9th Cir.: Shareholders in Derivative Suits Are in Privity for Issue Preclusion Purposes

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Dec. 17 — The U.S. Court of Appeals for the Ninth Circuit Dec. 17 affirmed the dismissal of a shareholder derivative action on the basis of issue preclusion because it was filed after four separate shareholders filed separate derivative lawsuits that were subsequently consolidated and dismissed for failure to sufficiently argue demand futility.

Addressing a novel issue under Nevada law—“whether shareholders in derivative suits are in privity for the purposes of issue preclusion”—Judge Consuelo Callahan agreed with other courts that “derivative stockholders are in privity with each other because they act on behalf of the defendant corporation.”

The appeals court recounted that defendant International Game Technology is a Nevada corporation that makes electronic gaming systems. Shareholder plaintiff Lawrence Arduini argued that certain IGT officers made intentionally misleading statements about the company's financial prospects and that the IGT board failed to adequately oversee the officers. In April 2011, Arduini filed a shareholder derivative complaint without making a pre-suit demand on the IGT board, instead alleging that a demand would have been futile.

Before Arduini filed suit, however, the lower court dismissed a similar consolidated shareholder derivative lawsuit —the Fosbre lawsuit—for insufficient demand futility allegations and the appeals court affirmed the dismissal. As for Arduini's complaint, the lower court granted IGT's dismissal bid, finding that the doctrine of issue preclusion prohibited relitigating the issue of demand futility. Arduini promptly appealed.

‘In Privity.'

Arduini first argued that issue preclusion does not apply because he has asserted new allegations regarding demand futility that were not in the Fosbre complaint. He also added that issue preclusion does not apply because he was not “in privity” with the Fosbre plaintiffs because they failed to establish derivative standing and to adequately represent IGT and its stockholders. The appeals court disagreed.

Under Nevada law, the appeals court opined, “the underlying demand futility allegations need not be identical before issue preclusion applies.” Rather, the question is “whether the ‘same ultimate issue' was decided in the prior case.” Clarifying that the matter in dispute in both Arduini's case and the Fosbre case is simply whether demand should be excused, the appeals court held that Arduini's offer of additional allegations does not change the issue under Nevada law.

The appeals court also held that shareholders in derivative lawsuits are in privity for the purposes of issue preclusion. It clarified that parties in separate derivative lawsuits, even if they are represented by different shareholders, are the same because the corporation is the “‘sole real party in interest in both cases.'” Adopting other courts' reasoning, it held that where the shareholders are acting on behalf of the corporation and its shareholders, the underlying issue of demand futility is the same “regardless of which shareholder brings suit.”

The opinion is available at http://www.bloomberglaw.com/public/document/Lawrence_Arduini_v_IGT_Docket_No_1215750_9th_Cir_Apr_04_2012_Cour.