Race to Courthouse in Shareholder Derivative Actions Could Raise Due-Process Issues

The Delaware Supreme Court requested further consideration of the federal due-process issues that might arise where a court is asked to hold that a shareholder derivative action is precluded because a prior derivative action was dismissed based on the first plaintiff's failure to make a demand on the company's board before filing suit. The Court's January 18, 2017 decision in California State Teachers' Retirement System v. Alvarez squarely focuses on an issue that has been raised several times in the Delaware Court of Chancery: whether federal due-process principles prevent the actions of a named plaintiff in a derivative action from binding other shareholders unless and until a court holds that the plaintiff has authority to sue on behalf of the corporation.