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2 cers in connection with amounts paid by the corpora- tion in parallel proceedings, liability may be entirely contingent upon the outcome of those proceedings. In such circumstances, it makes sense that the underlying predicate for liability be established first before pro- ceeding with derivative litigation. This article – the first in a two-part series – discusses the practical and strategic issues that arise in connec- tion with seeking to stay shareholder derivative litiga- tion because of pending parallel proceedings arising from the same events and the factors to justify a stay.1 We review various factors concerning whether a stay is warranted or appropriate, and then review the caselaw, both in Delaware and elsewhere, addressing these con- siderations. We conclude with a discussion of a recent decision of the Delaware Chancery Court, In re Moly- corp, Inc. Shareholder Derivative Litigation.2 Although the Molycorp court acknowledged that the derivative action had a ‘‘closely related factual underpinning[]’’ to a pending federal securities action, the court neverthe- less held that a stay of the action was unnecessary be- cause the claims and theories of liability in the actions did not overlap.3 However, as discussed below, the Molycorp holding should not be given a broad reading because the opinion did not engage with the full array of considerations discussed herein. II. Practical and Strategic Considerations in Favor of Stay There are a number of practical and strategic consid- erations weighing in favor of stays of derivative litiga- tion in the face of parallel proceedings. These consider- ations are discussed below. Prejudice. One consideration that has persuaded courts to stay derivative actions in light of parallel pro- ceedings is the determination that any harm suffered by the plaintiff and other stockholders due to a delay in the prosecution of the derivative claims is outweighed by the potential for harm to the corporation if the action were not stayed. For instance, courts have recognized that the fact that a corporation is pursuing claims against its directors and/or officers could by itself be viewed as an admission by the corporation in connec- tion with parallel proceedings in which the corporation is a defendant and claimed to be liable for the actions of its agents.4 For this reason, and because of the related 1 The issue of whether or not a derivative action should be allowed to proceed because the stockholder has adequately al- leged that a demand on the board would be futile is often liti- gated as a threshold issue. A determination that a demand is required may, as a practical matter, avoid the need to confront the issues discussed in this article. However, a demand can raise issues of its own. For this reason, the second article in this series will address key considerations for companies faced with shareholder demands for board action in connection with events that are the subject of ongoing litigation or regulatory investigations. 2 2014 BL 133790 (Del. Ch. Feb. 7, 2014). 3 Id. at *6. 4 In re STEC, Inc. Derivative Litig., 2012 BL 400353, at *4 (C.D. Cal. Jan. 11, 2012); In re Groupon Derivative Litig., 882 F. Supp. 2d 1043, 1052 (N.D. Ill. 2012); In re First Solar De- rivative Litig., 2012 WL 6570914, at *2 (D. Ariz. Dec. 17, 2012); Cucci v. Edwards, 2007 BL 295648, at *2 (C.D. Cal. 2007); Breault v. Folino, 2002 BL 23287, at *2 (C.D. Cal. Mar. 15, concern that findings of fact against directors and offi- cers in the derivative proceeding might be used against the corporation in parallel proceedings, it may not be in the best interest of the corporation for derivative claims to go forward at least until the parallel proceedings have fully concluded.5 Discovery in derivative proceedings could also preju- dice the corporation. This is true even if a protective or- der is in place. For example, if a court determines that demand on a corporation’s board of directors was ex- cused, under Delaware law, the board of directors would have the option of appointing a special litigation committee with authority to act on behalf of the corpo- ration in connection with the derivative litigation.6 If the special litigation committee, upon conducting an in- vestigation, concludes that claims against the corpora- tion’s directors and officers are not in the corporation’s best interest, it would typically file a motion to dismiss the action.7 Most courts have held that special litigation committee reports, to the extent they are relied upon in connection with a motion to dismiss, cannot remain un- der seal, and therefore will be accessible to parties ad- verse to the corporation in other proceedings.8 To the extent that a report contains adverse factual findings regarding directors, officers, or other employees of the corporation, it could be prejudicial to the company in connection with parallel proceedings. Judicial Economy. Courts have held that stays are also warranted where the factual matters underlying the de- rivative litigation are not fully developed. Most obvi- ously, to the extent that a derivative action is premised upon a claim for indemnification in connection with any losses faced by the corporation in parallel proceedings, it would not make sense for the derivative action to pro- ceed given that the derivative claim may be limited or eliminated completely by the resolution of the parallel proceeding.9 2002); Brenner v. Albrecht, 2012 BL 24018, at *6-7 (Del. Ch. Jan. 27, 2012); South v. Baker, 62 A.3d 1, 25 (Del. Ch. 2012). 5 STEC, 2012 BL 400353, at *4-6; Groupon, 882 F. Supp. 2d at 1052; First Solar, 2012 WL 6570914, at *2; Rosenblum ex rel. Amgen, Inc. v. Sharer, 2008 BL 355878, at *8 (C.D. Cal. July 28, 2008); Breault, 2002 BL 23287, at *2; Brenner, 2012 BL 24018, at *5-6; South, 62 A.3d at 25. 6 See, e.g., Spiegel v. Buntrock, 571 A.2d 767, 772 (Del. 1990). 7 See, e.g., Zapata Corp. v. Maldonado, 430 A.2d 779, 788 (Del. 1981). 8 See, e.g., Matter of Continental Ill. Sec. Litig., 732 F.2d 1302, 1314-16 (7th Cir. 1984); Joy v. North, 692 F.2d 880, 894 (2d Cir. 1982). But see In re Perrigo Co., 128 F.3d 430, 440-41 (6th Cir. 1997) (holding that when a district court relies upon an SLC report in adjudicating a motion to dismiss, the court should ‘‘conduct a hearing regarding whether the report or parts thereof should be disclosed to the public, or whether that information should remain sealed’’). 9 Groupon, 882 F. Supp. 2d at 1048 (‘‘Courts that have con- sidered the interplay between derivative and securities actions have often found that derivative claims cannot be adjudicated in full (or even in large measure) until the [securities class] [a]ction is tried.’’ (internal quotation marks omitted)); Rosen- blum, 2008 BL 355878 at *9 (‘‘If Amgen is exonerated in the securities class action, then it is unclear what, if anything, would be left of the derivative action.’’); In re Massey Energy Co., 2011 BL 149645, at *30 (Del. Ch. May 31, 2011) (‘‘One can- not even rationally determine what the potential derivative li- ability is until the direct liability Massey faces is determined.’’). 8-25-14 COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. SRLR ISSN 0037-0665PDF Image | Securities Regulation and Law Report
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