We are discussing La. Mun. Police Emples. Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012) and its potential impact on Caremark style derivative suits.
What are the implications of the decision? First, the case could be criticized because it was not limited on its face to Caremark actions. The decision seemed to impose a duty to inspect in all derivative actions. A subsequent case, as we will discuss tomorrow, however, made clear that the analysis was limited to Caremark actions, circumstances where the need to inspect may be stronger than in other types of derivative suits. Moreover, the subsequent case also clarified that the presumption against rapid filing of Caremark actions could be rebutted. So we will put those criticisms aside.
The clear intent of the opinion is to force counsel for shareholders to slow down the race to the courthouse, be more deliberative in formulating a case, and, ideally, actually deciding in some cases not to bring an action. Will this occur? Yes and no.
Clearly, counsel bringing these cases in Delaware will know that they will receive short shrift in VC Laster's courtroom if they do not first invoke inspection rights. Whether the other jurists in Delaware will follow his approach remains to be seen.
But invoking inspection rights will delay the filing only in Delaware. Unless courts in other jurisdictions apply the same approach, there will be no impediment to filing a quick action in a non-Delaware jurisdiction. To the extent that these plaintiffs survive a motion to dismiss, they will control the litigation and gain everything in discovery that the Delaware shareholders tried to obtain through an inspection demand. As a result, this approach may in fact encourage litigation outside of Delaware. See 2012 COLUM. BUS. L. REV. 427, 491 (2012) ("As we document elsewhere, since the mid-1990s, the rate of corporate litigation involving Delaware companies has increased, and the proportion of cases filed in Delaware courts has fallen.").
To the extent the non-Delaware court dismisses the action, Pyott makes clear that in at least one courtroom, shareholders will suffer the same fate unless they have invoked inspection rights. At the same time, this obligation will at least in some cases result in a stronger complaint being filed in Delaware than in the non-Delaware jurisdiction. It is possible that a few of them might survive a motion to dismiss, something that occurred in this case.
That possibility depends upon the Delaware courts. To the extent that Pyott effectively mandates the use of inspection rights as a precondition to a Caremark action in Delaware, it is effectively imposing on plaintiffs additional cost and additional delay. The costs and delay will only be beneficial if in fact they sometimes result in a case surviving a motion to dismiss that otherwise would not have.
This occurred in Pyott. But as we noted, counsel for shareholders in the California action received all of the material obtained from the inspection request by other shareholders. In other words, the Delaware case was allowed to go forward but there was no evidence that the complaint was any better than the one dismissed in California. To the extent the Delaware courts continue to dismiss almost all of the Caremark claims brought by shareholders, Pyott potentially makes the process more expensive without providing any compensatory benefit to make up for these additional costs.
Primary materials can be found at the DU Corporate Governance web site.