The Race to the Courthouse: La. Mun. Police Emples. Ret. Sys. v. Pyott (Part 1)

It has been a long time coming but the decision by VC Laster in La. Mun. Police Emples. Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012) deserves some comments.   

The case turns mostly on the right of Delaware courts to decide whether the dismissals of derivative suits in other jurisdictions have preclusive effect within the state.  At least where the action was brought by different shareholders, the Chancery Court concluded that an earlier dismissal by California courts was entitled to some weight but otherwise did not bind the Delaware judiciary.  Unsurprisingly for a proud and talented judiciary, they would make up their own mind. 

Yet the opinion contains much more than a discussion of this one issue.  The decision strongly encourages shareholders to bring their action in Delaware and strongly encourages them to avoid filing until after having made a demand to inspect corporate records, at least in cases alleging a Caremark violation.  The court also showed the benefits of this approach by upholding a Caremark claim. 

The case is an effort to slow down the race to the court house in certain types of derivative suits.  It is trying to impose on plaintiffs a more deliberative process that fundamentally pushes shareholders to inspect documents before deciding whether to file an action.  We will assess the likely effectiveness of this approach in subsequent posts. 

Primary materials can be found at the DU Corporate Governance web site.