Del. judges mean it: Don’t file derivative suit pre-investigation

By Alison Frankel
July 18, 2012

There’s an antitrust conspiracy in Delaware Chancery Court. Chancellor Leo Strine and Vice Chancellor Travis Laster are engaged in a cooperative effort to restrain the trade of shareholder lawyers who file derivative suits without obtaining books and records discovery. I’ve told you about Laster’s decision in the Allergan case, in which he found that shareholders who rushed to sue in California didn’t adequately represent the corporation (the nominal plaintiff in derivative litigation); and about Laster’s follow-up explanation that “diligent plaintiffs should get to litigate,” when he certified the case for appeal. On Monday, Strine echoed Laster when he refused to appoint a lead plaintiff in the derivative litigation over Wal-Mart’s alleged bribes in Mexico.

“More energy was spent by dueling plaintiffs over who gets to be lead counsel and lead plaintiff than was spent writing the complaints,” Strine said, according to my Reuters colleague Tom Hals. The chancellor chastised the two state pension fund giants vying to be named lead plaintiff for basing their complaints on the New York Times scoop on Wal-Mart’s alleged payments rather than on their own investigations, and said everyone should come back to court after the Indiana Electrical Workers Pension Trust Fund, IBEW, and its lawyers at Grant & Eisenhofer have obtained access to Wal-Mart’s books and records through the demand they have served on Wal-Mart’s board.

The California State Retirement System (CalSTRS) and the New York City Employees’ Retirement System had moved for appointments under what was previously considered the leading Delaware case on the standard for lead plaintiffs, Hirt v. U.S. Timberlands Service. Hirt laid out six factors the court should consider in choosing a lead in derivative litigation, including the quality of the complaint and the plaintiff’s economic stake in the outcome. (Remember, there’s no statutory framework for lead plaintiffs in derivative cases, as opposed to federal securities class actions.)

In CalSTRS’s lead plaintiff motion, its lawyers at Labaton Sucharow and Girard Gibbs highlighted their experience as securities litigators and the fund’s $340 million holding in Wal-Mart stock; in a reply brief, CalSTRS also said it had agreed to work with plaintiffs’ firms in most of the other Wal-Mart derivative suits in Chancery Court. But the New York funds, represented by Kaplan Fox & Kilsheimer and Rigrodsky & Long, said in their lead plaintiff motion that they’d been rebuffed when they reached out to CalSTRS about sharing the lead in the case. The New York funds claim to own more Wal-Mart shares than all of the other candidates and say they have a record of corporate governance enforcement to boot.

Strine signaled Monday that he’s sick and tired of the gamesmanship. Chancery Court has a history of encouraging shareholder lawyers to work out lead counsel deals without interference from judges, but Laster and now Strine are clearly signaling that it’s not enough to be the first to file or the biggest shareholder or even the leader of a coordinated group. You have to show you’ve done your prep work – and not just by reading news stories and securities filings.

Frederic Fox of Kaplan Fox, who represents the New York funds, said Strine “created a new dynamic” at the Wal-Mart hearing. “Maybe this does represent a new trend if courts in Delaware are going to have a strong preference for plaintiffs who bring [books and records] actions,” Fox said. The New York funds reminded Strine that they only filed their derivative complaint after CalSTRS filed its initial lead counsel motion, noting that a plaintiff mired in a books and records case could be aced out by a fast filer. Strine, Fox said, assured the plaintiffs firms in attendance Monday that they won’t be left behind if they take the time to investigate.

The only firm that emerged from Monday’s hearing a winner was Grant & Eisenhofer, which had the smarts to serve a books and records demand that will presumably result in material that will inform whatever complaint it ultimately files against Wal-Mart’s board – and will put G&E at the front of the line for leadership, even though its client has a relatively small Wal-Mart holding.

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