One Way To Try And Reduce Evils Associated With Follow-On Derivative Lawsuits

One Way To Try And Reduce Evils Associated With Follow-On Derivative Lawsuits


One feature of the recent changing mix of corporate and securities litigation has been the rise in the filing of follow-on derivative lawsuits in the wake of securities class action lawsuit filings. As Wilson Sonsini partner Boris Feldman recently noted, "like a moth drawn to a candle," the derivative bar watches class action filings and "just cannot resist cribbing the class action complaints, even though the company's setback does not suggest any breach of fiduciary duty."

The rise in the number of follow-on derivative lawsuits seems to be attributable to the efforts of smaller or newer plaintiffs' firms to try to get a piece of the action. The problem with these kinds of cases is that they just compound the defendant company's litigation expense and threaten distraction from or even prejudice to the company's defense in the class action suit - all as a result of a derivative action supposedly brought on the company's behalf.

One way to try to reduce at least some of the potential evils associate with these follow-on suits would seem to be to stay the derivative suit until the securities suit has concluded. In many cases, the derivative plaintiffs agree to a stay. The question whether the court itself should order a stay of one of these follow-on suits was addressed in a January 27, 2012 Delaware Chancery Court opinion (here) in a derivative action involving SunPower Corporation.

The litigation arose after SunPower announced that it would have to restate its prior financials due to the underreporting of expenses at its Philippine manufacturing operations. Following these announcements, the company and several of its directors and officers were named as defendants in securities class action lawsuits (later consolidated) in the Northern District of California. The consolidated class action case was initially dismissed without prejudice, but the class action plaintiffs' amended pleading survived the defendants' renewed motion to dismiss.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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