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4 shareholder derivative actions are filed only after the al- legedly wrongful conduct already has ceased and been publicly revealed. In such cases, there is no urgent need for an injunction to halt ongoing wrongful conduct.18 In addition, with the passage of time, relevant evidence may be compromised because evidence may no longer exist or witnesses’ memories may fade. But prosecution of the underlying action can serve not only to preserve relevant evidence, but potentially to further develop that evidence so that the derivative action, once it pro- ceeds, can be streamlined.19 III. Review of Case Law Regarding Stays Delaware and other state and federal courts have re- lied upon many of these considerations in determining whether to exercise their inherent discretion by grant- ing a stay of derivative action in light of pending paral- lel proceedings. This section reviews the caselaw in Delaware and elsewhere on this issue. A. The Delaware Approach. Brudno v. Wise,20 a deci- sion by then-Vice Chancellor Strine, remains one of the most cited Delaware opinions setting forth the circum- stances in which a court may exercise its inherent dis- cretion in granting a stay of a derivative suit in light of a parallel action. Brudno involved a shareholder deriva- tive action that proceeded simultaneously with a federal securities suit and an inquiry by the Federal Energy Regulatory Commission (‘‘FERC’’). The basis for the derivative litigation was the contention that ‘‘certain in- side directors actively participated in the misconduct’’ at issue in the securities action and FERC inquiry, and that the outside directors were ‘‘culpable for their fail- ure to prevent the misconduct.’’21 Therefore, the ‘‘pri- mary thrust’’ of the complaint was to ensure ‘‘that the . . . directors, rather than [the corporation], bear ulti- mate responsibility for any costs arising out of the Fed- eral Securities Actions or the FERC proceeding.’’22 The defendants moved for a stay of the action under McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Corp.23 and its progeny, pursuant to which Delaware courts may exercise their judicial discretion in favor of a stay where a prior action, involving the be useful to the plaintiffs in [both actions].’ ’’ (quoting Brudno, 2003 BL 1596, at *5 n.11)). 18 See, e.g., South, 62 A.3d at 25 (‘‘Critically, there was no reason to rush [in pursuing derivative claims] that would fur- ther the interests of the corporation. . . . [T]he underlying harms – the accidents at the Lucky Friday mine – [did not] call for haste. During 2011, as those unfortunate incidents were oc- curring, no stockholder plaintiff filed suit. It was only the pub- lic announcement of the lowered projection for silver produc- tion and the filing of the federal securities complaints that spurred the Souths and other derivative plaintiffs into ac- tion.’’). 19 In re Ormat Technologies, Inc., 2011 BL 222446, at *5 (D. Nev. Aug. 29, 2011) (‘‘Plaintiffs may be able to benefit from the proceedings in the Securities Class Action, and any potential harm from delayed litigation is more than outweighed by the harm of denying the stay and forcing Ormat to expend re- sources on this derivative suit, and the harm to Ormat of hav- ing its witnesses for the Securities Class Action undermined in this action.’’). 20 2003 BL 1596 (Del. Ch. Apr. 1, 2003). 21 Id. at *3. 22 Id. 23 263 A.2d 281 (Del. 1970). 8-25-14 same parties and issues, is pending in a foreign court. In Brudno, previously-filed securities actions and a companion derivative action were pending in another jurisdiction.24 The court held that it was unnecessary to apply McWane, because even if it applied a standard fo- rum non conveniens analysis, a stay was appropriate, and the same result would obtain under an exercise of the court’s inherent discretion to control its own docket.25 The Court reasoned that the derivative suit was merely a ‘‘placeholder indemnity action’’ in which, ‘‘to a great extent, the plaintiffs [] expressly hinge[d] [the corporation’s] right to relief on the outcome in the Federal Securities Action. As a result, it makes little sense for this Action to proceed until the bases for the plaintiffs’ indemnity claims are settled, or at the very least, closer to that point.’’26 The court also noted that the federal derivative action had been stayed in light of the same federal securities action.27 Therefore, the court held that the ‘‘interests of litigative efficiency, ju- dicial economy, and comity weigh[ed] heavily in favor of the entry of a stay for the time being,’’ although the court noted it would remain open to reconsidering the issue at a later point.28 In a later decision, then-Vice Chancellor Strine out- lined an additional rationale for granting a stay of de- rivative litigation in dicta in In re Massey Energy Com- pany.29 In April 2010, an explosion at a Massey mine in West Virginia killed 29 miners. Several families of the miners sued the corporation and regulatory proceed- ings ensued. In response, Massey stockholders filed de- rivative suits, seeking to hold corporate directors and officers responsible for their alleged failure to comply with applicable mine safety regulations.30 In the wake of all this, Massey’s stock price fell significantly and Massey entered into a merger agreement with Alpha Natural Resources, Inc. (‘‘Alpha’’). The stockholders sought a preliminary injunction to block the proposed merger on the basis that it allowed Alpha to acquire Massey without paying for the economic value of the derivative claims.31 The court denied the motion for preliminary injunc- tion, holding that the plaintiffs failed to establish that they had a reasonable likelihood of success on the mer- its or that they faced an irreparable injury. Moreover, the court held that the balance of equities weighed against an injunction because the stockholders could decide for themselves whether to approve the merger.32 In so holding, the court echoed Brudno in rejecting the 24 2003 BL 1596, at *3. 25 Id. at *1. 26 Id. 27 Id. at *5 (commenting on the motivations of the federal judge’s decision and noting ‘‘it is difficult to fault the idea that the primary liability case should go forward before the case seeking indemnity, when the indemnity case’s outcome neces- sarily depends on the outcome of the primary case. That judg- ment about how the cases should precede made by a judicial colleague should not be lightly disregarded.’’ (internal citation omitted)). 28 Id. (emphasis in original). 29 2011 BL 149645 (Del. Ch. May 31, 2011). 30 Id. at *2. 31 Id. at *2. The Massey court devoted significant space to examining whether the derivative claims survive a merger un- der Delaware law. However, this issue is outside the scope of this article and will not be discussed here. 32 See generally id. COPYRIGHT 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC. SRLR ISSN 0037-0665PDF Image | Securities Regulation and Law Report
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