The Race to the Courthouse: La. Mun. Police Emples. Ret. Sys. v. Pyott (Part 4)

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 about derivative suits from the shareholder perspective?  As the court described, shareholders seek to "displace the board's authority."  Particularly in Caremark style cases, they have a difficult burden of showing a relationship between some type of corporate calamity and the board of directors. Ideally, shareholders would benefit from this type of suit only "if there was a risk-adjusted prospect of a net-positive recovery."  

To accurately engage in this calculation takes time.  Shareholder would need to "hire well-qualified counsel" who would need to "conduct an investigation and seek books and records".  With the requisite documents in hand, they could "evaluate whether it made sense to sue." 

The books and records might show that the board had an appropriate monitoring system in place, but that the system did not alert the board. Or the books and records might show that despite their good faith efforts, the directors were misinformed or misled. Under these or other circumstances, the hypothetical stockholder collective logically might decide not to sue, preferring to leave their elected fiduciaries to the task of remedying the harm suffered by the corporation and dispensing with expensive litigation that likely would founder on Rule 23.1. 

There also might be information obtained in the inspection request that strengthened the suit.

if the books and records showed director misconduct, then the stockholders could decide to pursue a claim. Their counsel at that point would be well positioned to plead demand futility and survive a motion to dismiss. Importantly for all concerned, the costly process of briefing and arguing motions to dismiss would take place once, based on the stockholders' post-inspection complaint.

In other words, a more deliberative process might result in a determination that a suit should not be filed.

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

J Robert Brown Jr.