Race to File Shareholder Derivative Suits in Delaware Slowed by Judicial Roadblock

Allergan

Allergan, Inc., manufactures the muscle relaxant Botox. On Sept. 1, 2010, Allergan pleaded guilty to claims of misbranding and off-label marketing in a settlement with the United States Department of Justice (DOJ), agreeing to pay $600 million in fines. Within days of the settlement, Louisiana Municipal Police Employees' Retirement System (LAMPERS) commenced an action in Delaware. The action relied solely on public information and alleged (in substance) that the Allergan board of directors failed to appropriately oversee the conduct of the business and prevent the misconduct to which Allergan had pleaded guilty. Within weeks, three similar derivative suits were filed in the United States District Court for the Central District of California, and eventually consolidated (the California Litigation). Allergan moved to dismiss all complaints, arguing that the plaintiffs had not made a demand on its board of directors to investigate the alleged misconduct and that the allegations contained in the complaints did not demonstrate that demand was “futile.”

In November 2010, the U.F.C.W. Local 1776 & Participating Employment Pension Fund (UFCW) made a books-and-records demand on Allergan under 8 Del. C. ' 220, and moved to intervene in Allergan litigation pending in Delaware. Vice Chancellor Laster denied intervention without prejudice, but stayed any decision on the motion to dismiss until completion of UFCW's review of Allergan's books and records. Subsequently, LAMPERS and UFCW stipulated to both serving as co-plaintiffs, and filed an amended complaint based on information discovered through the books-and-records demand.

Meanwhile, the California Litigation was dismissed for failure to make a demand on the Allergan board of directors. With the dismissal of the California Litigation in hand, Allergan supplemented its Delaware motion to dismiss, claiming that collateral estoppel barred the suit. Vice Chancellor Laster denied the motion, ruling that dismissal of a derivative suit for failure to make a demand does not preclude subsequent derivative suits based on similar allegations. See Allergan at *37. The doctrine of collateral estoppel requires that the party facing estoppel must be the same as, or in privity with (here, parties representing the same entity in a representative action), a party in the previously litigated case.

There is a large body of state and federal law holding that dismissal of one shareholder derivative suit for failure to establish demand futility precludes other shareholders from bringing similar suits. These cases rely on the idea that all shareholders of a corporation who sue derivatively do so as a representative of the corporation, which puts those shareholder plaintiffs in privity with each other. Hence, when one shareholder's case is dismissed, the issue of demand futility is settled for all shareholders.

In reaching a contrary conclusion, Vice Chancellor Laster reasoned that shareholder plaintiffs do not have standing to bring a derivative suit until they establish that demand was futile or unreasonably denied. See id. at *11-12. And prior to doing so, a shareholder is suing in its own name for the right to represent the corporation. See id. at *12-13. Thus, at the initial stage when the court is evaluating whether demand would have been futile, a shareholder is not in privity with other shareholders and collateral estoppel is inapplicable until the motion to dismiss is denied. See id. at *12-16. Because the California Litigation motion to dismiss was granted, those plaintiffs were not, according to Vice Chancellor Laster, in privity with LAMPERS and UFCW, rendering collateral estoppel inapplicable. See id. at *8, 17, 37.

But it was Vice Chancellor Laster's alternative ruling that served as a shot across the bow of the plaintiffs bar. Vice Chancellor Laster ruled that even if collateral estoppel applied, the California Litigation did not preclude the Allergan claims because the California plaintiffs hastily filed their complaints and were, therefore, inadequate representatives of the corporation. See id. at *17, 28-29, 37. Vice Chancellor Laster characterized sloppy first-to-file complaints as “lottery tickets” for plaintiffs' firms who are “[i]ncentivized by contingent fees” and whose “interests can diverge from the class or entity they represent.” Id. at *18, 25. Vice Chancellor Laster noted that “fast-filing imposes real costs on corporations and their stockholders” by creating an incentive to rush to file poorly conceived of claims in the hope of hitting the jackpot. Id. at *19. Vice Chancellor Laster further developed this holding in Hecla.

Hecla

Hecla Mining Company (Hecla) had three separate accidents at its Idaho mine in 2011, which ultimately led to the deaths of two employees. Each of these incidents precipitated investigations from the United States Mine Safety and Health Administration (MSHA). None of MSHA's subsequent reports or statements cited director involvement in or responsibility for the incidents. When MSHA ordered Hecla to close the primary access point to its Idaho mine for reasons unrelated to the incidents, Hecla had to reduce its previously stated silver production projection. Shortly thereafter, MSHA issued a press release stating that it had issued 59 citations and 15 orders related to Hecla's “repeated failure” to adhere to industry guidelines and best practices.

