The predominant approach in most jurisdictions to determine whether the dismissal of a derivative action based on the failure to adequately plead demand futility bars re-litigation of this issue in a subsequent derivative action brought by a different stockholder plaintiff is to apply the traditional legal test for issue preclusion. Generally in these jurisdictions, issue preclusion bars re-litigation of demand futility if: the demand-futility issue is the same; the issue is actually litigated and necessary to a final judgment; it involves the same parties in the prior derivative action or in privity with those parties; and there is adequate representation of counsel in the prior derivative action.
Following the predominant approach for issue preclusion, the Delaware Court of Chancery dismissed a derivative action in In re Wal-Mart Stores, Delaware Derivative Litigation, C.A. No. 7455-CB (Del. Ch. May 13, 2016), based on an Arkansas federal district court dismissal of a prior derivative action, challenging the same Wal-Mart bribery scheme, on grounds of failure to adequately plead demand futility. In finding that the requirement of “privity” for issue preclusion was met in two derivative actions involving different stockholder plaintiffs, the court noted that the vast majority of other jurisdictions had found privity between different stockholder plaintiffs who file separate derivative actions because the corporation is the real party in interest, and both plaintiffs are bringing suit on behalf of the corporation, making them essentially interchangeable. Since the constitutional principles of “due process” are embedded in the restatement’s legal test to determine “adequate representation of counsel,” the court applied the restatement test to find that the representation of counsel in the prior derivative action was not “grossly deficient.” Accordingly, the court concluded that the Arkansas federal district court dismissal of the prior derivative action based on demand futility precluded re-litigation of this issue in the subsequent Wal-Mart derivative action.
