No Second Bite at the Apple for Allergan Plaintiffs

As we previously wrote in the December 27, 2012, edition of the Delaware Business Court Insider, the highly-publicized decision concerning the application of collateral estoppel to Delaware shareholder derivative litigation, Louisiana Municipal Police Employees’ Retirement System v. Pyott, 46 A.3d 313 (Del. Ch. 2012) — commonly known as Allergan — was the subject of an interlocutory appeal before the Delaware Supreme Court. On April 4, the Supreme Court, in an en banc opinion in Pyott v. Louisiana Municipal Police Employees’ Retirement System, — A.3d —, 2013 Del. LEXIS 179 (Del. Apr. 4, 2013), reversed the Court of Chancery, holding that a California federal court’s dismissal with prejudice of a shareholder derivative complaint for failure to plead demand futility precluded other shareholders of the same corporation from bringing the same claims in a subsequent derivative action in Delaware.

The Court of Chancery had held that the California federal court’s dismissal of the derivative complaint for failure to plead demand futility did not preclude other shareholders from bringing the same claims in a subsequent Delaware derivative action. Crucial to the Court of Chancery’s ruling was its determination that, pursuant to the "internal affairs doctrine," Delaware law (not California law) governed the "privity" prong of the California collateral estoppel analysis in an action alleging derivative claims against directors of a Delaware corporation. The court held that under Delaware law, a shareholder who sues in the name of the corporation, yet fails to allege particularized facts showing demand futility, is not in privity with his or her fellow shareholders because a shareholder is only able to sue on behalf of a corporation after he or she has shown demand futility. Prior to showing demand futility, the court found, a shareholder is only asking the court for the authority to sue on behalf of the corporation, and the court reasoned that until such authority is granted, a shareholder cannot bind the corporation or his or her fellow shareholders. Thus, the Court of Chancery permitted the Allergan plaintiffs to prosecute in Delaware the same derivative claims that previously had been dismissed, with prejudice, by the California federal court.