Companies under investigation for possible violations of the Foreign Corrupt Practices Act have more than just an enforcement action to worry about; they must be prepared to fend off shareholder derivative lawsuits as well.
Although the FCPA itself does not provide for a private right of action, that hasn’t stopped shareholders from devising creative ways to use an FCPA investigation or enforcement action to allege violations of other laws. The most common FCPA-related lawsuits are derivative actions, brought against the company’s directors or officers for alleged breaches of fiduciary duty of loyalty or care—such as, say, failing to prevent FCPA violations.
“These cases tend not to succeed,” says Sam Cooper, a partner with law firm Paul Hastings. “Many more are dismissed than get past the pleading stage.”
In March, for example, Walmart and Parker Drilling successfully moved to dismiss shareholder FCPA-related derivative claims on grounds that the shareholders in these cases failed to argue demand futility. Many states, including Delaware and New York, require shareholders to make a demand on the board to bring a lawsuit on behalf of the company before filing a derivative action, or, alternatively, to plead why such a demand would have been futile.
In the latest case, U.S. District Judge Susan Hickey for the Western District of Arkansas dismissed eight FCPA-related derivative claims that were consolidated into one action against Walmart’s board members and senior executives over allegations that they breached their fiduciary duties. Shareholders filed the lawsuit four days after a 2012 article by the New York Times reported that executives at Walmart’s Mexico unit bribed Mexican officials to smooth the way to open stores in prime locations in connection with the company’s expansion there.
“Nothing in the complaint suggests any particularized basis to infer that a majority of the board had actual or constructive knowledge of the alleged misconduct, let alone that they acted improperly,” Hickey wrote. For these reasons, the court also dismissed claims that the directors allowed the filing of knowingly false proxy statements. Lawyers for Walmart declined to comment on the case.
“These cases tend not to succeed. Many more are dismissed than get past the pleading stage.”
Sam Cooper, Partner, Paul Hastings
In the Parker Drilling case, the 5th Circuit Court of Appeals upheld a lower court’s decision to dismiss a shareholder’s lawsuit against Parker Drilling’s board members, because the shareholder did not first direct his complaint to the board before filing the lawsuit. According to the allegations, the board turned a blind eye to bribery payments made to foreign officials in Kazakhstan and Nigeria in violation of the FCPA.
Despite the significant hurdles plaintiffs must overcome to pursue an FCPA-related shareholder derivative claim, the mere proliferation of these lawsuits highlights the importance of establishing a strong defense. First, companies would be remiss not to anticipate the potential for civil liability exposure at every stage of an FCPA investigation.
Just as a government enforcement action can influence a civil claim, the opposite is also true. “Both the civil side and the criminal side interact, and people need to think about how that interaction works in both directions,” Cooper says. “Too often, people see them as parallel paths that don’t really touch.”
Leslie Caldwell, assistant attorney general for the Justice Department’s Criminal Division, emphasized that point in recent remarks during a regulatory conference at New York University. “It is Department of Justice policy that criminal prosecutors and civil attorneys should coordinate with one another and with agency attorneys to protect and advance the government’s overall interests,” she said. “Some matters initially may come to the attention of the department through a criminal investigation, but may best be resolved through civil, regulatory, or administrative remedies.”
“The time to avoid these lawsuits is on a clear day, when you don’t have an FCPA investigation,” says Chuck Smith, a partner with law firm Skadden Arps. At the board’s annual review of the company’s anti-bribery compliance program, take care to document that review, including in committee materials and in the minutes of that meeting. “That helps show that the board is meeting its fiduciary duty,” he says.
Companies can then better position themselves in the event of civil litigation by making certain disclosures in public documents, including any disclosures about the state of their anti-bribery compliance program. Why? Most of the fight in these cases is at the pleading stage, Cooper says. From a practical standpoint, that means companies have only a limited set of documents they can cite to the court to support their case, including the company’s public filings.
“It’s worth thinking about, ‘Do my public filings have the kind of disclosures that explain what I would want a court to know about my compliance program if I ever ended up litigating my compliance activities?’ ” Cooper says.
The following is an excerpt from In Re Walmart Stores.
Plaintiffs allege that certain director defendants received evidence of the alleged Walmex bribery scheme, and faced with this “red flag,” consciously chose to ignore it. Although the complaint alleges that the director defendants knew of and ignored evidence of wrongdoing, the complaint nowhere alleges with particularity what exactly the director defendants were told about the alleged misconduct or when they were told. Again, plaintiffs charge most of the director defendants with constructive notice of the alleged red flag. The court, however, has already rejected this theory and determined that plaintiffs have not pled with particularity that a majority of the board were put on notice of the alleged 2005-2006 misconduct. If a director defendant has no knowledge of the alleged misconduct (or “red flag”), he or she could not have consciously ignored it and disregarded any duty to act on it. Plaintiffs’ allegations, therefore, are not sufficient to establish a substantial likelihood of liability giving rise to demand futility.
Plaintiffs allege that the director Defendants “allow[ed] Wal-Mart to file false proxy statements in April 2010 and April 2011 in violation of Section 14 of the Exchange Act.” According to plaintiffs, demand is excused under Rales, because a majority of the board face a substantial likelihood of liability arising out of their alleged filing of false proxy statements. Plaintiffs allege that the director defendants materially represented the effectiveness of the board’s oversight of compliance issues at Wal-Mart.
This claim, however, fails because it rests on the same impermissible and unsupported inferences as plaintiffs’ other theories: the inference that the board allowed the filing of the proxy statements despite knowing they were false.
Source: In Re Walmart Stores.
“Derivative cases in this area are all about oversight: Did the board and management do their best to prevent something bad from happening?” Cooper adds. The more a company can show that its board and management demonstrated the proper level of oversight, the easier it is to dismiss a case at the pleading stage, he says.
During an Investigation
Companies also should take care with the documentation they create during the course of an FCPA investigation, which can make or break a civil case. “Not everything needs to be documented,” Cooper says. Once a company creates a document, it’s potentially attainable in civil discovery, “so it’s important to think about what documents you really need to create.”
During an internal investigation, for example, a special committee of the board might issue a report on the findings of that investigation. Because that report could later be used against the company, however, carefully consider whether a written report is necessary to satisfy the duties of that special committee, and what should go in that report if one is written.
“You should assume that any document that you produce is potentially going to be discoverable in litigation, or in a books and records request,” Cooper says. That document should be drafted with care to make sure it accurately describes the facts. “You don’t want something that can be easily taken out of context in a document that’s later obtained in a books and records request, or a discovery request,” he says.
Companies also should take steps to ensure that attorney-client privilege and attorney work-product protections remain intact during any litigation. “That requires conversations between general counsel and outside counsel to help ensure that you’re reducing the risk of that disclosure,” Smith says.
Following the resolution of an FCPA investigation, companies should contemplate how their settlement agreements will read not just from the government’s standpoint, but also what’s going to be potentially helpful or harmful in those papers from a civil standpoint, Cooper advises. “I can’t tell you how often I have pointed to something in resolution papers to help me out in derivative litigation,” he says.
In some recent settlements, the government has expressly given companies credit for cooperating in the investigation and for the remedial measures they have taken. “Pushing for that kind of language helps at the margin in a civil suit,” Smith says.
To the extent that any internal weaknesses in the company’s anti-bribery compliance program become apparent in the course of the investigation, the company will want to ensure those weaknesses are properly addressed and corrected, “so that by the time you finish the investigation, and by the time the public learns about the settlement the company already has a record that it remediated any problems,” Smith says.