In the recent Court of Chancery opinion in the matter of In re EZCORP Inc. Consulting Agreements Derivative Litigation, C.A. No. 9962-VCL (Del. Ch., Jan. 15, 2016), Delaware’s equity court explains in scholarly detail the doctrinal underpinnings of the due process rights of non-parties to a case, including members of a class that have not been certified. Those considerations prevent a dismissal with prejudice from binding anyone but a named plaintiff in a case where a derivative action has not yet been authorized through the denial of a motion to dismiss under Rule 23.1 or a class has not been certified. The procedural context of this case was that a motion to dismiss had been briefed but prior to oral argument the Delaware Supreme Court issued its opinion in the matter of In re Cornerstone Therapeutics, Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) (highlighted on these pages).
In Cornerstone, Delaware’s high court held that “a plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct – – be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” Cornerstone, 115 A.3d at 1175 – 76 (footnotes omitted). The existence of an exculpatory provision in light of Cornerstone, operates more in the nature of an immunity as compared to an affirmative defense.
This decision explains the interfacing between Court of Chancery Rule 41(a)(1) and Court of Chancery Rule 15(aaa). In essence, when a court dismisses a complaint after full briefing in the absence of a timely motion to amend, the dismissal shall be with prejudice unless the plaintiff can show good cause why the dismissal with prejudice would not be just under all the circumstances. When confronted with a motion to dismiss, Rule 15(aaa) presents a binary choice at that point. The plaintiff can either amend the complaint or file an answering brief. After an answering brief is filed, the rule generally compels a court to dismiss the case with prejudice.
The noteworthiness of this opinion is, in part, due to the scholarly research and reasoning that supports the explanation about why the dismissal in this matter is with-prejudice only as to the named plaintiff. In addition to the application of the Court of Chancery rules and substantive Delaware law, the court cites to decisions of the United States Supreme Court based on the Due Process Clause of the United States Constitution that addresses why dismissal should not apply to a “nonnamed class member” before the class is certified. See Smith v. Bayer Corp., 564 U.S. 299, 131 S.Ct. 2368 (2011).
The Court of Chancery explained that the Due Process Clause likewise prevents a judgment from binding a corporation or other stockholders in a derivative action until the action has survived a Rule 23.1 motion to dismiss or the board of directors has given the plaintiff authority to proceed.
The court in this matter concluded by explaining that the dismissal would be with-prejudice because good cause did not exist to make the dismissal without-prejudice. The court allowed for the possibility that the with-prejudice dismissal could be revisited in the future if a “compelling reason to do so appears.”