Source: http://www.delawarelitigation.com/2012/06/articles/chancery-court-updates/dismissal-of-one-derivative-lawsuit-not-bar-to-second-derivative-claim-by-second-stockholder/
Timestamp: 2014-09-20 17:59:29
Document Index: 352337994

Matched Legal Cases: ['§ 220', '§ 220', '§ 220', '§ 220', '§ 220', '§ 220']

Dismissal of One Derivative Lawsuit Not Bar to Second Derivative Claim by Second Stockholder | Delaware Corporate and Commercial Litigation Blog
Home > Chancery Court Updates > Dismissal of One Derivative Lawsuit Not Bar to Second Derivative Claim by Second Stockholder
Posted on June 27, 2012 by Francis Pileggi Print
Louisiana Municipal Police Employees’ Retirement Systems v. Pyott, C.A. 5795-VCL (Del. Ch. June 11, 2012).
Whether collateral estoppel, Rule 23.1 or Rule 12(b)(6) apply to require the dismissal of a Delaware derivative suit based on the dismissal in California of a related derivative suit in which a federal court granted a Rule 23.1 motion to dismiss for failure to make a pre-suit demand.
The Court of Chancery reasoned that collateral estoppel would not apply, and motions to dismiss based on Rule 23.1 and Rule 12(b)(6) were both denied. But see: Delaware Supreme Court’s reversal of this Chancery decision by opinion dated April 4, 2013.
Post-Decision Procedural History
The Delaware Supreme Court reversed this Chancery decision by opinion dated April 4, 2013. Highlights of that decision are available on these pages at this link.
See transcript of bench ruling on July 6, 2012 granting a motion for interlocutory appeal of this opinion and rebutting the online criticism of the decision. Alison Frankel of Thomson Reuters provides an insightful article about the oral argument on the motion. The Delaware Supreme Court next makes an independent decision whether or not to accept the interlocutory appeal.
This decision by the Court of Chancery is an iconic statement of the law relating to Delaware corporate litigation on several different levels. Much has already been written about this decision that was issued earlier this month and much more will be written, but in these brief comments I focus on two aspects of the decision that may help to place it in context. First, this opinion can be read as part of a continuing effort by the Delaware Court of Chancery to raise the bar and to establish and enforce the highest standards for derivative litigation and class action suits by shareholders against officers and directors. In that vein, this decision is part of an evolutionary process which was preceded by other decisions that heralded its coming. See, e.g., prior decision by the author of this Chancery decision highlighted here.
Another of the many noteworthy aspects of this decision is the principled manner in which the Court of Chancery has asserted its right to decide important issues of Delaware corporate law without deferring to the decisions of non-Delaware courts who either “get it wrong” or cannot be expected to address the issues with the same care and concern as the experts of the Delaware bench can bring to bear. [This should be contrasted with very recent decisions where the Delaware Court of Chancery has deferred to a first-filed lawsuit in another jurisdiction even when Delaware law applied (see, e.g., recent decision highlighted here), and a recent Chancery decision that deferred to a federal court on an issue of federal law. (See recent case highlighted here.)]
I make an additional preliminary comment with the respectful caution of someone who makes his living by, at least in part, practicing before the Court that issued this opinion. This decision extols the virtues of using § 220 of the Delaware General Corporation Law in order to obtain books and records of a corporation before filing a plenary lawsuit. I have written often about the less than simple and less than completely predictable aspects of § 220. For example, a recent decision by the Delaware Supreme Court rejected a § 220 request after more than a year of litigation. (See recent case highlighted here). In addition, a recent law review article I co-authored observed that there is no directly controlling authority in Delaware that requires a corporation to provide, in response to a Section 220 demand, electronically stored information, which comprises the majority of business data which is never printed in hard copy. See article here. So, even though on an epistemological level, it makes eminent sense to advance the position that one should use Section 220 to obtain as much information as possible before preparing and filing a plenary complaint, on a practical level “from the trenches,” my experience and my close reading of § 220 cases, persuades me that § 220 can often be an expensive and lengthy process that does not always bear fruit or does not bear sufficient fruit to fulfill the promise of § 220 – - or make it worth the effort.
Aside: Some of the issues addressed in this case are at least tangentially related to the school of thought which argues that plaintiffs are increasingly choosing a forum outside of Delaware, even when Delaware law applies, in order to “try their luck” with judges who are less likely to apply the same degree of specialized close scrutiny that members of the Delaware Court of Chancery apply to the pleadings and lawyers before them. See, e.g., a recent essay on the topic published on the Foley & Lardner website. Sometimes referred to as “ABC” (anywhere but Chancery), a termed coined by Ted Mirvis, the highly-regarded Wachtell Lipton lawyer who is frequently involved in many high profile Chancery cases, we have written often on these pages about that phenomenon. E.g., here and here.
Finally, a review of the details of the decision follows:
Background of Pyott case:
In September 2010, Allergan, Inc. entered into a settlement with the United States Department of Justice and pled guilty to criminal misdemeanor misbranding and paid a total of $600 million in civil and criminal fees. Allergan, Inc., a Delaware corporation which develops and commercializes specialty pharmaceuticals, biologics, and medical devices, specifically Botox Therapeutic, entered into the settlement after admitting that they illegally promoted off-label uses of their popular drug.
The public announcement of this settlement prompted Louisiana Municipal Police Employees’ Retirement System (‘LAMPERS’) to file this action. Similar claims were filed in Federal Court in California which dismissed with prejudice that suit for failure to plead demand futility. The defendants supplemented their motion to dismiss in this action to invoke collateral estoppel.
The Court rejected the 3 arguments of defendants why this Delaware derivative suit should be dismissed in light of the dismissal of a very similar derivative suit in California: collateral estoppel, Rule 23.1, and Rule 12(b)(6). The Court of Chancery disagreed with many of the California Federal Court’s holdings, and held that the plaintiffs were not collaterally estopped from asserting demand futility in the Delaware derivative action. The Court focused on privity, not on whether the prior Rule 23.1 dismissal was on the merits.
The Court emphasized that whether or not successive stockholders in a subsequent suit are in privity with the corporation and each other is a matter of Delaware law under the internal affairs doctrine and, thus, state law will govern. The Court reasoned that