Delaware Supreme Court Limits Duplicative Shareholder Litigation

In an important recent decision (, the Delaware Supreme Court reversed a Chancery Court permitting a second derivative suit to go forward against Allergan, even though a California federal court had already dismissed a derivative suit asserting similar claims brought by different Allergan shareholders.  The Chancery Court reasoned that the California shareholders had filed their derivative suit too quickly and without having made a demand for books and records under Delaware Corporate Code Section 220.  Accordingly, the Chancery Court reasoned that the California plaintiffs were inadequate representatives of the corporation and should not prevent other shareholders from asserting derivative claims on behalf of the company. The Delaware Supreme Court held that the dismissal of the California case raising the same issues was entitled to preclusive effect under the Full Faith and Credit Clause of the Constitution.  Absent this result, shareholder plaintiffs could seek a quick bite at the apple outside of Delaware.  If their suit fails, other shareholders could try again in Delaware after making a books and records demand, effectively subjecting the corporation to at least two lawsuits in different states over the very same claims.  The flip side, however, is that the decision places shareholders who want to conduct an orderly investigation before filing in a bind:  their case might be lost by others before it can be filed.  The Allergan decision does leave open the prospect that the later shareholders can prove that the "fast filers" were inadequate -- but they must present a factual record of the inadequacy, not just presume it based upon the lack of a Section 220 demand.