Richards Layton & Finger
 

Delaware Statutory Trusts and Shareholder Derivative Actions: Recent Delaware Cases Provide First Rulings on the Law

August 2012

Shareholder litigation is an ever-present fact of life for many investment funds and more and more shareholder litigation is taking the form of derivative actions. As Delaware’s importance as a jurisdiction of formation for registered investment companies has increased over the past decade, more and more funds and their advisors are seeking to become familiar with Delaware’s law in this area, particularly the law applicable to Delaware statutory trusts. This article will discuss recent Delaware case law addressing derivative actions involving registered investment companies organized as Delaware statutory trusts. These cases represent the first cases in Delaware discussing in depth the derivative action rules applicable to Delaware statutory trusts. In addition, this article will highlight a little-known provision of the Delaware Statutory Trust Act (the DSTA) that permits governing instrument restrictions on a shareholder’s right to bring a derivative action—an ability that is not found in any of Delaware’s other business entity statutes. A growing number of public and private investment funds are utilizing this ability to restrict derivative actions and have done so in part to address the potential for abuse inherent in this form of shareholder litigation.