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5 argument that Alpha would never pursue the derivative claims, reasoning, inter alia, that the derivative claims were necessarily contingent on the outcome of the par- allel actions – both the securities case and the criminal investigation – and until those actions had concluded, it was not clear whether it would make sense for Alpha to pursue the claims. Noting that the Massey stockholders erroneously conflated the value of their derivative claims with the loss in value of the corporation, the court noted that ‘‘[o]ne cannot even rationally deter- mine what the potential derivative liability is until the direct liability Massey faces is determined.’’33 The court also downplayed the stockholders’ argu- ment that Alpha would have no incentive to pursue the derivative claims because the very act of pursuing such claims might impact the position of the corporation in the pending parallel proceeding it also faced.34 The court concluded that, like Alpha, ‘‘so too would (or should) the plaintiffs, as fiduciaries for other Massey stockholders, be reluctant to prosecute the Derivative Claims they claim are so valuable until the direct claims against Massey are resolved’’ because ‘‘in either a Merger or non-Merger world . . . much or perhaps most of the Derivative Claims’ value is to reduce to some ex- tent the liability Massey faces as a corporation.’’35 As a result, the court held that the derivative claims ‘‘should follow, rather than precede, the resolution of the key di- rect suits and regulatory proceedings.’’36 Finally, the court also rejected the plaintiffs’ argument that the merger should be enjoined while the court held a trial on the derivative claims, holding that there were a vari- ety of reasons why that course of action would be ‘‘nei- ther practicable nor equitable,’’ including the fact that it would be ‘‘extremely disadvantageous to Massey as a stand-alone entity for Derivative Claims that seek to hold fiduciaries liable to indemnify Massey if Massey is held liable to others to go forward ahead of those direct claims.’’37 In Brenner v. Albrecht, Vice Chancellor Parsons ap- plied the reasoning in Massey to a consideration of whether or not to grant a stay.38 Brenner involved de- liberate accounting errors by certain employees of Sun- Power Corporation that caused the corporation to re- state its financial results. The announcement of an in- ternal investigation prompted a securities class action, which in turn led to a series of shareholder derivative lawsuits. Most of the derivative plaintiffs agreed to vol- untarily stay their suits pending the outcome of the se- curities class action. However, one shareholder — Brenner — pursued a derivative suit after receiving cor- porate books and records through a Section 220 de- mand.39 SunPower argued that the derivative action should be stayed because the allegations in the derivative suit overlapped substantially with those in the parallel secu- rities class action and would prejudice the corporation’s defense in that case, and the relief sought in the deriva- tive action was contingent on the outcome of the paral- 33 Id. at *30. 34 Id. at *29. 35 Id. at *31. 36 Id. 37 Id. at *36. 38 2012 BL 24018 (Del. Ch. Jan. 27, 2012). 39 Id. at *3-4. lel securities suit.40 Brenner responded that his deriva- tive claims alleged a failure to exercise oversight, a claim fundamentally different from the allegation of an intentional scheme to defraud in the parallel securities action. He further argued that the risk of prejudice to SunPower’s defense was overstated because his com- plaint was filed under seal, and he agreed not to dis- close confidential information that he obtained pursu- ant to his Section 220 demand. Finally, Brenner noted that the corporation had already incurred $8 million in costs associated with the restatement of financial re- cords and internal investigation, thus indicating that the corporation had already been damaged and that his suit was therefore not entirely contingent on the outcome of the securities action.41 Vice Chancellor Parsons noted that the power to grant a stay is ‘‘incident to the inherent power of a court to exercise its discretion to control the disposition of ac- tions on its docket in order to promote the economies of time and effort for the court, litigants, and coun- sel.’’42 The court turned first to the issue of similarity between the derivative litigation and the parallel class action proceeding, noting that the claims in each case were analogous. The court noted that the plaintiffs in both actions accused SunPower’s directors of having knowledge of wrongdoing or engaging in conscious misconduct, but that ‘‘Brenner . . . makes these argu- ments on behalf of the corporation while the Securities Class Action plaintiffs make them against Sun- Power.’’43 The court observed that SunPower could pursue one of two litigation strategies: the corporation could cross-claim against its directors and officers as the primary wrongdoers and seek indemnification from them – as asserted in the derivative action – or it could cooperate with its directors and officers and deny that any wrongdoing occurred – as asserted in the parallel securities action. However, it would not be practical for the corporation to pursue both strategies at the same time.44 As such, prosecution of both claims concur- rently would be ‘‘unduly complicated, inefficient, and unnecessary’’ and the potential for conflict created a significant risk of prejudice to SunPower’s defense in the securities class action.45 Next, the court addressed whether the derivative liti- gation was contingent on the outcome of the parallel se- curities action. While the court noted that some of Brenner’s derivative claims were ripe for adjudication, it found more persuasive ‘‘the wisdom as a practical matter of treating indemnification claims as unripe un- til the liability for which indemnification is sought is de- termined . . . .’’46 The court focused in particular on the difficulty for companies of making strategic litigation decisions upon a shifting landscape of material facts, stating that companies ‘‘deserve to know, for example, the extent of their prospective exposure when making strategic decisions during the course of litigation such as how vigorously to defend an action and, relatedly, how much to spend on defense.’’47 40 Id. at *4. 41 Id. at *4. 42 Id. (internal quotation marks and citation omitted). 43 Id. at *6 (emphasis in original). 44 Id. 45 Id. at *6. 46 Id. at *7. 47 Id. SECURITIES REGULATION & LAW REPORT ISSN 0037-0665 BNA 8-25-14PDF Image | Securities Regulation and Law Report
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