The dismissal of a putative stockholder derivative complaint for failure to make pre-suit demand has long been understood to have preclusive effect against attempts by different stockholders to relitigate the demand issue in another court. These decisions recognize that because a stockholder derivative plaintiff sues in the company’s name, privity for preclusion purposes exists between the plaintiffs in the first and subsequent actions making similar allegations because in both, the company is the real party in interest. Two recent Court of Chancery decisions have introduced uncertainty in Delaware and potentially elsewhere by urging that this long-standing derivative preclusion rule violates due process. In In re EZCORP Consulting Agreement Deriv. Litig., 130 A.3d 934 (Del. Ch. 2016), the court stated in dictum that the reasoning of the U.S. Supreme Court’s Smith v. Bayer, 564 U.S. 299 (2011), which held that absent class members are non-parties who are not bound by any rulings in the case unless and until a class is certified, should mean that stockholders pursuing derivative actions are not in privity with each other until the action has survived a motion to dismiss for failure to adequately plead demand futility under Rule 23.1. Under this approach, due process would foreclose any preclusive effect of a prior demand futility determination on anyone other than the named stockholder plaintiff. Last month, In re Wal-Mart Stores Delaware Deriv. Litig., 2017 WL 3138201 (Del. Ch. July 25, 2017), adopted and amplified EZCORP, recommending that the Delaware Supreme Court adopt a non-preclusion rule that would permit successive derivative litigation.
Pre-Suit Demand and Preclusion
Derivative claims belong to the corporation, which is why a stockholder must make a demand on the company’s board or adequately allege demand futility to pursue derivative claims on the company’s behalf. To prevent abuse of the derivative form of suit, as a precondition to seeking to enforce a right of a corporation a stockholder must demonstrate that the corporation refused to proceed as requested after suitable demand, unless demand is excused because particularized allegations create reasonable doubt that a majority of the board could impartially consider a demand.