Within four months, seven shareholder derivative suits were filed in Idaho state and federal courts and the Delaware Chancery Court, all asserting “failure of oversight” style claims under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), along with two securities class action suits filed in Idaho federal court. None of the putative derivative plaintiffs served a books and records demand on Hecla before filing suit. After Hecla moved to dismiss the Delaware complaint for failure to plead demand futility, Vice Chancellor Laster requested that the parties provide supplemental briefing regarding the adequacy of the plaintiffs' representation of the corporation and its shareholders.

Vice Chancellor Laster ultimately dismissed the suit with prejudice for failure to make a demand and, like Allergan, ruled that the dismissal would have no preclusive effect on subsequent “bona fide” claims. For the first time, Vice Chancellor Laster held that the Chancery Court would apply a rebuttable presumption of disloyalty to a putative derivative plaintiff that hastily files Caremark claims without conducting a books-and-records review pursuant to 8 Del. C. ' 220. See Hecla at **14-15.

First, Vice Chancellor Laster addressed the sufficiency of the plaintiffs' Caremark claims under Rule 23.1. Caremark and its progeny hold that directors may be held liable for “knowingly causing or consciously permitting the corporation to violate positive law, or for failing utterly to attempt to establish a reporting system or other oversight mechanism to monitor the corporation's legal compliance.” Id. at *1. A plaintiff may satisfy its demand futility pleading burden by alleging that a majority of the board: 1) knowingly made a decision that violated positive law; 2) consciously ignored so-called red flags concerning managerial conduct; or 3) presided over a sustained or systematic failure to exercise oversight. See id. at **9-10.

Vice Chancellor Laster ruled that the complaint failed to meet any of the three requirements because the plaintiffs relied solely on publicly available information. See id. at **11-13. Consistent with the jurisprudence cited above, he faulted the plaintiffs for failing to pursue a books-and-records demand. See id. at *9. Without the benefit of that investigation, the plaintiffs were incapable of pleading “any factual allegations regarding internal board deliberations, director decision-making, or knowledge or involvement of the Hecla directors in the accidents ' or the MSHA-mandated closure ' .” Id. at *19.

Vice Chancellor Laster then found that the failure to “use the tools at hand” and the lack of “deep reflection” in filing the claim constituted a failure by plaintiffs to meet their fiduciary obligations as purported representatives of the corporation. See id. at **1 n.1, 15, 19 (internal quotations omitted). On this issue, he again broke new ground and held that the court will apply “an evidentiary presumption that a plaintiff who files a Caremark claim hastily and without using Section 220 ' has acted disloyally to the corporation and served instead the interests of the law firm who filed suit.” Id. at *16. Vice Chancellor Laster recognized that Caremark claims typically develop over time and a derivative lawsuit may be “contrary to the interests of the corporation” while litigation related to the conduct underlying the Caremark claims is ongoing. See id. at *17 (emphasis added).

In these circumstances, the only real beneficiaries of a hastily filed Caremark claim are the plaintiff's attorneys attempting to gain control of the litigation. Vice Chancellor Laster found that placing an attorney's interest over that of the corporation is disloyal and will be presumed to demonstrate the plaintiff's inadequacy to act as a fiduciary of the corporation and its shareholders. See id.

The presumption is rebuttable if the plaintiff can establish that it conducted an adequate investigation addressing the merits of the claims or if it can demonstrate that acting quickly furthered the interests of the corporation. See id. at *17. Vice Chancellor Laster found that Hecla's interests here would have been best served by a deliberate and thorough pre-suit investigation, and as Hecla's self-appointed fiduciaries, the plaintiffs should have furthered those interests instead of the interests of their attorneys.

Books-and-Records Demands

Allergan and Hecla will likely increase the volume and importance of books-and-records demands. Both rulings strongly encourage plaintiffs and their attorneys to conduct an investigation of the corporation's books and records under 8 Del. C. ' 220 prior to bringing a derivative suit. As a result, we expect the frequency of books-and-records requests to increase substantially. We also expect that the materials provided in response to such requests will take on added importance in motion practice seeking dismissal of any ensuing lawsuit. We, therefore, examine briefly the boundaries of the disclosure required under this law.

