November 4, 2016
The Devil Is In the Details: How the Delaware Court of Chancery Permitted a Derivative Claim to Survive an Earlier Derivative Dismissal
By Stephen B. Brauerman and Sara E. Bussiere
Several recent decisions of the Delaware Court of Chancery dismissed derivative claims on collateral estoppel grounds in deference to the earlier decisions of courts in other jurisdictions dismissing such claims for failure to demonstrate demand futility. See, e.g., Laborers’ District Council Constr. Indus. Pension Fund and Hallandale Beach Police Officers and Firefighters’ Personnel Ret. Fund v. Bensoussan, 2016 WL 3407708 (Del. Ch. June 1, 2016) (hereinafter “Bensoussan”); In re Wal-Mart Stores, Inc. Delaware Derivative Litig., 2016 WL 2908344 (Del. Ch. May 13, 2016) (hereinafter “Wal-Mart”). Delaware courts showed deference to those earlier decisions notwithstanding that the Delaware complaints were “more detailed, specific, and extensive” than the first filed complaints on which the collateral estoppel dismissals were premised. Wal-Mart, 2016 WL 2909344, at *10-11. Continuing this trend, the Delaware Court of Chancery again showed deference to the earlier decision of a sister court in its August 31, 2016 In re Duke Energy Corporation Derivative Litigation decision. In re Duke Energy Corporation Derivative Litigation, 2016 WL 4543788 (Del. Ch. Aug. 31, 2016) (hereinafter “Duke Energy”). Duke Energy is, however, unique, in that the Court of Chancery’s deference was limited. Unlike Bensoussan and Wal-Mart, which dismissed the subsequent derivative claims in their entirety, Duke Energy found the rare circumstance where the claims the proposed derivative plaintiff sought to pursue in Delaware were different from the claims dismissed in the earlier North Carolina proceeding, and offered the stockholder plaintiffs a rare second bite at the apple. Duke Energy reaffirms Delaware’s deference to the demand analysis of its sister courts in first-filed derivative stockholder litigation, but provides important guidance for the unique circumstances where careful pleading can overcome the doctrine of collateral estoppel.
On January 10, 2011, Duke Energy Corporation entered into a merger agreement with its smaller rival, Progress Energy, Inc. Through the merger, Progress stockholders would receive Duke stock worth nearly $13.7 billion, and Progress would become a wholly owned subsidiary of Duke. Post-merger, the Duke board would consist of 11 Duke directors and 6 Progress directors. Progress’ chief executive, William D. Johnson would become Duke’s Chief Executive Officer; Duke’s chief executive, James E. Rogers would become Executive Chairman. The merger was subject to regulatory approval from state and federal authorities, including the North Carolina Utilities Commission (NCUC). The stockholders of both companies overwhelmingly voted to approve the transaction.
The Delaware complaint alleges that after obtaining stockholder approval, but before obtaining regulatory approval, the 11 legacy Duke directors began to have second thoughts about allowing Johnson to head the combined company. Rather than cancel the merger agreement, which would have required the payment of a sizeable termination fee, or breach the merger agreement, the legacy Duke directors allegedly agreed to replace Johnson as Chief Executive Officer immediately after the merger was consummated. Allegedly to cover up this plan, on June 27, 2012, Duke entered into an employment agreement with Johnson that contained lucrative severance benefits. The merger closed on July 2, 2012. The Duke board met almost immediately thereafter and appointed Johnson as CEO. Before the meeting concluded, the Duke board went into executive session. During this executive session, reading from a prepared script and without
Several recent decisions of the Delaware Court of Chancery dismissed derivative claims on collateral estoppel grounds in deference to the earlier decisions of courts in other jurisdictions dismissing such claims for failure to demonstrate demand futility. See, e.g., Laborers’ District Council Constr. Indus. Pension Fund and Hallandale Beach Police Officers and Firefighters’ Personnel Ret. Fund v. Bensoussan, 2016 WL 3407708 (Del. Ch. June 1, 2016) (hereinafter “Bensoussan”); In re Wal-Mart Stores, Inc. Delaware Derivative Litig., 2016 WL 2908344 (Del. Ch. May 13, 2016) (hereinafter “Wal-Mart”). Delaware courts showed deference to those earlier decisions notwithstanding that the Delaware complaints were “more detailed, specific, and extensive” than the first filed complaints on which the collateral estoppel dismissals were premised. Wal-Mart, 2016 WL 2909344, at *10-11. Continuing this trend, the Delaware Court of Chancery again showed deference to the earlier decision of a sister court in its August 31, 2016 In re Duke Energy Corporation Derivative Litigation decision. In re Duke Energy Corporation Derivative Litigation, 2016 WL 4543788 (Del. Ch. Aug. 31, 2016) (hereinafter “Duke Energy”). Duke Energy is, however, unique, in that the Court of Chancery’s deference was limited. Unlike Bensoussan and Wal-Mart, which dismissed the subsequent derivative claims in their entirety, Duke Energy found the rare circumstance where the claims the proposed derivative plaintiff sought to pursue in Delaware were different from the claims dismissed in the earlier North Carolina proceeding, and offered the stockholder plaintiffs a rare second bite at the apple. Duke Energy reaffirms Delaware’s deference to the demand analysis of its sister courts in first-filed derivative stockholder litigation, but provides important guidance for the unique circumstances where careful pleading can overcome the doctrine of collateral estoppel.
The Duke Energy Facts
On January 10, 2011, Duke Energy Corporation entered into a merger agreement with its smaller rival, Progress Energy, Inc. Through the merger, Progress stockholders would receive Duke stock worth nearly $13.7 billion, and Progress would become a wholly owned subsidiary of Duke. Post-merger, the Duke board would consist of 11 Duke directors and 6 Progress directors. Progress’ chief executive, William D. Johnson would become Duke’s Chief Executive Officer; Duke’s chief executive, James E. Rogers would become Executive Chairman. The merger was subject to regulatory approval from state and federal authorities, including the North Carolina Utilities Commission (NCUC). The stockholders of both companies overwhelmingly voted to approve the transaction.
The Delaware complaint alleges that after obtaining stockholder approval, but before obtaining regulatory approval, the 11 legacy Duke directors began to have second thoughts about allowing Johnson to head the combined company. Rather than cancel the merger agreement, which would have required the payment of a sizeable termination fee, or breach the merger agreement, the legacy Duke directors allegedly agreed to replace Johnson as Chief Executive Officer immediately after the merger was consummated. Allegedly to cover up this plan, on June 27, 2012, Duke entered into an employment agreement with Johnson that contained lucrative severance benefits. The merger closed on July 2, 2012. The Duke board met almost immediately thereafter and appointed Johnson as CEO. Before the meeting concluded, the Duke board went into executive session. During this executive session, reading from a prepared script and without