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.
The case involved derivative suits filed against Allergan following a guilty plea to a criminal misdemeanor and the payment of $600 million in civil and criminal fines. Multiple suits were filed, including one in Delaware (filed by the Louisiana Municipal Police Employees' Retirement System) and another in California. The California action was dismissed without prejudice and then dismissed a second time with prejudice.
In Delaware, the action was stayed pending an attempt to inspect the books and records under Section 220 by a shareholder, UFCW Local 1776. UFCW eventually intervened and, along with other plaintiffs, filed a second amended complaint (consisting of 84 pages and 241 paragraphs).
Defendants sought dismissal. In part, they based their argument on the actions of the California court. They asserted that the decision had collateral estoppels effect. The Chancery Court in the end said it did not but in the course of the opinion took a swipe at the "race to the courthouse" dynamic that apparently takes place with respect to derivative suits.
The court acknowledged that the race was a product of the structural nature of derivative suits. Derivative suits were, as the court reasoned, often brought by firms with expertise in the area. Id. ("For publicly traded Delaware corporations, the enforcement of fiduciary obligations is largely carried out by specialized plaintiffs' firms who bring claims on a contingent basis."). These firms were compensated in the form of fees but only if they achieved results.
In order to obtain the requisite "results," these firms had to obtain control over the litigation. Control, however, often went to the first to file. This imposed pressure on counsel to file suits quickly. As the Vice Chancellor put it: "No role, no result, no fee."
Rapid filing could be beneficial but only, according to the court, in a narrow set of circumstances where expedited action is called for. Id. ("When fast-filed complaints follow the announcement of a transaction or other event that likely will require expedited litigation, they at least perform the beneficial function of identifying the firms who wish to compete for leadership status. In a quickly evolving deal setting, fast-filing enables a leadership structure to be put in place so that expedited litigation can begin in earnest.").
Where, however, expedited action was not required, "any administrative benefit [from fast filing] disappear[ed]." The reason?
[H]astily filed complaints have little chance of surviving a Rule 23.1 motion, yet the defendant fiduciaries must respond, and the corporation must underwrite the costs of defense, either directly through indemnification and advancement or indirectly through insurance.
In other words, the presumption is that quick filed cases will be meritless. Rapid filing, therefore, requires companies to incur defense costs in connection with meritless cases.
Primary materials can be found at the DU Corporate Governance web site.