The Boundaries of Disclosure

While shareholders may investigate a corporation's books and records, their ability to do so is not unqualified or unfettered and a corporation may deny the request. If a shareholder's request is denied by the corporation, a shareholder may move to compel disclosure of the books and records. A shareholder must first establish in its written demand on the corporation that it is a shareholder, has complied with ' 220's procedural requirements, and must state a proper purpose for making the demand. See 8 Del. C. ' 220(c). If a shareholder does not meet these threshold “form and manner” requirements, it may not pursue its demand. See Central Laborers Pension Fund v. News Corp., 45 A.3d 139, 141 (Del. 2012). Most motions to compel under ' 220 hinge on the “proper purpose” requirement, which is statutorily satisfied if the stated purpose is “reasonably related to such person's interest as a stockholder.” See 8 Del. C. ' 220(b). Some proper purposes relevant to this article include investigations of alleged corporate mismanagement, assessments of pre-suit demand futility, and communications with other shareholders regarding their investments or legitimate non-derivative litigation against the corporation. See Compaq Computer Corp. v. Horton, 631 A.2d 1, 5 (Del. 1993).

Though a shareholder may explicitly state a proper purpose for its demand, Delaware courts will deny a motion to compel if “the stockholder's stated proper purpose is not the actual [improper] purpose for the demand.” Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 817 (Del. Ch. 2007). Some improper purposes include investigations to further public disclosure of confidential information in a proxy battle, pursuit of confidential information in support of a shareholder's bid for the corporation, the institution of harassing or annoying litigation, attempts to sell shareholder information, and the satisfaction of idle curiosity. See Compaq, 631 A.2d at 5; Pershing Square, 923 A.2d at 817 nn.17, 21.

Service of a books-and-records request is often the first step for a plaintiff in developing litigation against a company and its board of directors. Indeed, Allergan and Hecla require that a putative plaintiff engage in such a review in most cases. Determining the validity of each books-and-records demand and the appropriate scope of the permitted review is a fact-intensive, tactical exercise that should be conducted with the aid of litigation counsel.

Conclusion

The Delaware Chancery Court is likely to continue to issue rulings designed to bring about fundamental change in the way complex derivative litigation is conducted. Companies can take advantage of this trend in seeking dismissal of hastily filed, plaintiff attorney-driven derivative litigation. The “presumption of disloyalty” applied by the Chancery Court in Hecla will almost certainly chill hastily filed derivative cases. As a result, the plaintiffs bar may be incentivized to file quickly outside of Delaware (notwithstanding Vice Chancellor Laster's criticisms). The plaintiffs bar will likely become more aggressive in seeking extensive pre-suit discovery through books and records demands. When such requests are received, corporations should be fully prepared to address them in a manner consistent with fiduciary obligations and with the knowledge that such requests are a precursor to likely litigation.

Daniel Perry is a partner and John M. Yarwood is an associate in the New York office of Milbank, Tweed, Hadley & McCloy. They are both members of the firm's Litigation & Arbitration Group and may be contacted at [email protected] and [email protected], respectively.

In two recent opinions with wide-ranging practical implications for companies that are the target of shareholder derivative litigation, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued a well-developed, scathing critique of the plaintiffs bar's “first-to-file” mentality in derivative suits. See La. Mun. Police Emps.' Ret. Sys. v. Pyott, C.A. No. 5795-VCL, 2012 WL 2087205, (hereinafter Allergan); South v. Baker, C.A. No. 7294-VCL, 2012 WL 4372538 at **14-15 (Del. Ch. Sept. 25, 2012) (hereinafter Hecla). In these opinions, Vice Chancellor Laster was particularly focused on the unseemly “race to the courthouse” by plaintiff lawyers seeking to act as fiduciaries for a company and its stockholders in the litigation. While these decisions are not likely to reduce the threat of shareholder derivative litigation against companies, they are likely to change how the cases are litigated, and provide companies with the ability to dispose of ill-conceived, plaintiff attorney-driven litigation at an early stage in the case.

