Delaware Supreme Court

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The Delaware Supreme Court recently affirmed a Court of Chancery ruling granting a Special Litigation Committee’s motion to terminate a shareholder derivative action that had survived a motion to dismiss. The split decision in El Pollo Loco (June 28, 2022) highlights whether a director can be considered independent – especially as a member of a Special Litigation Committee (“SLC”) – if he or she had known about and had approved or not objected to the prior motion to dismiss, which had asserted that the claims at issue in the subsequent SLC investigation lacked merit.

The Delaware Supreme Court ruled today that Delaware corporations can adopt charter provisions requiring that actions under the federal Securities Act of 1933 be filed in a federal court. The decision in Salzberg v. Sciabacucchi gives Delaware corporations a way to avoid state-court or multi-forum litigation of Securities Act claims by channeling all such cases into the federal system, where they can be managed more effectively – and where they are subject to the more structured and stringent procedural standards mandated by federal law.

Delaware corporations might want to consider adopting federal-forum charter provisions to address the treatment of potential Securities Act claims.

The Delaware Supreme Court yesterday rejected a presumption of confidentiality for documents produced pursuant to books-and-records inspection requests under § 220 of the Delaware General Corporation Law.  The decision in Tiger v. Boast Apparel, Inc. (Del. Aug. 7, 2019) holds that courts can impose confidentiality restrictions in appropriate cases, but that some justification of confidentiality is necessary – and that an indefinite period of confidentiality should be the exception, not the rule.

In light of the emphasis that the Delaware Supreme Court has placed on § 220 requests particularly in the context of shareholder derivative actions, parties making and receiving those requests might now need to focus more closely on whether and the extent to which confidentiality restrictions can be justified and, if so, how long they should last.

The Delaware Supreme Court held yesterday that a corporation can be required to produce emails and other electronic documents where necessary to satisfy a shareholder’s legitimate request to inspect corporate books and records under § 220 of the Delaware General Corporation Law.  The Supreme Court also held that, under the circumstances of the case, a court could not impose jurisdictional limitations on the shareholder’s use of documents obtained through the § 220 inspection process.

On January 25, 2018, the Delaware Supreme Court held that the dismissal of a shareholder derivative action for lack of demand futility can preclude other derivative actions as long as the plaintiff in the dismissed case adequately represented the corporation’s interests. The Court’s decision in California State Teachers’ Retirement System …

The Chancellor of Delaware’s Court of Chancery yesterday urged the Delaware Supreme Court to revise Delaware law on preclusion in shareholder derivative actions.  The court’s July 25, 2017 decision in In re Wal-Mart Stores, Inc. Delaware Derivative Litigation recommended that the Supreme Court adopt a rule that a judgment in one derivative action cannot bind the corporation or its stockholders in another derivative action unless either (i) the first action has survived a motion to dismiss because a pre-suit demand on the corporation’s board of directors would have been futile or (ii) the board has given the plaintiff authority to proceed on the corporation’s behalf by declining to oppose the derivative suit.  In other words, preclusion would not apply unless the stockholder in the first case had been empowered by either a court or the board to assert the corporation’s claims.

The Delaware Supreme Court requested further consideration of the federal due-process issues that might arise where a court is asked to hold that a shareholder derivative action is precluded because a prior derivative action was dismissed based on the first plaintiff’s failure to make a demand on the company’s board before filing suit. The Court’s January 18, 2017 decision in California State Teachers’ Retirement System v. Alvarez squarely focuses on an issue that has been raised several times in the Delaware Court of Chancery: whether federal due-process principles prevent the actions of a named plaintiff in a derivative action from binding other shareholders unless and until a court holds that the plaintiff has authority to sue on behalf of the corporation.

The ultimate resolution of this question could affect the strategy decisions confronting plaintiffs and defendants when multiple shareholder derivative actions are filed in two or more forums.

The Delaware Supreme Court ruled yesterday that out-of-state corporations no longer would be subject to general personal jurisdiction in Delaware merely because they had registered to do business in Delaware. In making that ruling, the Court overruled prior state precedent, under which foreign corporations were deemed to have consented to jurisdiction in Delaware when they registered to do business within the state.