Delaware Chancery Court Issues Decision On Collateral Estoppel In Shareholder Derivative Actions

The Delaware Chancery Court issued a potentially important decision on June 11, 2012 in Louisiana Municipal Police Employees' Retirement System v. Pyott concerning duplicative shareholder derivative actions and the "race to the courthouse" that often accompanies the filing of such cases. The court (through Vice Chancellor Laster) held that Delaware law governs whether a court should accord collateral-estoppel effect to the dismissal of a prior derivative action for failure to make a pre-suit demand on the board of directors – and that, under Delaware law, a prior dismissal for lack of demand futility does not collaterally estop a different shareholder's subsequent derivative suit. The court held in the alternative that collateral estoppel would not apply because the first, dismissed case had been filed by a "fast filer" who had rushed to the courthouse without conducting a pre-suit investigation and thus had not adequately represented the corporation's interests.

Factual Background

The Pyott case was one of several shareholder derivative actions against the directors of Allergan, Inc., which had entered into a settlement with the U.S. Department of Justice arising from an investigation into Allergan's alleged promotion of Botox for off-label uses. Allergan had pled guilty to criminal misdemeanor branding and had paid a total of $600 million in civil and criminal fines.

Two days after the settlement was announced, a shareholder derivative action was filed in Delaware Chancery Court. Within the next three weeks, additional derivative actions were filed in a California federal court. Yet another shareholder later served a demand on Allergan to inspect the company's books and records, and that shareholder eventually became a plaintiff in the consolidated complaint in the Delaware case.

For "reasons not entirely clear" to Vice Chancellor Laster, the California cases proceeded faster than the Delaware action, and the California court – "without the benefit of oral argument" – dismissed the California derivative actions with prejudice, holding that the plaintiffs had failed to establish that a pre-suit demand on Allergan's board would have been futile. The defendants then sought to dismiss the Delaware action, arguing that the California court's ruling on lack of demand futility collaterally estopped the Delaware plaintiffs from trying to show that a pre-suit demand would have been futile.

The Chancery Court's Decision

The Chancery Court disagreed...