Delaware courts have, for some time now, been insisting that plaintiffs seeking to file derivative litigation on behalf of a company against its own officers and directors first use 8 Del. C. ' 220 to request an opporunity to review relevant books and records of the corporation. These so-called “books-and-records” requests can provide a shareholder with the ability to conduct a limited pre-suit investigation in order to assess whether litigation is appropriate. See, e.g., Wood v. Baum , 953 A.2d 136, 144 (Del. 2008); Beam v. Stewart , 845 A.2d 1040, 1056-57 (Del. 2004); White v. Panic , 783 A.2d 543, 556-57 (Del. 2001); Brehm v. Eisner , 746 A.2d 244, 266-67 (Del. 2000); Grimes v. Donald , 623 A.2d 1207, 1216 (Del. 1996); In re Dow Chem. Co. Derivative Litig., No. 4349-CC, 2010 WL 66769 (Del. Ch. Jan. 11, 2010); Desimone v. Barrows , 924 A.2d 908, 951 (Del. Ch. 2007); Rattner v. Bidzos, No. Civ.A. 19700, 2003 WL 22284323, at *14 (Del. Ch. Sept. 30, 2003); Guttman v. Huang , 823 A.2d 492, 493 (Del. Ch. 2003). But the plaintiffs bar has simply not heeded the direction of the Delaware courts.

As any corporate attorney advising a company that has had to deliver bad news to the market can attest, derivative litigation is often commenced within days of a negative announcement ' many times by multiple law firms. Vice Chancellor Laster's recent jurisprudence offers hope, however, that this practice will change. But any change in litigation tactics will be accompanied by new challenges for those advising companies that have attracted the attention of a plaintiffs lawyer ' particularly in responding to books and records requests aimed at securing ammunition for later litigation.

Allergan

Allergan, Inc., manufactures the muscle relaxant Botox. On Sept. 1, 2010, Allergan pleaded guilty to claims of misbranding and off-label marketing in a settlement with the United States Department of Justice (DOJ), agreeing to pay $600 million in fines. Within days of the settlement, Louisiana Municipal Police Employees' Retirement System (LAMPERS) commenced an action in Delaware. The action relied solely on public information and alleged (in substance) that the Allergan board of directors failed to appropriately oversee the conduct of the business and prevent the misconduct to which Allergan had pleaded guilty. Within weeks, three similar derivative suits were filed in the United States District Court for the Central District of California, and eventually consolidated (the California Litigation). Allergan moved to dismiss all complaints, arguing that the plaintiffs had not made a demand on its board of directors to investigate the alleged misconduct and that the allegations contained in the complaints did not demonstrate that demand was “futile.”

In November 2010, the U.F.C.W. Local 1776 & Participating Employment Pension Fund (UFCW) made a books-and-records demand on Allergan under 8 Del. C. ' 220, and moved to intervene in Allergan litigation pending in Delaware. Vice Chancellor Laster denied intervention without prejudice, but stayed any decision on the motion to dismiss until completion of UFCW's review of Allergan's books and records. Subsequently, LAMPERS and UFCW stipulated to both serving as co-plaintiffs, and filed an amended complaint based on information discovered through the books-and-records demand.

Meanwhile, the California Litigation was dismissed for failure to make a demand on the Allergan board of directors. With the dismissal of the California Litigation in hand, Allergan supplemented its Delaware motion to dismiss, claiming that collateral estoppel barred the suit. Vice Chancellor Laster denied the motion, ruling that dismissal of a derivative suit for failure to make a demand does not preclude subsequent derivative suits based on similar allegations. See Allergan at *37. The doctrine of collateral estoppel requires that the party facing estoppel must be the same as, or in privity with (here, parties representing the same entity in a representative action), a party in the previously litigated case.

There is a large body of state and federal law holding that dismissal of one shareholder derivative suit for failure to establish demand futility precludes other shareholders from bringing similar suits. These cases rely on the idea that all shareholders of a corporation who sue derivatively do so as a representative of the corporation, which puts those shareholder plaintiffs in privity with each other. Hence, when one shareholder's case is dismissed, the issue of demand futility is settled for all shareholders.

In reaching a contrary conclusion, Vice Chancellor Laster reasoned that shareholder plaintiffs do not have standing to bring a derivative suit until they establish that demand was futile or unreasonably denied. See id. at *11-12. And prior to doing so, a shareholder is suing in its own name for the right to represent the corporation. See id. at *12-13. Thus, at the initial stage when the court is evaluating whether demand would have been futile, a shareholder is not in privity with other shareholders and collateral estoppel is inapplicable until the motion to dismiss is denied. See id. at *12-16. Because the California Litigation motion to dismiss was granted, those plaintiffs were not, according to Vice Chancellor Laster, in privity with LAMPERS and UFCW, rendering collateral estoppel inapplicable. See id. at *8, 17, 37.

