Friday, April 5, 2013

Another Semtek in the Making? Delaware Supreme Court Holds Collateral Estoppel Bars Shareholder Derivative Suit

            Allergan, the pharmaceutical company, agreed to pay $600 million in civil and criminal fines after a Department of Justice investigation into the company's allegedly improper marketing of BOTOX for off-label uses.  Several Allergan shareholders then filed shareholder derivative suits, some in federal district court in California (which were consolidated) and one in Delaware Chancery Court.  Allergan moved to dismiss both actions for failure to plead demand futility under Rule 23.1 (the Delaware rule is "substantially the same" as Federal Rule 23.1).

            The federal court dismissed the California action with prejudice (the dismissal is currently on appeal).  The Delaware Chancery Court held that the California judgment did not bar the Delaware action and denied Allergan's motion to dismiss.

            On interlocutory appeal, the Delaware Supreme Court reversed.  Pyott v. Louisiana Municipal Police Employees' Retirement System, No. 380, 2012 (Del. April 4, 2013).  Citing Semtek, the court first held that the preclusive effect of the California judgment would be determined by California state law.  The California federal court held, as a matter of Delaware law, that demand was not futile and dismissed the derivative complaint "on the merits of demand futility."

            Applying California preclusion law, the Delaware Supreme Court held that the issue of "whether, under Rule 23.1, the failure to make demand on the Allergan board is excused because such a demand would have been futile" was precluded.  The court held that "because the real plaintiff in a derivative suit is the corporation, 'differing groups of shareholders who can potentially stand in the corporation's stead are in privity for the purposes of issue preclusion.'"     

            In addition, the court addressed and rejected plaintiffs' argument that the California plaintiffs' representation was inadequate.  The Delaware Chancery Court had applied an irrebutable presumption that derivative plaintiffs who file their complaints without seeking books and records, very shortly after the announcement of a "corporate trauma," are inadequate representatives.  The Delaware Supreme Court rejected such an irrebutable presumption.


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