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Alice Hong

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The Case for Do-Over Derivative Shareholder Suits in Delaware Chancery Court

Alice Hong

Most of the literature addressing shareholder derivative litigation has emphasized the perils of excessive multi-forum shareholder litigation, proposing various solutions to sidestep the problems encountered in cases like California State Teachers’ Retirement System v. Alvarez (Wal-Mart II). This Note addresses a separate and distinct problem—a long overlooked inquiry into the due process implications of using nonparty issue preclusion to curb what is seen as an overgrowth of shareholder derivative litigation. 

The Delaware Chancery Court’s recent decision in Wal-Mart II illustrates a conceptual puzzle in the application of issue preclusion rules in the context of derivative shareholder suits. In Wal-Mart II, a separate federal suit was dismissed on the grounds that the plaintiffs had failed to satisfy the demand requirement, a crucial step for establishing the plaintiffs’ authority to bring a derivative suit on behalf of the corporation. The Delaware courts gave preclusive effect to the federal court’s ruling in barring a derivative action by different shareholders. But how can such a judgment—finding that a shareholder plaintiff seeking to bring a derivative action lacks authority to bring suit on behalf of the corporation—be given preclusive effect to bar a future suit by other shareholders? A rule that would resolve this inconsistency was proposed by Chancellor Bouchard’s decision for the Chancery Court late in 2017, In re Wal-Mart Stores Delaware Derivative Litigation (Wal- Mart I). While the Delaware Supreme Court declined to adopt the proposal, an analysis of the Delaware Supreme Court’s decision suggests that Chancellor Bouchard’s proposal may have been the right rule at the wrong time. This Note proposes adoption of the rule proposed in Wal-Mart I as Delaware’s preclusion law, arguing that the current treatment of nonparty preclusion in derivative share- holder suits is incompatible with the strong presumption against nonparty preclusion and inconsistent with the treatment of a related mechanism: the class action. In doing so, this Note advocates for an approach to nonparty issue preclusion that would deny preclusive effect to putative derivative suits dismissed prior to satisfaction of the demand requirement.