholder plaintiffs
in both jurisdictions are not in privity with each other. Next, the Court
of Chancery determined that the California stockholders were not adequate
representatives of the defendant corporation.
The Delaware Supreme Court ruled that the Court of
Chancery was wrong on both points. The High Court of Delaware determined
that California law controlled the issue of privity, and that the derivative
stockholders were in privity when they acted on behalf of the
corporation. In addition, the trial court erred in holding that there was
a presumption of inadequacy without any record to support the factual premise
on which the presumption was based.
background facts are described in more detail in the summary of the trial court
opinion highlighted on these pages at this link.
Substantially similar complaints were filed in both
California and in the Court of Chancery, although the Court of Chancery allowed
the UFCW to intervene after it employed Section 220 to inspect books and
records of the company involved, Allergan. Motions to dismiss were filed
in both courts and the federal court in California granted the motion to
dismiss with prejudice prior to the ruling by the Court of Chancery. The
Court of Chancery held that the California judgment did not bar the Delaware
action and denied the motion to dismiss the Delaware case. An
interlocutory appeal followed.
Short Overview of Reasoning by the Delaware
The Delaware Supreme Court relied on the Full Faith and
Credit Clause of the United States Constitution at Article IV, §1, which
provides that: "Full Faith and Credit shall be given in each State to the
public Acts, Records, and Judicial Proceedings in every other state."
This clause has been understood to encompass the doctrine of res judicata,
claim preclusion, and collateral estoppel or issue preclusion. The United
States Supreme Court has held that a state court is required to give a federal
judgment the same force of effect as it would be given under the preclusion
rules of the state in which the federal court is sitting. The Delaware
Supreme Court applied this law to require the state of Delaware to give Full
Faith and Credit to the California federal judgment.
The Delaware Supreme Court then determined that the Court
of Chancery failed to apply this settled law because it "conflated collateral
estoppel with demand futility." The Court reasoned that a motion to
dismiss should have been addressed exclusively on the basis of federalism,
comity, and finality. The interest that Delaware has in the internal
affairs of its corporations: "must yield to the stronger national
interests that all state and federal courts have in respecting each other's
judgments." See footnote 11.
The Supreme Court did not directly address the analysis
under Delaware law about whether an individual derivative claim has preclusive
effect on derivative claims of other stockholders because the Delaware Supreme
Court determined that California law and not Delaware law applied to the
preclusive effect issue. The court also noted that "although the Court of
Chancery is divided on the privity issue as a matter of law, we cannot address
the merits of that issue in this case." See footnote 20.
Section 220 and Alleged Inadequacy of
The Delaware Supreme Court rejected the "fast filer"
presumption of inadequacy referenced in the trial court, and reasoned that:
"undoubtedly there will be cases where a fast filing
stockholder also was an inadequate representative. But, there is no
record support for the trial court's premise that stockholders who file
quickly, without bringing a Section 220 books and records action, are a
priori acting on behalf of their law firms instead of the
corporation. This court understands the trial court's concerns about fast
filers, but remedies for the problems they create should be directed at the
lawyers, not the stockholder plaintiffs or their complaints." See
footnotes 23 and 24.
The net result of the foregoing quote is that the trial
court decision in Pyott, and the separate Chancery decision in South
v. Baker, highlighted
on these pages here, will not likely be relied on for the
imposition of a prerequisite of using Section 220 before a derivative claim is
Frankel of Thomson Reuters penned an insightful article about the case at this
Mirvis authored an insider's viewpoint in a piece published on The Harvard
Law School Corporate Governance Blog at this link. Kevin
LaCroix provides insightful commentary about the case at this link.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
For more information about LexisNexis
products and solutions connect with us through our corporate site.