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Thursday
Nov012012

The Race to the Courthouse: La. Mun. Police Emples. Ret. Sys. v. Pyott (Part 5)

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.

Having identified the idealized version of the shareholder derivative suit (at least in a Caremark context), the court sought to turn this version into the reality. 

In reviewing the facts of the case at hand, the Chancery Court concluded that the firms filing the California actions "failed to provide adequate representation."  As a result, the dismissal in California was not determinative of the motion to dismiss the action in Delaware.

The characterization of California counsel was not, in the end, based upon the merits of the complaint but solely from the decision to file quickly.  The case, the court reasoned, "exemplif[ied] the race-to-the-courthouse problem."  Within 48 hours of the settlement between Allergan and the Department of Justice, a derivative suit was filed in Delaware.  Three additional complaints were filed within weeks of the initial suit in California. 

The complaints were "filed hastily for one reason only: to enable the specialized law firms to gain control of a case that could generate legal fees."  As a result, the company was forced to "fund the teams of the lawyers hired by the individual defendants to respond in each jurisdiction, address coordination issues, and brief parallel motions to dismiss." The court viewed the actions of the California law firms as a failure to "fulfill the fiduciary duties they voluntarily assumed as derivative action plaintiffs." 

Presumably California counsel should have delayed filing and invoked inspection rights.  Had they done so, they would have had additional information to use in deciding whether to bring the action.  Yet in fact, they had that very information.  A shareholder in Delaware had successfully made a demand to inspect records at Allergan and the materials were given to the plaintiffs in the California actions.  California plaintiffs "used the materials to file an amended complaint. and used in the amended complaint."

So it wasn't about the inadequacy of the complaint.  It was about the decision of the California plaintiffs to file quickly.  As the Vice Chancellor opined:

the fast-filing plaintiffs already had shown where their true loyalties lay. Asking for and receiving the benefit of another lawyer's work did not rehabilitate them. It rather evidenced their continuing desire to control the case. In this regard, I disagree that the policy goal of encouraging plaintiffs to use Section 220 will not be undercut by a rule that affords priority to fast filers if the corporation gives them the same books and records that a diligent stockholder fought to obtain. . . . Under the rule enunciated in King I, the issue would not arise because stockholders like the California plaintiffs would not be able to file fast, suffer dismissal, and then ask for books and records to try again.

In other words, the case amounted to a warning.  Counsel bringing a Caremark action without first invoking inspection rights (and presumably undertaking some kind of deliberative process over whether to bring the case) incurred the risk that a Delaware court would view them as failing to provide adequate representation.

Primary materials can be found at the DU Corporate Governance web site.

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