The Delaware Supreme Court held that the Court of Chancery erred by failing to give preclusive effect to an earlier with-prejudice dismissal of a parallel derivative suit in another state, and by creating a presumption that all plaintiffs who file derivative suits without first conducting books-and-records inspections are inadequate representatives. Pyott v. La. Mun. Police Emps.’ Ret. Sys., No. 380, 2012 (Del. Apr. 4, 2013). The decision stresses the importance of interstate comity and the need to give full faith and credit to the decisions of other courts.

Allergan is a drug company that incurred losses in resolving civil and criminal investigations of off-label drug marketing. Derivative suits were filed in both federal court in California and the Court of Chancery alleging that Allergan’s directors were liable for the losses because they failed to properly monitor the company’s marketing practices. The Delaware shareholder plaintiff obtained documents through a books-and-records inspection under 8 Del. C. § 220 before filing suit. The California plaintiffs did not, but later amended their complaints when the Delaware plaintiff shared the documents. Defendants moved to dismiss in both jurisdictions. The California federal court ruled first, dismissing with prejudice for failure to establish demand futility. The Court of Chancery refused to give preclusive effect to that ruling, applying Delaware law to the preclusion question. Turning to the merits, Chancery disagreed with the federal court, holding that demand was futile and that the case should proceed.

…continue reading: Delaware Court Limits Non-Delaware Dismissal

Takeover litigation continued unabated in 2012 according to our just released annual report Takeover Litigation in 2012.

We find that 91.7% of transactions in 2012 experienced litigation almost at an almost identical rate as 2011 when 91.4% of transactions experienced litigation. This figure continues the increasing trend of takeover litigation which is now brought at a rate almost 2.5 times that of 2005.

The number of complaints brought per transaction remained about constant in 2012 at 5.0 lawsuits per transaction – identical to the rate in 2011. While the number of lawsuits (and rough approximation of law firms) remained steady from 2011 to 2012, this still represents a more than doubling from the mean number in 2005 of 2.2 lawsuits.

Multi-jurisdictional litigation also remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states. This compares to 53.0% of transactions with multi-state litigation in 2011. This rate continues what has been described as the biggest phenomena in takeover litigation. Multi-state litigation has gone from 8.3% of litigations in 2005 to half of all transactions in 2012.

…continue reading: Takeover Litigation in 2012

The United States Supreme Court ruled unanimously that a plaintiff’s pre-class certification stipulation, under which plaintiff committed not to seek damages on behalf of the proposed class in excess of $5,000,000 (the federal jurisdictional threshold under the Class Action Fairness Act (“CAFA”)), cannot bind absent class members and therefore cannot be used to defeat federal jurisdiction. Standard Fire Ins. Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).

In 2005, Congress enacted CAFA, which provides that federal district courts have jurisdiction over class actions (subject to certain exceptions, including a carve-out for many state-law class actions for breach of fiduciary duty) if the proposed class has 100 or more members, the parties are minimally diverse (meaning that, for example, one member of the plaintiff class and one defendant are from different states) and the “matter in controversy” exceeds the sum or value of $5,000,000.

In Standard Fire, plaintiff sought to circumvent the federal jurisdiction provisions in CAFA by filing a class action in a state court on behalf of a proposed class of members from that state and stipulating that the plaintiff and the class would not seek to recover total aggregate damages of more than $5,000,000. The defendant nevertheless removed the case to federal court. The district court found that, absent the stipulation, the amount in controversy would have been just above the $5,000,000 jurisdictional threshold. But in light of the stipulation, the district court concluded that the amount in controversy was below the threshold and remanded the case to state court. The Court of Appeals declined to hear the appeal.

…continue reading: Class Certification and Federal Jurisdiction under CAFA: Supreme Court Ruling

The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly. In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself. [1] As a forum for corporate litigation, in other words, Delaware no longer dominates.

Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware could, over time, reduce the expertise of the Delaware judiciary in corporate law matters. Worse, the decisions reached by non-Delaware “dilettantes” threaten to adulterate and degrade the basic Delaware product. In sum, prior commentary on the out-of-Delaware trend has treated it as very bad for corporate defendants, very bad for shareholder plaintiffs, and very bad for Delaware.

…continue reading: Multi-Forum Merger Litigation and the “Market for Preclusion”

Summary

On November 20, 2012, the New York Court of Appeals issued an opinion that is of substantial importance to international banks and financial institutions that maintain and use correspondent banking accounts in New York. In Licci v. Lebanese Canadian Bank, SAL (N.Y. Nov. 20, 2012), the Court of Appeals held that a non-U.S. bank’s maintenance and use of such an account to effect “dozens” of wire transfers, worth millions of dollars, on behalf of a non-U.S. client was sufficient to form the basis for personal jurisdiction under the New York State long-arm statute, N.Y. C.P.L.R. § 302(a)(1). Due to the prevalence of U.S. dollar-denominated financial transactions, many non-U.S. banks maintain and use correspondent accounts in New York. As a result, the Licci decision has the potential to increase plaintiffs’ ability to establish personal jurisdiction over non-U.S. financial intuitions in state and federal courts in New York.

…continue reading: Personal Jurisdiction Over Non-U.S. Financial Institutions

Last month, the Columbia Business Law Review published “A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking.” In this brief paper, I examine interaction between Delaware and Washington in corporate lawmaking, focusing on the shareholder access initiatives in each jurisdiction. The paper uses a straight-forward spatial model of the state-federal interaction, paralleling spatial models that political scientists have used to illustrate other instances of jurisdictional interaction.

In prior work I showed how Delaware corporate law can be, and often is, confined by, or influenced by, federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally, leaving no space for state corporate law action. Sometimes Delaware tilts toward or follows Washington opinion, even if Washington opinion does not square perfectly with the state lawmakers’ own consensus view of the best way to proceed. I examined these channels in Delaware’s Competition, 117 Harvard Law Review 588 (2003), and Delaware’s Politics, 118 Harvard Law Review 2491 (2005).

…continue reading: A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking

In the past two years, the court system has seen a sharp increase in the volume of merger-related class-action lawsuits, particularly (but by no means exclusively) in the Delaware Court of Chancery. See John W. Molka III, Advisen Ltd., Securities Suits Abound in a Harsh 2009: An Advisen Quarterly Report—2009 Review 9–10; John W. Moka III, Advisen Ltd., 2010 a Record Year for Securities Litigation: An Advisen Quarterly Report—2010 Review 3–4 (noting that the number of M&A-related lawsuits filed nationwide increased dramatically from 159 in 2008 to 398 in 2010). The increased case volume has led to unusual behavior by shareholders’ and defense counsel alike, particularly in connection with the organization of parallel actions in different jurisdictions and the appointment of lead class counsel.

…continue reading: Improving Multi-Jurisdictional, Merger-Related Litigation

Since the Delaware Chancery Court’s opinion in In re Revlon, Inc. Shareholders Litig., [1] where Vice Chancellor Laster endorsed a Delaware entity’s right to mandate in its governance documents a chosen forum for the resolution of intra-corporate disputes, numerous boards of public companies have determined that such a provision is in the best interests of the corporation and its shareholders.

At least 36 boards of public companies have enacted bylaw amendments seeking to designate Delaware’s Chancery Court as the exclusive jurisdiction for intra-corporate disputes, [2] and at least 37 companies have included such provisions in their charters. [3] In addition, at least 11 public companies have included an exclusive jurisdiction provision for their charter or bylaws in proxy materials for their 2011 annual meetings. As of April 28, 2011, three of those proposals have been voted on and approved and the remaining eight will be voted on later in this proxy season. [4]

…continue reading: New Challenges and Strategies for Designating Delaware as Jurisdiction for Corporate Disputes