Due Process Rights in Multi-Jurisdiction Shareholder Derivative Actions

In several recent cases, the Delaware Court of Chancery has addressed due process issues arising out of shareholder derivative actions.¹ The Delaware Supreme Court has now taken up the baton in a case called California State Teachers’ Retirement System v. Alvarez, — N.E.3d —, 2017 WL 239364 (Del. Jan. 18, 2017), which raised the question of when a court in a subsequent action is obligated to honor an earlier dismissal of a shareholder derivative action for failure to plead demand futility. After making several pointed observations about the case, the court remanded the action to the Court of Chancery for further consideration of the due process challenge. However that court eventually decides the dispute, it is certain to influence strategic considerations for both plaintiffs and defendants.

Two Different Paths

Following publication of a New York Times article describing the cover up of an alleged bribery scandal at a Mexican subsidiary of Wal-Mart Stores, two groups of shareholders filed separate actions asserting derivative claims on behalf of the company.² One case was filed in Arkansas federal court, alleging Delaware state claims and federal securities laws claims, while the other was filed in Delaware state court, alleging Delaware state claims only. At an initial pre-trial conference in the Delaware case, then-Chancellor Leo Strine Jr. “explicitly warned plaintiffs’ counsel that the extant complaints before him likely would not survive a motion to dismiss,” as he did not see how plaintiffs could adequately allege demand futility as to each defendant. Chancellor Strine also “urged counsel” to undertake a careful review and examination of Wal-Mart’s books and records before filing a derivative claim. The Delaware plaintiffs heeded that warning and pursued a books-and-records demand and lawsuit, which took over three years to complete. Meanwhile, the Arkansas plaintiffs chose to proceed without the books-and-records inspection, relying instead on the New York Times article that described the alleged bribery in some detail and that referred to a series of internal documents published on the newspaper’s website.