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.