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Court of Chancery Rejects Attempt To Revive Derivative Suit

West Coast Management & Capital LLC v. Carrier Access Corporation, C.A. No. 2262-N (Del. Ch. November 14, 2006) is a classic example of what can go wrong in trying to plead a derivative suit. The Court of Chancery dismissed the complaint because the plaintiff had filed a prior complaint in federal court that had been dismissed for failure to establish that demand on the directors was excused. Here, the plaintiff tried to pursue a stockholder inspection claim to establish that demand was excused, but the Court held it was precluded from doing so by the dismissal of its prior complaint. This shows that a plaintiff better know what it is doing when it files a derivative suit because the chances to correct errors will be limited. In the prior litigation, the federal court had dismissed the complaint "without prejudice" for failure to show demand was excused. In this case, the plaintiff argued that such a dismissal still permitted another complaint to be filed. The Court of Chancery rejected that argument, holding that such a dismissal of derivative litigation only meant that the corporation itself still retained the right to sue on its claim. In Delaware, special Chancery Rule 15(aaa) governs when an amended complaint may be filed. That rule needs to be carefully considered when a plaintiff faces a motion to dismiss its complaint. Share
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