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

By Daniel Perry and John M. Yarwood
November 27, 2012

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.

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