But it was Vice Chancellor Laster's alternative ruling that served as a shot across the bow of the plaintiffs bar. Vice Chancellor Laster ruled that even if collateral estoppel applied, the California Litigation did not preclude the Allergan claims because the California plaintiffs hastily filed their complaints and were, therefore, inadequate representatives of the corporation. See id. at *17, 28-29, 37. Vice Chancellor Laster characterized sloppy first-to-file complaints as “lottery tickets” for plaintiffs' firms who are “[i]ncentivized by contingent fees” and whose “interests can diverge from the class or entity they represent.” Id. at *18, 25. Vice Chancellor Laster noted that “fast-filing imposes real costs on corporations and their stockholders” by creating an incentive to rush to file poorly conceived of claims in the hope of hitting the jackpot. Id. at *19. Vice Chancellor Laster further developed this holding in Hecla.

Hecla

Hecla Mining Company (Hecla) had three separate accidents at its Idaho mine in 2011, which ultimately led to the deaths of two employees. Each of these incidents precipitated investigations from the United States Mine Safety and Health Administration (MSHA). None of MSHA's subsequent reports or statements cited director involvement in or responsibility for the incidents. When MSHA ordered Hecla to close the primary access point to its Idaho mine for reasons unrelated to the incidents, Hecla had to reduce its previously stated silver production projection. Shortly thereafter, MSHA issued a press release stating that it had issued 59 citations and 15 orders related to Hecla's “repeated failure” to adhere to industry guidelines and best practices.

Within four months, seven shareholder derivative suits were filed in Idaho state and federal courts and the Delaware Chancery Court, all asserting “failure of oversight” style claims under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), along with two securities class action suits filed in Idaho federal court. None of the putative derivative plaintiffs served a books and records demand on Hecla before filing suit. After Hecla moved to dismiss the Delaware complaint for failure to plead demand futility, Vice Chancellor Laster requested that the parties provide supplemental briefing regarding the adequacy of the plaintiffs' representation of the corporation and its shareholders.

Vice Chancellor Laster ultimately dismissed the suit with prejudice for failure to make a demand and, like Allergan, ruled that the dismissal would have no preclusive effect on subsequent “bona fide” claims. For the first time, Vice Chancellor Laster held that the Chancery Court would apply a rebuttable presumption of disloyalty to a putative derivative plaintiff that hastily files Caremark claims without conducting a books-and-records review pursuant to 8 Del. C. ' 220. See Hecla at **14-15.

First, Vice Chancellor Laster addressed the sufficiency of the plaintiffs' Caremark claims under Rule 23.1. Caremark and its progeny hold that directors may be held liable for “knowingly causing or consciously permitting the corporation to violate positive law, or for failing utterly to attempt to establish a reporting system or other oversight mechanism to monitor the corporation's legal compliance.” Id. at *1. A plaintiff may satisfy its demand futility pleading burden by alleging that a majority of the board: 1) knowingly made a decision that violated positive law; 2) consciously ignored so-called red flags concerning managerial conduct; or 3) presided over a sustained or systematic failure to exercise oversight. See id. at **9-10.

Vice Chancellor Laster ruled that the complaint failed to meet any of the three requirements because the plaintiffs relied solely on publicly available information. See id. at **11-13. Consistent with the jurisprudence cited above, he faulted the plaintiffs for failing to pursue a books-and-records demand. See id. at *9. Without the benefit of that investigation, the plaintiffs were incapable of pleading “any factual allegations regarding internal board deliberations, director decision-making, or knowledge or involvement of the Hecla directors in the accidents ' or the MSHA-mandated closure ' .” Id. at *19.

Vice Chancellor Laster then found that the failure to “use the tools at hand” and the lack of “deep reflection” in filing the claim constituted a failure by plaintiffs to meet their fiduciary obligations as purported representatives of the corporation. See id. at **1 n.1, 15, 19 (internal quotations omitted). On this issue, he again broke new ground and held that the court will apply “an evidentiary presumption that a plaintiff who files a Caremark claim hastily and without using Section 220 ' has acted disloyally to the corporation and served instead the interests of the law firm who filed suit.” Id. at *16. Vice Chancellor Laster recognized that Caremark claims typically develop over time and a derivative lawsuit may be “contrary to the interests of the corporation” while litigation related to the conduct underlying the Caremark claims is ongoing. See id. at *17 (emphasis added).

