In Brandon v. Deason, (Del. Ch., July 20, 2007), read opinion here, the Delaware Chancery Court denied a motion to stay a Delaware derivative action, despite a parallel proceeding in Texas, due the the important, substantive issues of Delaware law at issue. The court described the objections of defendants  to the motion as "dilatory and pretextual". This case could be used as an "exhibit" in the debate between those who support the efforts of Delaware to retain its preeminence in serving at the nation’s tribunal for corporate governance and the overtures of other jurisdictions, including the federal government, to regulate corporate law.

There are many intellectually compelling analyses that support this decision and that I will cursorily highlight, but here is a colloquial way to give the holding in this case: There are important issues of Delaware law that have far reaching importance and that the Delaware courts are best situated to decide and that Delaware has a legitimate interest in deciding without deferring to federal courts (who are otherwise quite capable of applying Delaware law.)

A key part of the court’s reasoning focused on the situation involving a:

 "derivative action in a federal court in which the federal securities law claims (over which the federal court has exclusive jurisdiction), are predicated on the same fiduciary misconduct that animates the state law claims…. [T]he stockholders of companies incorporated in this state would suffer a disservice if Delaware courts suddenly became a forum of last resort, available only for that small percentage of representative suits which do not, at least in theory, overlap with issues of the federal securites laws."

Initially, the Chancery Court applied the familiar McWane doctrine [263 A.2d 281, 283 (Del. 1970)], that favors first-filed lawsuits in general, but the court drilled down deep for a more intense public policy reasoning. Preliminarily, the court noted that derivative cases are problematic for purposes of applying the McWane doctrine, and in such cases the focus must be on ensuring that the stockholders’rights are fairly enforced according to the law governing the corporation. See here for a summary on this blog of a recent Chancery case applying similar reasoning and relying on the "internal affairs doctrine" to allow a Delaware case to proceed despite a first-filed suit out of state. Compare, however, another very recent Chancery case, Kaufman v. Kumar, summarized on this blog here, and decided by the same vice chancellor who decided the instant case, but in that matter ruled that the first-filed federal case was allowed to proceed over the Delaware case, with the Chancery Court in that Kaufman case having confidence that the federal courts are quite competent to apply Delaware law.

 In sum, when faced with parallel derivative cases, the court applies something akin to a forum non conveniens inquiry. The court listed the 6 factors in that analysis.

 This case involved allegations of stock options backdating. In light of three recent Delaware Chancery Court cases having addressed that issue, the defendants argued that Delaware law on the topic was well-settled. To the contrary, the court at footnote 14 described the defendants’ argument on that point as follows:

"The defendants’ argument that all the legal nuances associated with options backdating are crystalline is a bit sophomoric, considering that only three Delaware cases have dealt substantially with the issue to date." (citing  the recent Desimone; Tyson and Topps cases, all of which have been summarized on this blog.)

Rather, the court reasoned that: "Delaware courts have a sizable interest in resolving such novel issues to promote uniformity and clarity in the law that governs a great number of corporations."

In addition to backdating, the opinion emphasized two other issues of far-reaching importance in the case that were not yet the subject of definitive Delaware decisions (as opposed to dicta):

1.) Instead of a Motion to Dismiss based on an alleged failure to satisfy the pre-suit demand requirements of Rule 23.1, the defendants merely asserted that argument as an affirmative defense–while engaging in discovery for over a year. The court noted that such conduct may result in a waiver of the defense, and that result might have a collateral estoppel effect on the issue if presented in the parallel Texas litigation. (See cases cited at footnotes 16 and 17).

2.) The issue of standing in connection with a continuing wrong exception to the normal statute of limitations that may apply when wrongdoing may have been concealed for a long period is an issue of importance that was referenced in dicta in the recent Desimone case but that in this court’s view was not the subject of a definitive Delaware opinion.

Finally, the court rejected arguments that the Delaware case should be stayed because there were witnesses that were not available to come to Delaware or that could not be forced to come to Delaware. The reasons the court did not find those arguments persuasive were manifold: (i) the court emphasized that it "stands ready" to grant Motions for Commissions to take out of state depositions pursuant to Section 368 of Title 10 of the Delaware Code or take live testimony via videoconference from remote locations; and (ii) pursuant to Court of Chancery Rule 32(a), the deposition testimony of persons who refuse to appear for trial can be admitted at trial; and (iii) many of the witnesses involved worked for national and international firms–implying that they should not be averse to travelling if they work for service firms with such widespread coverage. In closing, the nail in the coffin for the moving party here was the documented observation that the Texas proceeding was moribund, dormant and mostly inactive for more than a year–all during the time that the defendants in the instant Delaware case were not objecting to the Delaware case continuing. That is, only recently the defendants here decided to argue that it was no longer convenient to be in Delaware. Motion denied.