In “Delaware Court of Chancery ‘Overrules’ Federal Court“, I wrote about Vice Chancellor J. Travis Laster’s ruling Louisiana Municipal Police Employees’ Retirement System v. Pyott, C.A. No. 5795-VCL (Del. Ch. June 11, 2012) to allow a derivative suit against the board of directors of Allergan, Inc. to proceed in Delaware even though U.S. District Court Judge David Carter had dismissed a similar suit in California. I referred to the ruling as a “judicial bolt from the blue” and noted that the ruling departed from numerous federal and state decisions. This article quotes University of Pennsylvania Law School Professor Edward B. Rock describing the ruling as “a very clever interpretation of doctrine to keep derivative litigation in Delaware where it belongs.”
Since then the list of contrary decisions has lengthened. In Holt v. Golden, C.A. No. 11-cv-30200-MAP (U.S. Dist. Ct. D. Mass. (July 25, 2012)), Judge Michael Ponsor gave preclusive effect to an earlier state court decision dismissing a shareholder’s derivative suit for failing to make pre-suit demand. This case involved the famed firearms company, Smith & Wesson, which is incorporated in Nevada. Judge Ponsor applied Massachusetts’ law of issue preclusion.
In the meantime, Vice Chancellor Laster’s ruling has been appealed to the Delaware Supreme Court. Both the United States Chamber of Commerce and the Washington Legal Foundation have filed amicus briefs arguing for a reversal of the ruling. The Chamber of Commerce concludes in its brief:
While the Court of Chancery’s effort to control multi-forum [sic] litigation should be commended, its solution is worse than the problem. The law from which the Court of Chancery departed had the virtue of assuring corporations that once one court dismissed a shareholder suit for failure to satisfy the demand requirement, the corporation could rest assured that other attempts to litigate the same issue would be rejected.
The Washington Legal Foundation pulls fewer punches in its brief, calling Vice Chancellor Laster’s ruling “contrary to binding California law”, an “invitation to judicial chaos”, and “constitutionally problematic”. In particular, the WLF argues that the adoption of a rule intended to prevent or deter filing of lawsuits outside of Delaware raises both full-faith-and-credit and commerce clause concerns.