Delaware Supreme Court Confirms Applicability of Issue Preclusion to Dismissals of Shareholder Derivative Actions for Failure to Plead Demand Futility: Court Rejects Chancery Court’s Proposed Rule That Issue Preclusion Applies Only if Derivative Plaintiffs Survive Motion to Dismiss

Sullivan & Cromwell LLP - January 29, 2018
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In California State Teachers’ Retirement System v. Alvarez, the Delaware Supreme Court, sitting en banc, unanimously declined to adopt the Court of Chancery’s proposed rule that, as a matter of federal due process, “a judgment in a derivative action cannot bind a corporation or other stockholders until the suit has survived a Rule 23.1 motion to dismiss.”  The Delaware Supreme Court held that due process does not prohibit giving preclusive effect to a dismissal for failure to plead demand futility as against subsequent derivative plaintiffs unless the earlier derivative plaintiffs were not adequate representatives of the corporation’s interests.  This opinion confirms, consistent with federal court rulings, that, in most circumstances, dismissal of a shareholder derivative claim for failure to plead demand futility will have a preclusive effect on shareholder suits brought in other jurisdictions.