October 10, 2017

Delaware Supreme Court to Address Whether Federal Due Process Protects Repetitive Derivative Suits

Caroline Zalka and Robert S. Ruff – October 10, 2017

When a court has dismissed a stockholder derivative suit for failure to plead demand futility, what is the preclusive effect on a later suit that brings the same claims? The vast majority of courts that have addressed the question have held that, because the corporation is the real party in interest in a derivative suit, the parties in both suits are the same or the stockholder plaintiffs are at least in privity with one another. Thus, preclusion is appropriate assuming the other elements are present.

But a recent decision from the Delaware Court of Chancery in the long-running Wal-Mart case (No. 7455-CB, filed in 2012) has introduced uncertainty. The decision recommends that the Delaware Supreme Court adopt a rule based on dicta from an earlier Court of Chancery decision, In re EZCORP Inc. Consulting Agreement Derivative Litigation, 130 A.3d 934 (Del. Ch. 2016). On due process grounds, the “EZCORP rule” would give no preclusive effect to a derivative suit judgment unless the board had declined to oppose the suit or the suit had survived a motion to dismiss by pleading that demand on the board was excused as futile or wrongfully refused (a Rule 23.1 motion in both Delaware and federal court). The rule is questionable as a matter of both law and public policy.

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