The Paradox of Delaware's 'Tools at Hand' Doctrine: An Empirical Investigation
57 Pages Posted: 21 Mar 2019
Date Written: March 18, 2019
Much has been written on the subject of abusive shareholder litigation. The last decade has witnessed at first an increase and then a dramatic spike in such suits, primarily suits filed in connection with mergers and acquisitions. In the face of these changes, the Delaware courts have been doctrinal innovators. One such innovation occurred in Rales v. Blasband, 654 A.2d 927 (Del. 1993), establishing the “tools at hand” doctrine, whereby before considering whether to grant a motion to dismiss the court admonishes the shareholder-plaintiff to resort to shareholder inspection rights accorded the Delaware General Corporation Law and the Delaware LLC/LP statutory provisions so as to gather facts necessary for the complaint to survive the pretrial motion. On its face, the doctrine reflects a balanced approach to the competing claims that shareholder litigation is necessary to address and discourage managerial misconduct and the belief the suits are vexatious being brought to garner an extortionate settlement.
In this paper, we empirically examine how Rales has dramatically changed shareholders’ efforts to exercise their inspection rights. We compare the composition, outcomes, and related questions surrounding such suits maintained 1981-1994 with the post-Rales period 2004-2018. We not only find that the post-Rales period entails thirteen-fold more suits involving “books and records” requests but after tracing the results of those requests we find that plaintiff merits-based suits maintained after using the tools at hand often enjoy successful outcomes. On the flip side, we also find that many instances in which the tools at hand is pursued unsuccessfully, or for little benefit, so that there is no follow-on shareholder suit. Thus, our data supports the positive social benefits of Delaware’s innovative tools at hand doctrine.
Nonetheless, in the concluding section of the paper we bring bad news. We show that the Delaware Supreme Court’s decision in California State Teachers Ret. Sys. v. Alvarez, 179 A.3d 824 (Del. 2018) likely eviscerates the tools at hand. Alvarez holds that the Delaware litigant’s suit is precluded by an earlier decision in another jurisdiction that a derivative suit initiated by a different shareholder than was prosecuting the Delaware action lacked standing to sue. We reason that Alvarez is a powerful disincentive for Delaware litigants to pursue the tools at hand as the time expended in pursuing that right may enable competing slothful lawyers to take their chances with a less developed complaint in a sister jurisdiction’s courts on the same claim.
Keywords: Class Action Suits, Corporate Directors, Corporate Governance, Corporate/Securities Law, Delaware Court, Delaware Law Suits, Empirical Analysis, Fiduciary Principles, Litigation, Multi-Jurisdictional Shareholder Class Action Law Suits
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