In these circumstances, the only real beneficiaries of a hastily filed Caremark claim are the plaintiff's attorneys attempting to gain control of the litigation. Vice Chancellor Laster found that placing an attorney's interest over that of the corporation is disloyal and will be presumed to demonstrate the plaintiff's inadequacy to act as a fiduciary of the corporation and its shareholders. See id.

The presumption is rebuttable if the plaintiff can establish that it conducted an adequate investigation addressing the merits of the claims or if it can demonstrate that acting quickly furthered the interests of the corporation. See id. at *17. Vice Chancellor Laster found that Hecla's interests here would have been best served by a deliberate and thorough pre-suit investigation, and as Hecla's self-appointed fiduciaries, the plaintiffs should have furthered those interests instead of the interests of their attorneys.

Books-and-Records Demands

Allergan and Hecla will likely increase the volume and importance of books-and-records demands. Both rulings strongly encourage plaintiffs and their attorneys to conduct an investigation of the corporation's books and records under 8 Del. C. ' 220 prior to bringing a derivative suit. As a result, we expect the frequency of books-and-records requests to increase substantially. We also expect that the materials provided in response to such requests will take on added importance in motion practice seeking dismissal of any ensuing lawsuit. We, therefore, examine briefly the boundaries of the disclosure required under this law.

The Boundaries of Disclosure

While shareholders may investigate a corporation's books and records, their ability to do so is not unqualified or unfettered and a corporation may deny the request. If a shareholder's request is denied by the corporation, a shareholder may move to compel disclosure of the books and records. A shareholder must first establish in its written demand on the corporation that it is a shareholder, has complied with ' 220's procedural requirements, and must state a proper purpose for making the demand. See 8 Del. C. ' 220(c). If a shareholder does not meet these threshold “form and manner” requirements, it may not pursue its demand. See Central Laborers Pension Fund v. News Corp. , 45 A.3d 139, 141 (Del. 2012). Most motions to compel under ' 220 hinge on the “proper purpose” requirement, which is statutorily satisfied if the stated purpose is “reasonably related to such person's interest as a stockholder.” See 8 Del. C. ' 220(b). Some proper purposes relevant to this article include investigations of alleged corporate mismanagement, assessments of pre-suit demand futility, and communications with other shareholders regarding their investments or legitimate non-derivative litigation against the corporation. See Compaq Computer Corp. v. Horton , 631 A.2d 1, 5 (Del. 1993).

Though a shareholder may explicitly state a proper purpose for its demand, Delaware courts will deny a motion to compel if “the stockholder's stated proper purpose is not the actual [improper] purpose for the demand.” Pershing Square, L.P. v. Ceridian Corp. , 923 A.2d 810, 817 (Del. Ch. 2007). Some improper purposes include investigations to further public disclosure of confidential information in a proxy battle, pursuit of confidential information in support of a shareholder's bid for the corporation, the institution of harassing or annoying litigation, attempts to sell shareholder information, and the satisfaction of idle curiosity. See Compaq, 631 A.2d at 5; Pershing Square, 923 A.2d at 817 nn.17, 21.

Service of a books-and-records request is often the first step for a plaintiff in developing litigation against a company and its board of directors. Indeed, Allergan and Hecla require that a putative plaintiff engage in such a review in most cases. Determining the validity of each books-and-records demand and the appropriate scope of the permitted review is a fact-intensive, tactical exercise that should be conducted with the aid of litigation counsel.

Conclusion

The Delaware Chancery Court is likely to continue to issue rulings designed to bring about fundamental change in the way complex derivative litigation is conducted. Companies can take advantage of this trend in seeking dismissal of hastily filed, plaintiff attorney-driven derivative litigation. The “presumption of disloyalty” applied by the Chancery Court in Hecla will almost certainly chill hastily filed derivative cases. As a result, the plaintiffs bar may be incentivized to file quickly outside of Delaware (notwithstanding Vice Chancellor Laster's criticisms). The plaintiffs bar will likely become more aggressive in seeking extensive pre-suit discovery through books and records demands. When such requests are received, corporations should be fully prepared to address them in a manner consistent with fiduciary obligations and with the knowledge that such requests are a precursor to likely litigation.

Daniel Perry is a partner and John M. Yarwood is an associate in the New York office of Milbank, Tweed, Hadley & McCloy. They are both members of the firm's Litigation & Arbitration Group and may be contacted at [email protected] and [email protected], respectively.