Walmart’s board of directors successfully moved to dismiss a shareholder FCPA-related derivative claim, in which shareholders accused the directors of breaching their fiduciary duties in connection with a massive bribery and corruption scandal at the retail giant’s Mexico operations.
In a 60-page decision, Delaware Chancery Court Judge Andre Bouchard on May 13, ruled that the dismissal by an Arkansas judge of a parallel shareholder derivative claim precluded the Delaware case from going forward.
Derivative claims are brought by shareholders on behalf of a company, typically against the company’s directors or officers and often for alleged breaches of fiduciary duty. Any monetary award recovered is paid to the company—not the plaintiff—after the deduction of attorneys’ fees.
The vast majority of cases, however, do not result in monetary awards at all. The more typical outcome is that the company is forced to make a change to its corporate governance practices and procedures.
In April 2012, the New York Times published an exposé describing the cover-up of an alleged bribery scheme at Walmart de Mexico (WalMex), a subsidiary of Walmart. Following this article, Walmart stockholders filed 15 lawsuits in Arkansas and Delaware asserting derivative claims on behalf of Walmart.
One of the stockholders in Delaware demanded access to Walmart’s books and records under Section 220 of the Delaware General Corporation Law, which allows shareholders to demand access to books and records for a “proper purpose.” The Delaware actions were consolidated, and Delaware plaintiffs vigorously pursued the books-and-records litigation, which took three years to resolve, including an appeal to the Delaware Supreme Court.
In May 2015, the Delaware plaintiffs filed an amended derivative complaint with information obtained from Walmart’s records. “The Arkansas plaintiffs neither sought Walmart’s records nor waited for the outcome of the Section 220 case in Delaware,” Bouchard wrote. “They instead proceeded with their case, which defendants moved to dismiss.”
In March 2015, before the plaintiffs in Delaware had completed the Section 220 litigation and filed their amended complaint, the district court in Arkansas granted defendants’ motion to dismiss. It concluded that the Arkansas complaint failed to adequately allege “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 this case, Walmart directors moved to dismiss this action, arguing that issue preclusion prevents the plaintiffs here from re-litigating demand futility.
Subject to Constitutional standards of due process, Arkansas law governs the question of issue preclusion in this case. The basic test for issue preclusion under Arkansas law is easily satisfied here, but Arkansas courts have not addressed issue preclusion in the context of stockholder derivative suits. That context requires one to determine whether two different stockholder plaintiffs asserting derivative claims on behalf of the same corporation in separate cases are in privity.
“Thus, this case presents the challenge of having a Delaware trial court predict how a court in Arkansas likely would resolve an open question of Arkansas law,” Bouchard wrote. “I conclude, consistent with the clear weight of authority from other jurisdictions, that an Arkansas court likely would find privity in this situation.”
Bouchard also considered whether an Arkansas court would deem a stockholder plaintiff who fails to pursue books and records before launching a derivative lawsuit to be an adequate representative of the company. “On that question, I conclude, consistent with Delaware Supreme Court authority, that an Arkansas court would not presume inadequacy from failing to pursue books and records, but would conduct a case-specific inquiry of the issue with principles of due process in mind and, based on the particular circumstances of this case, would find the Arkansas plaintiffs to be adequate representatives,” he wrote.
“For these and other reasons explained below,” Bouchard ruled, “the plaintiffs in this case are barred from re-litigating demand futility and their complaint must be dismissed.”