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Joseph M. McLaughlin and Shannon K. McGovern

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. 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; in both, the company is the real party in interest. A recent Delaware Supreme Court en banc decision has ended uncertainty in Delaware and potentially elsewhere introduced when two Court of Chancery decisions urged that this longstanding derivative preclusion rule violates due process. In California State Teachers’ Ret. Sys. v. Alvarez, 2018 WL 547768 (Del. Jan. 25, 2018), the Supreme Court (1) reaffirmed that because the corporation in a derivative suit is the real party in interest, stockholders of the same corporation seeking the same relief on behalf of the same entity are in privity with one another, and (2) held that according preclusive effect to the dismissal of the prior complaint on demand futility grounds did not violate the due process rights of non-party stockholders.

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