Delaware Court of Chancery Orders Follow-On Derivative Action Stayed in Light of Pending Class Action

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Today, in an authoritative 18-page ruling, Delaware Vice Chancellor Parsons ordered a follow-on derivative action stayed in light of a federal securities class action arising out of the same underlying facts. This ruling, Brenner v. Albrecht, should help defendants seeking to avoid the expense, distraction, and potential prejudice of defending related derivative and class action claims simultaneously.

As surely as federal securities class actions follow stock drops, stockholder derivative actions have come to follow securities class actions. Follow-on derivative actions seek recovery on behalf of the corporation against corporate officers and directors for harm suffered by the corporation arising out of (1) the events leading to the stock drop, and (2) the ensuing class action litigation, including the costs of defense. Unlike securities class actions, which must be brought in federal court, and where discovery is stayed pending resolution of motions to dismiss, these derivative actions are often brought in state courts, where the Private Securities Litigation Reform Act does not apply. Derivative plaintiffs routinely name all corporate directors as defendants and attribute corporate actions to board malfeasance or inaction. Often multiple derivative actions are brought in different jurisdictions. While derivative plaintiffs purport to represent the corporation, their litigation can prejudice the company in its defense of the class action and substantially increase the cost and distraction of the litigation.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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