The Race to the Courthouse: La. Mun. Police Emples. Ret. Sys. v. Pyott (Part 3)

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 harm from fast filing of complaints in derivative suits is, according to the court in Pyott, the filing of meritless cases.  These filings impose on companies unnecessary defense costs.  This in turn imposes costs on shareholders.  The problem is apparently limited to shareholder initiated actions.  It does not apply to the process used by the board in deciding whether to bring an action. 

Absent "doubt" about the "directors' ability to make disinterested and independent decisions about litigation," the court reasoned, the board is "optimally positioned to make decisions on behalf of the corporation and, if appropriate, pursue litigation."  Directors are in a position to investigate, to access internal information, and "[p]erhaps most significantly, the board can take into consideration and balance the interests of multiple constituencies when determining what outcome best serves the interests of stockholders."

This analysis gives too much credit to the system of board review.  It is in fact accurate to suggest that the board has more information and is potentially in a better position to weigh all of the competing interests.  But what it can do and what it does are two different things.  In fact, boards invariably seek dismissal of derivative suits.  See La. Mun. Police Emples. Ret. Sys. v. Morgan Stanley & Co., 2011 Del. Ch. LEXIS 42 (Del. Ch. March 4, 2011) (noting that directors "typically" refuse demand for litigation in derivative context).

In other words, the analysis in this case deals with the costs associated with an excessive number of derivative suits brought by shareholders.  What it does not address are the costs associated with an inadequate number of suits brought by management.  

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

J Robert Brown Jr.