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Collateral Estoppel Doesn’t Bar Second Derivative Case After First is Dismissed

By Jason C. Jowers

This article analyzes the recent decision by the Delaware Court of Chancery in Louisiana Municipal Police Employees’ Retirement System v. Pyott, __ A.3d __, 2012 WL 2087205 (Del. Ch. June 11, 2012), which could prove to be the most significant derivative action decision by the Court of Chancery in years. In Pyott, the defendant directors moved to dismiss a second shareholder derivative action based on collateral estoppel after a substantially similar derivative action brought by different shareholders was dismissed in California. The Delaware Court of Chancery, disagreeing with a prior Court of Chancery case as well as a growing body of federal case law applying the collateral estoppel doctrine in the derivative action context, denied the motion to dismiss, finding that a derivative shareholder plaintiff does not have authority to step into the shoes of the corporation until a court finds either that (1) demand on the board of directors is excused as futile or (2) the board is wrongfully refusing the demand. Because neither of these conditions precedent was met in the first derivative case, the first group of plaintiffs never became synonymous with the corporation. Thus, the court determined that the first derivative plaintiffs were never in privity with either the corporation or the subsequent Delaware derivative plaintiffs, and collateral estoppel did not bar a subsequent derivative action involving the same facts.

This article addresses: (1) the court’s rationale for its decision; (2) the court’s disagreement with prior case law; and (3) the potential impact on derivative litigation involving Delaware corporations post-Pyott, assuming the decision survives appeal.

First published in Business Law Today, July 2012. Link to article
Reprinted with permission.

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